Authors: Jan Y. Yang, Shansi Liu, and Jason Chen

In this article, the authors examine the driving forces behind the steadily growing Chinese used car market, and analyze the four distinct business models that exist currently in the Chinese O2O (online-to-offline platform) market. This country and industry specific article provides valuable insights to pricers in multiple industries, and especially to those working in international markets. Jan Yang is Managing Director of China Desk at Simon-Kucher. He can be reached at Jason Chen and Shansi Liu are Consultants at Simon-Kucher’s Beijing Office.

The Pricing Advisor, October 2017

The used car market in China has been growing steadily for almost 15 years. According to the China Automobile Dealers Association, in 2015, the annual transaction volume of used cars in China increased from 2014 by approximately 2.3 percent to 9.4 million units. Additionally, the annual turnover increased by 26 percent to RMB 368 billion. More and more friendly policies as well as dynamic “Internet Plus” environment allow the used car market to rapidly grow in the China market. The market is estimated to reach 20 million units in 2020. However, used cars make up a very small part (around 28% in 2015) of total car sales in China compared to the mature markets, in which the transaction rate of used cars is around 70% of the overall car sales. There is still enormous potential for growth – especially in the times of “Internet Plus”1.

There are mainly two used car transaction channels in China: the traditional market, and the Internet online-to-offline platform (O2O). In the traditional market, transparency lacks for buyers and sellers alike. The seller can’t identify a potential buyer and likely does not know the market value for his or her car. At the same time, the buyer does not know where to buy and also has no way of knowing what kind of condition the used car is in. As more and more O2O platforms join the game, services such as professional consulting, on-site car inspection, car registration, re-examination, transaction services, etc. become more professional. The exchange of information is more efficient, and the inspection of used cars is more transparent and standardized. According to Analysys, in 2015, the Internet transaction volume of used cars in China exceeded 1 million units, an increase of 60 percent since 2014.

Currently the Internet O2O business in China is still in its early development phase, in which multiple business models co-exist due to the complexity of the transaction chains. From “production” to “distribution” to “consumption,” we can distinguish four distinct business models that exist currently in the Chinese O2O market.

The C2C business model

To begin with, in a C2C business model the O2O platform provides free inspection of the used car and then posts the car information on its online or offline platforms for the follow-up deals. Beepi, the American peer-to-peer market place for buying and selling used cars, is the forerunner of this model. offers all-in-one services including on-site inspection, online transaction and door-to-door delivery, resulting in improved transaction experience. In China, and are using this kind of business model.

The C2B2C business model

In the C2B2C business model, the O2O platform issues inspection reports of the used car and then runs an auction among end dealers. The dealer with the highest auction price wins the car and re-sells it to the end customer. The Chinese websites and apply this model.

The B2C shopping mall

The O2O platform acquires used cars and then re-sells them to the end customers via its online or offline platform. Carmax, the American largest used car retail transaction platform is a good example of this model. In China, and are platforms representing this business model. The market of B2C shopping mall is much larger than C2C (in ToC market, the B2C and C2C business respectively accounted for 80% and 20% in 2015) due to higher standardized transaction processes and aftersales services.

The B2B auction

The core business of the B2B auction model is to provide an online auction platform for used cars dealers, such as and practice. Among all existing business models, B2B auction is relatively the most mature business model. It has a high transaction efficiency accounting for the largest share (in 2015, the transaction amounts of the two biggest B2B platforms accounted for 60% of the entire O2O used car market) in the O2O used car market. However, comparing with those models involving end customers, the B2B model has less branding opportunities. The development potential of the B2B model is perceived to be smaller than that of other ToC business models.

All of these models outplay the traditional transaction channel by providing a platform that is more efficient in the exchange of information and more standardized and accurate when it comes to the car inspection (which increases credibility among platform users). However, this is not a cure for the root problem. So far, no one can be ensured that the used cars are valued fairly: a standard inspection and valuation system across the whole country is still lacking. In other words, all existing business models fail to solve the key pain point in the used car market, i.e. the information asymmetry between seller and buyer. The information asymmetry is becoming one of the biggest headaches of the end users which refrains them from buying used cars or haunts them even after the transaction is completed. For the online platforms selling used cars, information asymmetry is seen as the biggest bottleneck for them to gain more business.

To tackle this issue, the used car industry could potentially learn from other industries. A leading telecom operator, for example, bundles handsets and telecom services by offering an all-in subscription model. In that model, users can switch the handset to the latest model every time the contract is renewed. Another example comes from the security services business. A world-class provider in this sector breaks the standard product approach by offering diverse packages of service levels. According to the service level, the provider will assign on-site staff and provide the necessary surveillance equipment. In doing so, the lines between traditional service and product offering blur. More importantly, the customers benefit from the carefree service, because they no longer have to worry about technical details.

Both examples have one thing in common, i.e. the underlying subscription revenue model, which has been a mega-trend that we have observed in the last years. Subscription-based revenue models are making inroads to many consumer businesses for good reasons, as they help boost customer loyalty and value by bringing companies and their customers closer.

They enable companies to learn about customers’ needs and usage behaviors and develop more personalized offers. The distinct advantage of subscription revenue models is well-recognized in capital market – Wall Street values subscription businesses at higher multiples because such businesses have the potential to improve customer lifetime value as well as reduce acquisition cost. On the other hand, the future revenue streams under a subscription model are predictable, a key to enterprise valuation.

A subscription revenue model can fit well with the used car market. Instead of paying a large amount of money upfront, consumers would typically rather prefer smaller and manageable installments instead. Subscriptions would effectively lower the entry barrier to the used car market and lure potential buyers, who would not consider buying a car otherwise.

We could imagine something like this: The O2O platform could purchase various used cars and provide bundling services to end customers. End customers could pay for the service on a monthly basis during the contract period. Such a bundling service could, for example, include the right to use the chosen used car, enjoy car insurance, basic repair and regular maintenance services. The fees could vary by car segment, the condition of the car, and possibly the contract length. During the contract period, the user could also be allowed to switch to another car of the same category.

Furthermore, the O2O platform could offer location-based services to explore broader business opportunities. The key here is to reach a critical mass of paying subscribers. To pave the way for a smooth launch, the O2O platform could collaborate with selected car manufacturers to ensure technical and financial support. This would help reduce operation costs and attract more customers. Overall, such an innovative business model would put an end to the information asymmetry and not only benefit the end users, but also the platform and its business partners. Admittedly, the platform’s financial reports may suffer in the ramp-up phase of its operations.

The account above is an example of an innovative idea that would face numerous challenges when being implemented. Challenges include setting optimal prices that exploit the willingness to pay of the end customers, designing customer incentives to ensure the appropriate usage of the used car, creating customized loyalty programs to encourage the extension of the agreement period, and identifying up-sell and cross-sell opportunities, just to name a few.

The times of “Internet Plus” provide the possibilities to establish business connections on “cellular level” and thus reduce the challenges of implementing innovative business models. We remain therefore opportunistic that some innovative companies will break through the chaos in the used car market with innovative business models in near future.

1The Chinese government’s “Internet Plus” action plan of March 2015 aims to integrate mobile Internet, cloud computing, big data and the Internet of Things with modern manufacturing, to encourage the development of e-commerce, industrial networks and Internet banking and to help Internet companies increase global presence.

2 See more insights in the article “Winning in the subscription economy — From transaction to Loyalty” by Susan Lee, Partner in the Boston Office of Simon-Kucher

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