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Market Expansion Strategy in China Automotive Aftermarket Proposal to Company ABC

Prepared by Jong-Sik Ahn

Case Study Requirements

For each case study requirements, please refer to the page below

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1. Please conduct some desk research to gain a preliminary understanding of the product and market in China

2. Provide a draft proposal focusing on the following: a) Approach / Framework for this study to meet the

client’s objectives

b) Project Methodology including types of primary research required

c) For the rest of the proposal, an outline of what should be included is sufficient

Requirements Section Page No.

Project Background Project Approach

p.5~8 p.12~19

Project Approach p.9~21

Project Methodology p.22~33

Project Management Why Ipsos Business Consulting

p.34~35 p.36~37

Project Objectives

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Project Objectives

The objectives of this project is to decide whether or not to invest in the production of Company ABC’s starters products locally in China

4

Requirements

2012 market size in volume, inclusive of past 3 year growth and next 3 year forecast

Analysis of trends including drivers and barriers for this specific market segment

Assessment of the competitive landscape

Mapping of current channel structure

Recommendations on market expansion feasibility

1

2

3

4

5

Project Background

5

Global Automotive Market

In global automotive market, developing countries(especially China) are growing market. Market polarization is intensified and technology is key success factors in this competitive market

6

13.6 21.6

37.5 54.0

70.6 41.6 41.4

33.4

38.7

39.9

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2000 2005 2010 2015 2020

Global Auto Market Forecasting

Advanced Countries

(* Source: IHS Automotive, KARI)

Developing Countries

-2.2% 1.8%

10.7% 6.5%

’00~’10 Yr ’10~’20 Yr

CAGR

Global Auto Market Trend

(Unit: mn passenger cars) Markets

- The developing countries including BRICs have high growth rate compared to the advanced countries

- Among the developing countries, China is the biggest and most attractive market for automotive industry

Car Model

- The growth of small car is remarkable and M/S increased from 41.1%(2000) to 50.6%(2011)

- Market polarization is intensified between low price and premium cars

Technology - Technology is developed in fuel-efficient, eco-

friendly, electrical device area - Technology is key success factors in the

automotive industry

China Automotive Market

China automotive market will experience growth of 15% between 2010 and 2013, with growth in market volume slowing down between 2013 and 2015 to 7%. The highest new registrations can be seen in the major cities along the coast and Inner Mongolia

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(* Source: China’s Automotive Market, Arthur D Little, 2011 The automotive aftermarket for passenger cars in China, Polk, 2012)

2010A 2011E 2012E 2013E 2014E 2015E

Locals Importers

China Automotive Market Volume Forecast

(Unit: mn passenger cars)

11.5 12.6

14.2

15.5 16.4

17.2

69%

31%

37%

63%

New Car Registration (2011)

Up to 6 6 up to 9 9 up to 12 12 up to 15 15 and more

Passenger vehicle 1 year old per 1000 inhabitants

* If you want to know consumer trend in China auto market, please refer to ‘ Industry/Market Model – Consumer Perspective’ section

Global Automotive Aftermarket

Based on a global growing car fleet and an increasing average fleet age in mature markets, market forecasts show a strongly growing after sales market volume. This growth is mainly driven by the rapidly growing service demand in emerging markets

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(* Source: Automotive After Sales 2015, Arthur D Little, 2008)

105 134 154 208 10

13 15

19

31

50 57

73

63

84 98

130

15

28

39

70

19

31

42

71

7

11

16

28

36

61

77

119

0

100

200

300

400

500

600

700

800

2001 2007 2010 2015

USA Canada Japan Western Europe

Eastern Europe Asia-Pacific Middle East South America

Global After Sales Market Value (Unit: bn EUR)

Trends in After Sales Market

Increasing Competition - Aggressive growth of independent fast fitters - New players offering “low price parts” - Internet as sales channel will gain higher

importance - Second brand workshops by OEM

Structural Changes

- Stagnating new car sales volumes in triad markets

- More and more cars in later lifecycles

Customer Requirements - Differentiation of customer segments with

specific requirements - Increasing demand of fleet and company cars - Increasing product complexity

Project Approach

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Project Approach Overview

Framework consists of three parts: 1) Industry/Market Model for the analysis of external environment, 2) Operating Model for the analysis of internal capabilities, 3) Evaluation Model for the selection of market entry strategy

Market Political/

Legal Customer/

Product Competitor

Value Chain Channel Structure

Operating Model

Industry/Market Model

Competitive Position Assessment

Option Generation

Evaluation Model

Market Entry Strategy

Project Framework for Company ABC

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Mapping Client’s Requirements

To meet the Company ABC’s objectives, project framework will cover Company ABC’s requirements

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2012 market size in volume, inclusive of past 3 year growth and next 3 year forecast

Analysis of trends including drivers and barriers for this specific market segment

Assessment of the competitive landscape

Mapping of current channel structure

Recommendations on market expansion feasibility

Client’s Requirements

1

2

3

4

5

Project Framework

Market

Political/Legal

Consumer/Product

Competitors

Value Chain

Channel Structure

Option Generation

Market Entry Strategy

Industry/Market Model

Operating Model

Evaluation Model

Industry/Market Model – Market Perspective

The aftermarket volume will grow significantly during the next few years in China. Due to the high number of new vehicles each year, and successive aging, a positive development in the aftermarket is very likely to occur.

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(* Source: The automotive aftermarket for passenger cars in China, Polk, 2012)

23

28

34

42

50

60

0

10

20

30

40

50

60

70

2010 2011 2012 2013 2014 2015

Aftermarket Size in China

(Unit: Bn. USD)

≤ 1 Year, 20%

2 Years, 20%

3 Years, 14%

4 Years, 9%

5 Years, 8%

6 Years, 6%

7 Years, 5%

8 Years, 4% ≥ 9 Years,

14%

Vehicle Age in China

Date: 1/1/12

* Basis: End user prices without labor costs and VAT * 2010~2011 volume was recalculated based on CAGR(2012~2015)

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(* Source: Opportunities and Challenges in China’s Automotive Aftermarket, Technomic Asia, 2012)

Fragmentation in Parts Types

Fakes

Substitute

Value

Branded

OEM Parts

100%

80%

60%

40%

20%

Relative Pricing

High Relative Quality

Parts are generally segmented into 3 types in the service market

- OEM parts(Zeng Chang Jian) - Non-OEM parts(Fu Chang Jian) - Fakes(Jia Jian)

1) Zheng Chang Jian

2) Fu Chang Jian

3) Jia Jian

Parts are generally segmented into 3 types in the service market. Distributors fall on a spectrum between specialist and generalist

Distributor Types

Product Breadth

Model Breadth Broad Narrow

Broad

Specialist Covers limited number

of models and will tend to go deeper in

product offering

Generalist Will have wider model coverage but tends to

have more limited product line depth

Distributors fall on a spectrum between more model/platform focused and product type focused

- In general, most are relatively small scale(<RMB 100 million) and regionally oriented

Industry/Market Model – Market Perspective

Industry/Market Model – Political/Legal Perspective

Government policies have both positive and negative effects on the aftermarket. As China auto industry grows, the aftermarket should pay attention to the quality control of parts.

Local Government Policy

(* Source: 2013 China Economy Outlook, KARI, 2013)

Auto Recall Law

Due to the lack of public finance, the local government may enforce the policy to boost consumer spending

The local government such as Anhui and Henan has reviewed the policy to boost consumer’s auto spending

The central government enforced the law for the recall of defective auto products

Auto recall law has extended scope of recall and strengthened punishment about illegal activities

Sanbao Policy

Sanbao(repair/change/return) policy will be started in October 2013

Within 60 days from issuance of Sanbao receipt or 3,000 km mileage, customer may select the free exchange if there are defects in major parts such as engine, transmission

Policy

Positive on volume

Negative on quality

Positive on quality

Description Effect

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Industry/Market Model – Consumer Perspective

Due to the increase of middle class, C segment and SUV continued favorable tendency of sales. If this trend continues, the aftermarket will grow and consumers may have lots of choices to repair their cars with high quality and lower costs.

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(* Source: 2011 World Automotive Market Outlook, KARI, 2011 The European Automotive Aftermarket Landscape, BCG, 2012)

Compact Car

Due to sluggish demand of the middle class which is price-sensitive, compact car sales were decline

Due to the end of compact car purchase tax reduction, demand for A/B segment was decline

SUV

Due to the increase of the middle class and demand for leisure activities, SUV continued favorable tendency of sales

C Segment

Due to the increase of the middle class in the central and western inland regions, C segment(including low-price C1 segment and old C2 segment) continued favorable tendency of sales

Consumer Trend Future Consumer Trend in Aftermarket

High Quality, Lower Costs

The most important criteria for customers to select a repair shop will be value for money and parts quality

Aftermarket will evolve to transparent market and service costs will be declined steadily

Branded Chains

Decreasing Customer

Loyalty

Branded chains will get the wide recognition to consumers in the aftermarket

Among owners of used and older vehicles, the majority may favor independent repair shops rather than authorized repair shop

Numerous service providers with different strengths will offer customers a wide service selection

Industry/Market Model – Product Perspective

China domestic auto parts suppliers has low-cost competitiveness and go to the aftermarket for low-cost vehicle repairs. Foreign auto parts suppliers manufacture high value-added products such as engines, electronic parts, brakes.

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Product Volume (2007)

Trend

Engine Filter 300 mil Directions of technological improvement were minimization of environmental pollution, improvement of durability, miniaturization, modularization

Bearing Most of bearing for intermediate and premium vehicles depended on the import

Radiator 25 mil Chief items of export

Transmission of Power

Clutch 10 mil Top global parts suppliers from Germany and USA extended their business to China aggressively

Brake Drum brake

In passenger cars, domestic products were used only in cheap small car. Market share for passenger cars was about 20%

Disc brake 10 mil Demand was increased fast recently

ABS Lack a sense of ABS (only 20% of all cars were equipped ABS)

(* Source: The Outlook of China Auto Parts Industry, Korea Eximbank, 2009)

State-Owned Enterprise - Medium-size - Supplied auto parts to automakers

prior to opening markets - Due to low technology development

capability and low market share, business situation was worse

Private Enterprise

- Based on low price competitiveness, they went to aftermarket for low-cost vehicle repairs

Foreign-funded Enterprise

- Manufactured high value-added products such as engines, electronic parts, brakes, safety systems

- Supplied auto parts to other foreign firms and China domestic firms

China Auto Parts Product and Trend

Industry/Market Model – Competitor Perspective

Nearly all well known international aftermarket service providers have started to make inroads into the Chinese market, mostly via franchises, chain stores or auto supermarkets. All the business models make use of the ‘one-stop’ concept of providing a full range of products and service to satisfy customer demand

(* Source: China – Auto Aftermarket, US Commercial Service, 2009)

Company Description

Bosch China Bosch China, a one-stop shop with a full range of products and services and has plans to expand their service network to 1000 centers in China by 2010.

Yellow Hat Yellow Hat, a Japanese leading car aftermarket service provider, it cooperated with Shanghai Automotive Industry Sales Company to open its first chain store in Shanghai in 2005. The chain store is a one-stop aftermarket station with a full range of products and services. As of June 2008, it had 13 chain stores in China and has plans to open at least 500 stores before 2015.

Japanese Autobacs China

Japanese Autobacs China was set up in Beijing in 2005 and as of 2008 had 12 franchise stores in China. It plans to expand to 100 stores within 5 years. It provides full range of auto aftermarket products and services.

Shell China Shell China and SAIG set up a 50-50 joint venture company to promote the brand “Anji- Jellylube in 2005 with plans to grow the business to about 100 stores in Shanghai in the first three years with investments of $30 million. It is currently close to its 100 stores goal.

Cinep China Cinep China was set up in Beijing in 1997 and their chain stores are all over China. Cinep cooperated with Shell’s Pennzoil to sell Pennzoil’s “SNAP” products through its network. Cinep provides a full range of products and services.

ACDelco Started in 1999, ACDelco is a trusted brand with a full range of maintenance replacement and repair services. Their warehouse distributor network in China services over 100 ACDelco branded service centers as well as the independent aftermarket. Since 2002, ACDelco has greatly expanded its business in China.

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Operating Model – Value Chain Perspective

The important factors for auto aftermarket are cost and quality management. For these factors, value chain management should be optimized and operated in cost-effective manners

(* Source: The Outlook of China Auto Parts Industry, Korea Eximbank, 2009 OEM after sales strategy, Arthur D Little, 2008)

Aftersales Support

Logistics Marketing and Sales

Manufacturing R&D

Foreign-funded enterprise invested R&D center in China aggressively

Due to the government regulation and cost reduction, strengthened localization of parts sourcing

Due to poor infrastructure and cost reduction, considered options: in-house, collaborative with retailers or outsourcing

Should be closely linked with production quality processes

Value Chain for Production of Auto Parts

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Operating Model – Channel Structure Perspective

In China, almost all auto workshops that directly offer services to auto aftermarket end users try to provide a full range of aftermarket services. Products and services can reach consumers through 1) authorized channels, 2) franchise/chain store channels, 3) independent channels

(* Source: China – Auto Aftermarket, US Commercial Service, 2009)

Authorized 4S Shops

Franchise/ Chain Store

This is the major business model in China and it occupies over 50% of total market share

The 4S shop is authorized by the manufacturer to sell its vehicles and to provide the full range of aftermarket services to buyers within the quality guarantee period

Compared with building up and running a 4S shop, the capital investment to set up and to run a franchise workshop or chain store is lower

The prices of the products and services are generally also lower than 4S shops, and the location for setting up a store is much more flexible and is usually very convenient to customers.

Independent Repair Shops

The rest of the market share is taken up by other non-brand, small-scale workshops, workstations, maintenance centers or body shops

Channel Description Advantage Disadvantage

4S shop take advantage of manufacturers’ brand, image and guarantee to lock up almost all the maintenance and repairs and further aftermarket service

Most manufacturers have strict guidelines that a 4S shop must follow in order to maintain the image of the manufacturers’ brand

The model is mature and systematic and has proven to be very successful in U.S, Europe, and Japan for distributing global brands

Products and services are only guaranteed by the shops themselves

Limits customer demand for aftermarket products and services from chain stores

Provide customers with convenient access and offer much lower prices

Usually characterized as lacking skilled staff and not providing quality guarantees

19

Evaluation Model – Option Generation Perspective

From the result of competitive position assessment, there are several options by identifying new opportunities with competitive position and market expansion objectives

20

Market Political/

Legal Customer/

Product Competitor

Value Chain Channel Structure

Operating Model

Industry/Market Model

Competitive Position Assessment

Co

mp

etit

ive

Posi

tio

n

Market Expansion Objectives

Wea

k M

ediu

m

Stro

ng

Performance Brand-building

Outsourcing

M&A

Alliance or Joint Venture

Direct Investment

New Business Entry Options Competitive Position Assessment

Evaluation Model – Market Entry Perspective

Decision making framework helps to ask key question sequentially to enter market or not

21

Core competency for creating competitive

advantage

Assessment of market

attractiveness

Assessment of market entry

barriers

Don’t Enter Don’t Enter Don’t Enter

Enter

Decision Making Framework for Market Entry

Project Methodology

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Project Methodology Overview

Project will be performed in three phases: Phase I. Strategic Direction Planning, Phase II. Strategy Development, Phase III. Implementation Plan

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Phase I Strategic Direction Planning

Phase II Strategy Development

Phase III Implementation Plan

External Analysis

Internal Analysis

Industry/Market Political/Legal Competitors Customer Needs Market Opportunity

Product/Service Value Chain Core Competency Strengths/Weaknesses Competitive Advantage

Strategic Direction

Strategic Position Option Generation Evaluation Visioning

Strategy Development

Objectives Gap Analysis Enterprise/SBU Strategy Roadmap

Implementation Plan

Action Items Prioritization Organization Schedule

Project Methodology

Phase I. Strategic Direction Planning – External Analysis

For external analysis, we will use the following tools for understanding client’s business scope and overall attractiveness

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Key Questions

What are the market opportunities which are attractive to Company ABC?

What are the issues and obstacles as regards to political and legal perspective?

Who are the current and potential competitors?

What are customer’s needs and the trend of customer’s behaviors?

Activities

Desk Research - Press release - Statistics - Reports and surveys - Analyst reports

Indepth Interview

- Industry experts - Analysts - Competitors

Case Study and Benchmarking

Outputs

Industry Analysis - Industry value chain - 5 Forces analysis - Political/legal issue - Industry attractiveness

matrix

Competitor Analysis - Growth/share matrix

Market Analysis

- Market sizing

Phase I. Strategic Direction Planning – External Analysis

Illustrative outputs for external analysis

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4 1.5 1.0 .5

30%

25%

20%

15%

10%

5%

A B

C

E

F

G

D

Ind

ust

ry G

row

th (

%)

Relative Share

.25

Growth/Share Matrix Market Size Forecasting

Top-down

Bottom-up

Consensus

Scenario

Econometric forecasting - Correlation analysis - multiple regression analysis

Primary market research - Segmentation - Survey - Statistical analysis

Experience and assumption from industry experts, customers, etc

- Interview - Survey

Multiple cases based on statistical analysis

- Worst case, moderate case, best case

The growth share matrix displays graphically in a 2-by-2 matrix the position of each business of a company’s portfolio or compares the position of players in one industry

Illustrative

Phase I. Strategic Direction Planning – Internal Analysis

For internal analysis, we will use the following tools for understanding of a company and assess Company ABC’s own performance

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Key Questions

What is the vision and strategy of Company ABC?

How are our products and services delivered to customers in terms of brand image and quality

What is the competitive advantage of Company ABC?

Activities

Internal Report/Data Review - Strategy goal - Short-term and long-term

business plan - Financial performance - Internal data analysis

Client Survey and Interview

- Executives survey/interview - Working group interview - TFT workshop - Surveys - Internal data and reports

Outputs

Diagnosis of Company ABC’s Business

- Value chain analysis - Market positioning - Channel usage - Customer segmentation - Organization performance - Core competency - Competitive Advantage

Phase I. Strategic Direction Planning – Internal Analysis

Illustrative outputs for internal analysis

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Illustrative

Aftersales Support

Logistics Marketing and Sales

Manufacturing R&D

Value Chain Analysis

A Company

B Company

A value chain should show where value is being created within an industry or company. A value chain should be compared to major competitor.

Phase I. Strategic Direction Planning – Strategic Direction

For strategic direction, we will derive the strategic direction based on Company ABC’s strategic position and internal/external environment

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Key Questions

What is the current position in the market?

What is the target position in the market?

What are the options in order to reach target position?

What are the issues and obstacles to reach target position?

Activities

Identifying Key Issues - Key issues derived from

external and internal analysis - Importance of Issues

Option Generation

- Option lists

Vision Workshop - TFT workshop - Discussion

Outputs

Strategic Position Analysis - Industry attractiveness - Competitive advantage

Strategic Direction Planning

- Option Evaluation - SWOT analysis

Phase I. Strategic Direction Planning – Strategic Direction

Illustrative outputs for strategic direction

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Illustrative

Low Moderate High

Clear Leader

Strong

Favorable

Tenable

Weak

Industry Attractiveness

Competitive Advantage

Natural Development

Selective Development

Up or Out

Strategic Position Matrix

Natural Development Area - Strategy for investing constantly

and maintaining competitive advantage

Selective Development Area

- With a detailed analysis, strategy for investing selectively or enhancing competitive power

Up or Out Area

- Strategy for raising competitive power to upward or withdrawing from the market

Phase II. Strategy Development

For strategy development, we will define the objectives of Company ABC in the automotive aftermarket and derive market expansion strategy

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Key Questions

What is our measurable and concrete objectives?

Who are target customers?

What is value proposition?

What is profit model?

How do we get to the objectives?

Activities

Goal Setting - Target customers - Value proposition - Profit model - Assets - Organization structure

Feasibility Study

- Industry experts interview - Market survey

Outputs

Objectives - Strategic goal - Financial goal

Gap Analysis

- As-Is/To-Be gap analysis

Strategy Development - Market expansion strategy - Strategy roadmap

Phase II. Strategy Development

Illustrative outputs for strategy development

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Illustrative

Options for Market Entry

Asset Purchases

Acquisition

Mergers

Mergers-of-Equals

Joint Ventures

Strategic Alliances

Complexity

Preserves Autonomy

High Low

High Pros Cons

Alliance Low risk Low cash

investment Easy withdrawal

Complexity Low flexibility Long payback

period

Merger High synergy effect

Complex deal structure

Hard to sale after merger

Acquisition High controllability

Fast decision making

Easy gain of new capability

Vulnerable to regulation

Huge cash investment

High liability Fall in stock price

Phase III. Implementation Plan

For implementation plan, we will define action items and project schedule to achieve objectives derived from strategy development phase

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Key Questions

What are the necessary action items to achieve market expansion strategy?

What is the project schedule or time table to perform market expansion strategy?

Activities

Action Items Development - Align with market expansion

strategy

Prioritization - Importance evaluation of

action items

Outputs

Action Items Definition - Objectives - Major activity - Schedule - Cost and benefit

Project Schedule

- Short/long-term roadmap - Work breakdown structure - Gaant chart

Project Management Plan

- Monitoring plan - Contingency plan

Phase III. Implementation Plan

Illustrative outputs for implementation plan

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Illustrative

Task 1W 2W 3W 4W 5W 6W 7W 8W 9W 10W

I. Preparation

Project Setup

II. Strategic Direction Planning

External Analysis

Internal Analysis

Strategic Direction

III. Strategy Development

Goal Setting and Gap Analysis

Market Expansion Strategy

IV. Implementation Plan

Action Items Definition

Short/Long-Term Roadmap

Project Schedule

Project Management

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Outline of Project Management

In Project Management section, the following items should be included in proposal

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Organization

Organization Structure - Steering Committee - Project Task Force Team - Advisory Board

Communication Plan

Communication Plan - Kick-Off Meeting - Management Reporting - Interim/Final Reporting

Manpower

Project Manpower - Project Manager - Project Leader - Project Member

Quality Assurance

Quality Assurance Plan - Quality of Deliverables - Contingency Plan

Know-How Sharing

Know-How Sharing Plan - Education - Training - Workshop

Why Ipsos Business Consulting

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Outline of Why Ipsos Business Consulting

In Why Ipsos Business Consulting section, the following items should be included in proposal

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Value Proposition

Prior Experience - Project Experience - Thought Leader - Global Network

Company Introduction

Introduction - History - Service Line - Financial Status - Organization Structure

Manpower Introduction

Role and Responsibility - Project Experience - Educational Background

End of Document

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