What’s driving the boom in sales in China’s used car market?

Buying a used car or anything else secondhand is still uncommon in China, where consumers have a deep desire for the new. But, as Timothy Ang explains in this extract from CKGSB Knowledge, low prices, online convenience and a slowing economy are beginning to change attitudes.

He Bin, like many men his age in China, started his search for a car on the showroom floors of car dealerships. It quickly became clear, however, that the shiny coupės he was eyeing had a few too many zeros at the end of their price tags. He Bin could just not afford to buy a brand-new set of wheels. That’s when he decided to turn to the secondhand car market for a better deal.

With a wife, two young children and a job based 45 minutes away from his rural home in Fujian, the southeastern province opposite Taiwan, the 26-year-old is now the proud owner of a secondhand Volkswagen.

To people from developed countries, buying secondhand items is perfectly normal. But for China, buying used bargains is still the exception, and not something that you would necessarily want to brag about. Yet despite a deep cultural distrust toward anything that is not new, shoppers now have access to a number of efficient and accessible online platforms that offer big-brand items at low prices.

The value of recommerce

According to the China Center for Internet Economy Research, Chinese yuan (CNY) 500 billion (United States dollars (USD) 70.5 billion) was spent on secondhand goods in 2017 by 76 million active online users. This is a modest figure compared to Western economies—the used goods market in the US is roughly four times as large—but as with many sectors in the world’s second-largest economy, growth is the real aspect to monitor.

The number of users of online secondhand platforms in 2017 was up 55 per cent year-on-year. Some analysts predict that used goods will be a trillion yuan industry by the end of 2020.

Like He Bin in Fujian, many buyers’ first experience of the sector is on one of the so-called ‘recommerce’ apps. Given the centrality of mobile phones to Chinese commercial activity, from online payments to food delivery, it is not surprising that bright, appealing apps have become the epicentre for the secondhand market’s rise.

The platforms usually vary by product specialisation, but three companies together occupy 90 per cent of the market. Uxin targets the car industry, while industry leaders Zhuanzhuan (‘Pass on’) and Alibaba-owned Xianyu (‘Idle Fish’), have become the main trading posts for used bags, clothes and unwanted cosmetics from across the country.

“I use the app to find limited editions of lipsticks, mascaras and sometimes t-shirts. I have a student budget, but I can normally still buy what I want.”

Zhixin, a recent graduate from Hebei

Young users like Zhixin are the engine of the recommerce trend. A study by the Sootoo Research Institute found that half of recommerce users are under 24 years of age, with another third between 24 and 30. For the Xianyu platform, millennials under 30 constitute around 60 per cent of the user base. The number is slightly lower for vehicle platform Uxin, for which the 30-and-under demographic contributed just 18 per cent of total sales in 2018.

In the auto sector, while sales of new vehicles have fallen, those of secondhand cars have been steaming ahead. There were roughly 13 million used cars sold in China last year, according to official figures, compared to new car sales of around 28 million. In the first half of 2019, sales grew by 17.8 per cent from a year earlier, with over two million units sold in June alone.

“Secondhand car sales used to grow at a slower pace compared to the new car market, which until recently was growing at double digits. But since last year, we’ve seen the reverse taking place.”

Jochen Siebert, managing director of auto market consultancy JSC Automotive

But Siebert adds that China still lags industrialised nations when it comes to resales as a proportion of the total market. In the US and Western Europe, secondhand car sales are typically double those of new.

The millennials

The rise of the circular economy comes at a time when many consumers, particularly millennials, are increasingly strapped for cash. Media coverage tends to focus on the loaded pockets of China’s urban elites, but such people make up a small section of the population and are concentrated in a handful of coastal cities.

Looking inwards to the rest of the country has proven to be a great e-commerce strategy. The success of Pinduoduo, since its founding in 2015, was in part due to 65 per cent of its customers coming from smaller cities inland. Pinduoduo reached CNY 100 billion (USD 14.3 million) in gross sales after just three years, twice as fast as it took market leader Taobao to reach the same milestone.

A tightening of consumer purse strings has, however, been balanced by the powerful drive of the younger generation to embrace consumerism. Smarter shopping is not only a matter of price and increased acceptance of used goods among the youth – it also offers a solution to the impact of more extreme shopping habits by using apps such as Xianyu to sell excess junk accumulated over the year.

A key driver for Western consumers buying secondhand has been concerns about the environmental implications of buying everything new. The cultural legacy of excessive consumption that has recently dominated China may not be so easily done away with. However, some people see the beginnings of a heightened social awareness amongst China’s middle class around the industrial footprint created by purchases.

Market consultancy Mintel found that, in urban areas, over half of customers listed environmental concerns among their top reasons for going for secondhand products. This rose to 63 per cent among the well-educated demographic, where environmental issues surpassed affordability as the number one factor.

The secondhand auto market will be one to watch, though not for reasons of sustainability. The central government is working to free up the domestic used-car market, realising that, otherwise, top-tier cities will become overloaded with sellers unable to shift their vehicles. It has already passed legislation prohibiting protectionist policies by provincial governments, and in early 2019 green-lit the export of secondhand cars abroad. Despite this, the market still has a long way to go to reach maturity.

“A big problem is trust. Buyers generally trust vendors less than in the US or Germany. They are much more likely to assume they’re crooks than give them the benefit of the doubt.”

Jochen Siebert, managing director of auto market consultancy JSC Automotive

That suspicion is well-founded. Even used-car directory Uxin was implicated in fraud earlier this year. This followed a damning report accusing it of overstating its transaction volume and charging extortionate operator fees. Uxin’s owner Dai Kun denied all claims.

Early days

It’s too early to pinpoint the repercussions of a booming secondhand market. In many key product categories, China lags well behind Western counterparts. Nevertheless, experts expect continued growth, and the main downside, the impact on manufacturers, is yet to become evident in the data.

Take He Bin in Fujian. A few years ago, he would never have considered checking out the used market for his first car. “Now, I don’t understand why everyone isn’t doing it,” he says. Well, maybe soon they will be.

Note: This is an extract from an article which has been reproduced with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business.

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