The Rise of China’s Second-Hand Car Market

By the end of 2015, the Chinese owned approximately 172 million cars, and the country maintained its position as the world’s largest car market for the seventh consecutive year.

However, annual growth in the market for new cars has slowed significantly since 2011, while the market for used cars has gradually gathered momentum.

In terms of sheer volume, the new-car market still dwarfs the second-hand car market. In 2015 alone, 21.1 million new cars traded hands in China – nearly double the volume of the U.S. market and larger than all of Europe. However, according to the Chinese Association of Automobile Manufacturers, this market boasted only a mild growth of 4.68% year-on-year, down from a  9.2% rate in 2013. This deceleration could be attributed to the overall sluggish performance of the Chinese economy in 2015, which sported its lowest growth rate in 25 years. Yet analysts forecast that the lower growth rate in the new- car market will persist as the new norm.

The opposite is true on the market for used cars. As early as 2011, the growth rate for second-hand car sales surpassed that of new cars – a trend which has since continued. In 2014the market for used cars expanded at a rate of 16.2%, and a total of 6 million used cars were traded. Despite, or perhaps due to, the overall economic downturn in 2015, the market sported a similar expansion in 2015, as 7 million used cars traded hands. The Chinese Association of Automobile Manufacturers predicts that second-hand car sales will rival or, potentially surpass, that of new car sales by 2020.

One of the most significant reasons for this market shift lies in the changing attitudes of Chinese consumers. Increasingly, consumers are emphasizing the importance of practicality and functionality in their car-purchasing decisions. Certainly, luxury cars remain desirable, particularly in upper-tier cities in times of economic surplus; yet, the allure of owning a car as a mere status-symbol seems to be diminishing. Moreover, competition from alternative modes of transportation has disrupted the market. As ride-sharing and e-hailing continue to flourish, consumers face a diverse array of transportation options. For many, this means that car-ownership is no longer a necessity.

Nonetheless, the enthusiasm for car-ownership remains significant, which means that other factors must account for the market shift. The data indicates that consumers today more readily accept used cars as a potential alternative. According to a 2016 survey by McKinsey and Co., 47% of potential car-buyers now consider used-cars as a viable alternative to new cars; in 2011, only 18% considered the two goods as adequate substitutes. What sparked this change in preferences?

Perhaps the most significant development in the burgeoning used-car market was the proliferation of online sales-channels between 2011 and 2015. Back in 2011, the market for used cars more heavily relied upon traditional sales channels. Auto dealers rarely offered warranties on second-hand vehicles, and verifiable information about product quality was relatively scarce. Informational asymmetries abounded, as buyers worried that untrustworthy sellers would take advantage of them. Though these concerns are still prominent today, the implementation of E-commerce has helped mitigate the problem by providing consumers with increased transparency. Some websites, such as youxinpai.com, serve as online marketplaces that connect buyers and sellers; more importantly, they provide condition assessments, facilitate secure payments, offer warranties, and sometimes even handle logistics and transportation – all for a transaction fee of approximately 1-3%. Large auto dealerships, such as Pang Da, began teaming up with websites like Youxinpai in 2014, thereby streamlining the sales-process and lending further credibility to the transactions.

Digital sales has expanded rapidly: in 2014, 350,000 cars were traded online, representing a staggering year-on-year growth rate of 58.4%, according to PR Newswire. Though that sales volume accounts for a small percentage of the used-car market, trends indicate that online sales will play an increasingly important role. The online marketplace has heightened the expansion of the used-car market in other ways as well. Even when the entire transaction is not processed online, consumers increasingly use online data to verify a vehicle’s history. Nonetheless, although these channels have helped minimize informational problems in the marketplace, trust remains a key concern for many consumers. The aforementioned McKinsey survey found that car-buyers biggest reservation about used-cars was a lack of trust in the dealer’s warranty and in the seller. Evidently, though E-commerce has made important gains, there is still a lot of room for improvement.

Important legal changes also contributed to the growth in the used-car market and have allowed digital sales channels to unlock their potential. In one example, government policy used to prevent cars from being re-sold in provinces other than where they originated. In 2015, the government changed that law. Such a change meant that cars in upper-tier cities could be sold as second-hand cars in lower-tier ones – an important development that helped boost consumer demand. The government has also relaxed its regulation on the re-sale of car-parts, instilling confidence in consumers that they will be able to repair their used car if necessary. Indeed, online selling of car-parts has become an important industry in itself.

Though the used-car market remains small in comparison to that for new-cars, it has been gradually gathering momentum and will continue to play an increasingly important role in the economy moving forward.

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