July 13, 2006

Used Cars in China: Part 3 – What do you get when you mix sake and baijiu?

Filed under: Automotive — Administrator @ 2:45 pm

The winning used car model in China is going to be a combination of an online/offline offering – this, I think, we all know. The question is who is going to be the first player to make this happen? The key to unlocking this secret is in fact not a key at all but rather an Apple.

No, not a Steve Jobs’ Apple but a Japanese Apple – namely Apple International Company Limited. Apple, one of Japan’s largest secondhand automotive dealers, not only operates over 290 nationwide franchised used car outlets but also exports secondhand automobiles to overseas markets, principally to Southeast Asian countries.

Back in September 2005, Apple Auto Network, a subsidiary of Apple International, teamed up with Beijing-based Yafei Cars and a leading Japanese conglomerate, Sojitz Company, to establish Beijing Taizhi Zixun Company. Aipu, as the joint venture has been come to be called, will purchase and sell used cars through a franchise network in China – Aipu looks to have 500 stores by year-end 2007 and 3,500 branches by 2010 (a bit ambitious, aren’t we?).

The last bit of public information I’ve been able to find on this relationship was from an April 2006 report in China Daily announcing the opening of Aipu’s flagship store in Beijing’s Changping district.

Right. So, how dominating is this venture going to be? I think the answer hovers somewhere between absolute domination to competitive (oh, yeah to complete bust, but let’s be glass is half-full people for just once).

And here is why – the core players (Apple and Yafei each own 40% of the JV) bring to the table three core attributes: (1) automotive related franchise experience in both domestic and international markets; (2) ability to readily source, control, replenish used car inventory; and (3) in-house technology expertise (e.g. infrastructure, auction, and sales management).

Apple International Company Limited

Apple International entered China in 2003 when it established A.I. Holdings in Hong Kong. Over the past three years, A.I. Holdings has established several subsidiaries and joint ventures in China and Hong Kong – and thus amassing the following four business line: (1) international car trading – buying/selling new and used cars; (2) car rental and leasing; (3) operates China-based automotive dealerships, selling both domestic (Jinbei, Dadi, Wuling, Hangtian, and Soyat) and foreign (Mercedes, Renault, Hyundai, Chrysler, Jeep and Mitsubishi) brands; and (4) global/regional exporter of Chinese made cars via its subsidiary China Automobile Exports.

The “amassing” kicked off in March 2004, when Apple International established a new joint venture in Hong Kong called Prime On Corporation which would focus on establishing a nationwide (China) chain of Mercedes dealerships. This was followed a couple months later, May 2004, with the creation of Yunnan Kubo Auto Trading Limited, an entity 90% owned by A.I. Automobile (China) used to purchase Xinglong Motor Group. Xinglong maintain franchise rights to sell Renault, Hyundai, Chuka, Chrysler and Jeep.

In April 2005, Apple entered the Shanghai market by establishing, China Automobile Exports (CAE). With showrooms in Shanghai, CAE has exclusive global distribution of Shenyang Jinbei (pick-up trucks and SUV), SAIC GM Wuling (mini-trucks and mini vans), and Wuxi Yuejin (sedans); CAE has exclusive regional (Africa, Australia, and part of Asia and Middle East) distribution rights of Baoding Dadi (pick-up trucks and SUV) and Shanghai Zhunti (min-bus).

Back in Japan, Apple was equally as active on the technology front. In February 2004, Apple International purchased 16% of Autobytel Japan. The Alliance was intended to build a web based auto marketing platform to serve customers in Japan, China and Southeast Asia to support Apple’s dealerships in China and Thailand – essentially, Apple wanted to develop Internet sales network to cover Asia Pacific region, leveraging Autobytel’s platform.

About a year later, January 2006, Apple liquidated its stake in Autobytel. I spoke with some individuals from Apple and from what I gather there are two key reasons for this liquidation: (1) public response – Apple had a shift in direction; and (2) internal response – there wasn’t enough demand for a web based platform outside of Japan (i.e. market immature).

Anyhow, back to 2004, specifically September 2004, Apple Auto Network (a subsidiary of Apple International) formed an alliance with i-Auc (a web based subsidiary of Aucnet, one of Japan’s largest used car auction networks) and established Apple Auction. The platform Apple Auction – based of i-Auc’s internet auction bidding service – is used nationwide by Apple Auto Networks’ 300 franchised used car outlets – Apple’s end game is to introduce the platform to China.

Yafei Qiche (Automotive) Chain Store

Founded in 1994, Yafei is one of China’s largest nationwide chain stores with 500 outlets in 240 cities across China – of which about 270 outlets have links with local banks and insurance companies to provide loans. Yafei also has ties to Century Automotive Club, an automotive rental/leasing company with a nationwide network consisting of about 50 branches.

Early in 2000, Yafei looked to leverage the Internet by signing a deal with Sina.com in June 2000, to develop an online car sales and rental platform. The deal would later include provisions for an online auto lease lead generation platform.

Actually, Yafei was one of the earliest players in the auto leasing segment – this largely came as result of Chinese banks looking to spread their risk among several institutions. For example, Yafei formed a joint venture with department store chain Parkson and Shanghai Automobile Industry Sales Corporation to guarantee car loans. Unfortunately, this and other such relationships lead to a 2003 investigation by People’s Bank of China (central bank) into Yafei’s automotive finance business.

Some concluding thoughts

Offline, Aipu looks fairly well positioned to be a major threat in the used car space – the key is to observe how they plan to leverage the Internet. On one front, Apple is coming off a one year partnership with Autobytel while continuing to maintain its relationship i-Auc’s Internet based auction network – so, yeah, there is knowledge that can be transferred. On the other front, Yafei has shown they too are “somewhat” web savvy having forged a partnership, albeit unsuccessful one, with Sina five years ago (my guess is it was less about the offering and more about timing). It seems reasonable to assume Aipu has Internet opposable thumbs and therefore won’t completely muck up an Internet offering.

Yet in spite of this neither Apple nor Yafei has an existing footprint in China’s Internet space – and to be honest, if you want to hit the market hard and fast, you’re gonna need this footprint from day one (queue Conan the Barbarian: Crush your enemies. See them driven before you…).

And so, this seems like an excellent opportunity for a China based auto related Internet portal with zero resources to address the offline opportunity and start chatting Aipu up with the idea of owning Aipu’s online presence (perhaps, drawing some lessons learnt from Ebay’s hook-up with Manheim and AutoTrader).

As Sox fans say…cowboy up!

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