Will the Global Chip Shortage Rejuvenate China’s Used Car Market
The global chip shortage has impacted the majority of the world’s automakers and is it possibly here to stay until 2023. Many automakers have cut production and some have chosen to only produce their most profitable models. New cars are so hard to come by nowadays, many car buyers in the US have turned to used cars. But what about China? How is the world’s largest car market reacting to this phenomenon?
Unlike the US and many other Western countries, China’s cultural stigma against used things has prevented the majority of car buyers from purchasing used cars in the past. Is the chip shortage “chipping” away at these long-held beliefs? It appears so. Second-hand car transaction data released by the China Automobile Dealers Association shows that in the first half of 2021, a total of 8.4342 million vehicles were traded in the second-hand car market, a year-on-year increase of 52.89%.
Altering the “Must Buy New” mentality among younger generations
As we mentioned above, “new” plays an important role in Chinese traditional concepts. Wearing new clothes for bring in the New Year, buy a new house when getting married, if you pay attention, you will find that “new” often appears in the Chinese language. Clothing rental platforms have struggled to take off, and while gaining some momentum, thrift stores are nowhere near as popular as they are in the US. Therefore, in order for China’s used car market to become more mainstream, the first thing it needs is to defeat the “new is better” tradition.
As Gen Zs consumers gradually enter the market and become the main consumer group, the traditional concept of “buying new and not buying old” is being eroded. In contrast to previous generations, contemporary young people pay more attention to value for money, making them more open to buying second-hand. A great example of this is the second hand marketplace app Xianyu, which has become quite popular among Gen Z consumers.
While young consumers’ attitudes towards used things may already be changing, when it comes to cars, the shortage of new vehicles may be accelerating this shift.
Supply and demand imbalance brings business opportunities for China’s used car market
The market is mainly composed of two parts, supply and demand. Opportunities arise when demand exceeds supply. Affected by the global epidemic, a large-scale chip shortage in the automotive industry has led to a decline in automotive production capacity. On average, a semi-conductor disk needs 3 month to “age” if not longer. On top of a chip shortage, other factors like the supply chain back ups and covid lockdowns in China and the Ukraine war shutting down factories, are further delaying new cars from rolling down the assembly lines.
However, the market demand did not decrease with the decline in the supply of new cars, so consumers have been forced to turn their attention to the used car market.
In addition to the supply and demand gap caused by the decline in production capacity, the reduction in income caused by lockdowns in China and a sluggish job market have also lowered many consumers’ budgets for a new car, but it did not decrease consumers’ expectations.
While there is a stigma against used cars in China, consumers are also worried about appearances. In the “face” driven Chinese culture, a vehicle’s brand is very important. To many people, a used Audi is still better than a brand new Toyota. With this mentality, many Chinese consumers are finding themselves in the used car market.
Policy changes and digitization promoting market development
In addition to the market opportunities brought about by the imbalance between supply and demand, the introduction of favorable policies has also contributed to the development of the used car market.
On the one hand, the cancellation of the relocation restriction policy has made the transaction and circulation of used cars more efficient. In the past, considering the pressure of environmental protection and complicated procedures, local governments usually restricted the inflow of second-hand cars from other provinces, which made it difficult for the second-hand car market to circulate throughout the country. The cancellation of the relocation restriction policy not only increases the circulation rate of used cars, but also further improves the value of used cars.
On the other hand, the reduction of value-added tax on used cars has also reduced the financial pressure of dealers to a certain extent and promoted healthy competition in the industry. Since personal transactions can be exempted from VAT, many used car dealers choose to conduct transactions through “scalpers”, which results in an overall VAT burden well below 2%. The reduction of value-added tax makes the tax burden fairer and healthier development of the market.
What’s more, online apps have also provided a platform for used cars, so that used cars are no longer confined to the small trading market, but can be noticed by more consumers through the Internet.
