Maroc - EURASIAREVIEW.COM - A la une - 29/Aug 11:52

Models And Risks Of Chinese Automobile Exports – Analysis

By He Jun It is not uncommon to hear Chinese foreign trade professionals talking about doing businesses in the Middle Eastern region this year, and automobile dealers have been particularly active in this context. Following the outbreak of the Russia-Ukraine conflict, Chinese car dealers capitalized on the opportunity to export vehicles to Russia, which was experiencing a supply shortage, and consequently achieved substantial profits. However, as of the latter half of last year, intensified industry competition and the imposition of new tariff policies by Russia have transformed the Russian market from a lucrative opportunity into a challenging environment. Consequently, traders are now redirecting their focus to the affluent Middle Eastern market. The concept of automobile parallel exports derives from the notion of parallel imports. Specifically, car dealers, lacking authorization from the original brand manufacturers, procure new vehicles from the Chinese market and subsequently sell these vehicles abroad as used cars, despite their essentially new condition. This practice is commonly referred to as "zero-kilometer used cars". By eliminating numerous intermediaries, this model provides advantages in terms of both pricing and delivery processes. The explosive demand in overseas markets has facilitated the rapid expansion of this business model. As a business that has surged in popularity in recent years, there are stories of Chinese traders in Russia suddenly becoming extraordinarily wealthy through parallel exports, earning millions of yuan in a year. The typical operation of this business involves first registering new cars in China, then leveraging Central Asia's personal vehicle purchase discounts and low-cost customs clearance policies to sell the cars at a low cost to Central Asia. Alternatively, Central Asia is used as a transit point for exporting the vehicles to Russia, thereby earning substantial profits. According to statistics, last year China exported 900,000 vehicles to Russia, more than quadrupling the figure from the previous year, a significant portion of which were zero-kilometer used cars. However, the Russian government mandates that from April 1, all vehicles transiting through the Eurasian Economic Union to Russia must pay the previously saved tax differences, which has effectively closed the loopholes in the gray market clearance routes. Consequently, some Central Asian countries have raised their import thresholds, increasing the costs of parallel exports. From the Khorgos port to the transit hub in Bishkek, there has been a large-scale withdrawal of vehicles, with many traders urgently selling off their accumulated inventory, leading to a temporary congestion at the port. As the industry in Russia becomes increasingly competitive and the new tariff policies are enacted, traders have begun shifting their focus to the affluent Middle Eastern market. Geographically, the Middle East comprises over 20 countries across West Asia and North Africa, with a combined population of around 500 million. These countries vary in their development, with some exceptionally wealthy while others are affected by ongoing conflict. When exporting Chinese cars to the Middle East, there are mainly two approaches. The first is through manufacturers authorizing overseas dealers, which is essentially a formal channel. The other is through parallel exports, where traders privately convert new cars into used cars for export. In 2013, during the era when parallel imports were popular in China, there were few participants in parallel exports. As a result, parallel exporting a Chinese car priced at over USD 10,000 could yield gross margins as high as 30%. According to feedback from a car dealer, the business of automobile parallel exports to the Middle East actually grew during the three years of the pandemic, with cars selling exceptionally well. The pandemic marked a turning point for the development of Chinese automobiles in the Middle East. Previously, the Saudi automotive market was predominantly dominated by Japanese and Korean brands, with Japanese brands alone holding over 50% of the market share at one point. However, as these foreign brands faced production interruptions due to chip shortages, while Chinese manufacturers' production capacities remained largely unaffected, the market share vacated by Japanese and Korean brands was seized by Chinese car dealers. Although the volume of vehicles in parallel exports is smaller compared to those authorized by dealerships, their impact on overseas markets should not be underestimated. The foundation of this business lies in the information asymmetry and price differences between countries. For instance, consider a specific model from a particular automobile manufacturer. In different countries, this model is sold by various dealers, each with different procurement costs and promotional strategies, leading to significant variations in retail prices. Additionally, the allocation of quotas from manufacturers to dealers varies by country. For example, in politically unstable countries like Iran and Iraq, quotas are relatively limited. Due to issues such as payment methods, dealers in these countries often have to source vehicles from third-party countries. This demand creates market opportunities for parallel exports. However, as more and more participants enter the market, the Middle Eastern automotive market has also become increasingly competitive, with price-cutting becoming more common. For instance, if a dealer quotes a customer USD 10,000 today, another dealer might offer a lower price the next day, even though the actual retail prices remain relatively stable. The current state of the Middle Eastern market resembles that of Russia last year: some individuals have already made significant profits, attracting more entrants, which increases competition. Despite the heightened competition, the market is yet to be saturated to the point of eliminating profit opportunities, so many continue to enter the field. Noteworthily, similar to the Russian market, parallel automobile exports carry significant transaction risks and are highly susceptible to policy changes. However, unlike Russia, the Middle East is more distant from China and the policy uncertainties are greater. For instance, a car dealer received an order from Iran in the first half of the year, and the vehicles were prepared at the port in Dubai and ready for dispatch. However, due to the Iranian presidential election, customs suddenly suspended vehicle imports, causing the shipment to be delayed at the port for nearly two months. More critically, if vehicles are exported and face issues with customs clearance, they cannot return once they have left the country. There was an incident where a batch of vehicles from a domestic German joint venture was exported to Dubai. Due to the low sale price, it impacted the interests of local authorized dealers. Consequently, these dealers complained to the German headquarters, which led to the vehicles being unable to complete registration locally, resulting in substantial financial losses for the exporter. Final analysis conclusion: While the Middle Eastern market may appear prosperous, it is fraught with complex risks. Many Chinese dealers believe that the automotive market in the region still holds significant growth potential, particularly in Saudi Arabia and the UAE, where residents enjoy substantial economic affluence, leading to a continual renewal of automotive demand and suggesting substantial future market potential. However, the sustainability of this business remains uncertain. In the long term, the internationalization strategy of Chinese automotive companies is an irreversible trend, and manufacturers are likely to establish their own sales networks and even invest in production facilities in the Middle East. As these official channels become more established, opportunities for traders reliant on parallel exports will gradually diminish.