Thanks to years of sustained and stable growth in its output, the automotive industry became one of the pillar industries in China's national economy in 2007. According to statistics announced by China Association of Automobile Manufacturers on April 3, as far as the global automobile production is concerned, the growth rate in Asia-Pacific and European region ranks top in the world, with Japan, the US and China in the first three places respectively. And almost without being noticed, automobile has become the popular consumer goods and made its way into the ordinary people's homes like other daily necessities. The skyrocketing number of the consumer group has brought an increasingly bright prospect to the automotive industry. Apparently, this trend has not escaped the attention of the hawk-eyed VCs and PEs.

Apart from raw materials, the value chain of the automotive industry covers from spare parts, manufacturing, sales to after-sales service. The spare parts and after-sales service at both ends of the chain have attracted more attention of VC and PE due to their untapped fast growth and high profits.

Manufacturing of Spare Parts is Gradually Attracting the Attention of VC and PE

Statistics show that the profitability of the spare parts manufacturing industry is generally higher than that of the automobile entire vehicle manufacturing industry. Over the past decade, the 6.4% average profit rate of the ten extra large-scale automotive spare parts enterprises in the world has been higher than the 4.7% of the large-scale automotive entire vehicle enterprises, while the average profit rate for the top 50 automotive spare parts enterprises in terms of sales turnover in China is 6.9%.

The past several years has witnessed the rapid growth of China's automotive spare parts industry, which also has grabbed global attention. The enormous space for the development hidden in the Chinese market is the biggest momentum to attract the active participation of global venture capital. Besides, China's automotive spare parts industry is also facing enormous opportunities for development. The increasing global procurement by multinational companies has created opportunities for local automotive spare parts enterprises to enter the global supply chain.

According to statistics from Zero2IPO Research Center, 14 enterprises have obtained the investment of VC and PE since 2000, with total amount invested of nearly US$224 million. The number of local investment institutions that have invested in automotive spare parts enterprises is far more than that of foreign-funded investors, while the latter is higher than the former in the total amount invested and the single amount of investment.

From Table 1 we can see that since KPP invested US$100 million in ASIMCO in 2004, and Standard Chartered Private Equity Limited and Temasek Holdings invested in Dongfeng Motor Group Co., Ltd. in December 2005, Baring Private Equity Asia Group injected US$23 million in Minth Group Ltd. within less than half a year. And eight months later, DT Capital Partners, along with GGV, injected US$14.75 million in Chongqing Chaoli Hi-Tech Co., Ltd. It is obvious that foreign VC and PE are becoming more and more interested in the automotive spare parts industry.

On the other hand, from the perspective of fixed assets investment in automotive industry these years, the investment in the automotive spare parts industry accounts for about 30% of the total. Compared with those foreign countries that are fairly developed in automotive manufacturing, the automotive spare parts industry in China is obviously undercapitalized. With the improvement of IPR, financial system and innovative ability of domestic automotive spare parts enterprises, they will surely attract more and more venture capital investors.

Auto After-sales Market - a Golden Industry

With the rapid development of China's automotive industry and the influx of foreign capital into domestic automotive service industry after China's entry into the WTO, China's auto after-sales market will witness a remarkable growth. The auto after-sales market refers to all kinds of services after the sales of automotive, covering various demands arising in the process from the sales to abandonment and a series of transaction activities arising therefrom, which include after-sales service, spare parts and maintenance of products, automobile insurance, automobile financing, automobile-related information, culture and advertisement, etc. Besides, it also includes the intelligent traffic, automobile entertainment, and automobile club.

In the mature international automobile markets, 60% of the profit comes from their service sector. In the US, the annual output value of the automotive after-sales service industry amounts to as high as US$140 billion. American Automobile Association (AAA) that specializes in the automobile services has 49 million members, accounting for more than 40% of the total number of US drivers. The annual membership fee alone hits US$2.5 billion. In Europe, the automotive after-sales market also is the main source of the profit of the automotive industry. Therefore, the auto-after market is recognized by insiders as the most profitable "cheese" on the automotive industry chain.

Wang Xia, Vice President of Automotive Sub-Council of China Council for the Promotion of International Trade, anticipates that by 2010, the total market value of China's auto after-sales market will reach US$300 billion. At present, as China's auto after-sales market as a whole is still in its infancy, the fast-growing market and the 40% profit rate, 13 percentage points higher than that of the European and American countries, have strongly drawn eyeballs of a large number of venture capital investors.

Among these investees, 51auto, biauto.com, 2duche.com and motor2.cn are information providers of the second-hand automobile transaction. UAA, cars.com and sooboo.com.cn deal mainly with such services as automobile insurance, rescue, and maintenance. From this we can see that VCs are targeting at some weak or new rings on the automotive industry chain, which are more of the re-integration and intensification of the traditional chain.

In a short period of two years since 2006, nine enterprises focusing on auto after-sale services have obtained a total investment of more than US$138 billion, which is lower than that of the automotive spare parts enterprises, but it was mainly because the automotive spare parts enterprises mostly belong to traditional industry and the investors are mostly the PE institutions that heavily invest in fast-growing enterprises or enterprises at the later stage of development, with a moderately large investment amount. On the other hand, most of the auto after-sales market enterprises are "automobile plus Internet" auto.com companies that mostly belong to high tech Internet industry where the investors are VC institutions that are inclined to invest in startup companies. Therefore, the financing amount of the auto after-sales market enterprises is inevitably lower than that of traditional industries.

In addition, the number of investees in the automotive spare parts industry is larger than that of enterprises in auto after-sales market mainly because the former starts business (since 2000) earlier than the latter (only starts from 2006). But, the frequency of investment in enterprises in auto after-sales market is obviously higher than that in automotive spare parts.

"Worry" and "Hope"

¡ô Some Spare Parts Enterprises Lacking Core Technology

Just like an invisible magnet, China's automotive market has deeply won the favor of famous international automotive service enterprises. The alarming thing is that more and more foreign spare parts enterprises have chosen to establish wholly foreign owned enterprises since their entry into China. Even some joint ventures are being changed to wholly foreign owned enterprises and the core technology has never been shared by the Chinese side even in joint ventures. At present, China's automotive manufacturers have found themselves in a passive position because the core technology of whole vehicle is in the hands of others. So if the spare parts also have been controlled by the foreign side, the maintenance of the auto after-sales market and many other related aspects will be seriously affected.

¡ô No Leader in the Auto.com Enterprises

Compared with the industries of online games, education & training, and outdoor advertising, the financing ability of the automotive websites has not utterly demonstrated due to lack of industry leaders. From the perspective of investment frequency, chinacars.com, UAA and biauto.com all have obtained two rounds of financing. Wherein, the two-round financing of chinacars.com has exceeded US$30 million. However, the automotive websites are still in their infancy at present, and there will be much more investment events occurring in the future. In this sense, it is hard to say what types or what automotive websites will be more favored by VC and PE.

The successful overseas listing of Shanda, New Oriental and Focus Media and the repeated new records set in market value aroused the interest of VC and PE in the areas of online games, education, and outdoor advertising where the enterprises of the same kind, with leading companies as their models, can increase their financing evaluation and as a result the number of investees will be larger than other industries. In conclusion, only by undergoing test of the market, can leaders stand out among automotive websites.

¡ô More and More Competitors Emerging

National Automotive Parts Association (NAPA), the biggest automotive parts chain enterprise in the US, made its way into China as early as the 1990s. Later on, many automotive service enterprises in the auto After-sales Market including ACDelco, the world's biggest automotive fast-repair chain enterprise, Bosch corporation, the world's biggest automotive parts supplier, and Autobacs, the biggest manufacturer of automotive products in Japan, have set foot in the Chinese market successively and are ambitious to seize the market in China.

At the same time, there appeared more and more Chinese enterprises dealing with the same business. Take the automotive websites that have obtained the financing for example, many of their business services are overlapped. The main business of UAA, cars.com, sooboo.com.cn and chinacars.com all include the automotive insurance. UAA and cars.com both deals with the rescue and maintenance service. In terms of the profit-making mode, UAA, cars.com and sooboo.com.cn all charge a procedure fee of automotive insurance. The income of chinacars.com also includes the automotive insurance. Obviously, the market competition is becoming increasingly intense.

¡ô Local Enterprises Enjoys Inherent Advantages

Although China's auto after-sales market is still in the bud, China's local automobile service enterprises enjoy inherent advantages in establishing network channels, having better understanding of spending habits of local consumers and promoting service-oriented culture, while the foreign standardized service system will probably need some time to adapt itself to local needs after its entry into the Chinese market. Therefore, as far as the domestic auto after-sales market service is concerned, we still have time to update our ideas to provide all-round, standardized and customer-based services.