During the fourth meeting of the Central Committee for Financial and Economic Affairs, relevant authorities have decided to encourage the exchange of durable consumer goods such as automobiles and home appliances for new ones, with a primary focus on reducing logistics and transportation costs.
The initiative to exchange old cars for new ones will not only drive the development of the second-hand car market but also naturally boost sales of new vehicles. Consequently, following the meeting, stocks across the entire automobile sector soared, with companies like Jianghuai Automobile, Jiangling Motors, Great Wall Motors, witnessing a significant surge, and Beiqi Blue Valley even hitting the limit-up.
Car manufacturers or large-scale used car platforms are the ones capable of facilitating the exchange of old cars for new ones; it's not something ordinary used car dealers can pull off. Lowering logistics costs is just the first step. More related regulations are expected to follow, continuously driving the car replacement service forward.
The new policy undoubtedly benefits electric vehicle companies the most. Official participation by car manufacturers in the old-for-new exchange program can address the biggest issue faced by electric vehicles when reselling—low residual value.
According to data from the China Automobile Dealers Association, the residual value of pure electric vehicles in the domestic market is generally low. Among the few products with relatively better residual value, are either high-priced luxury cars like the Porsche Taycan or the extremely affordable micro and mini cars like the Changan Lumin and Dolphin.
There are two main reasons for the low residual value of pure electric vehicles: battery degradation and frequent price reductions by car manufacturers.
Battery degradation is an inherent issue for electric vehicles, and even if the vehicle is not in use, the battery life deteriorates over time. Currently, car manufacturers generally provide an 8-year or 120,000-kilometer warranty for batteries, with some offering lifetime warranties. They promise that within the warranty period, battery capacity will not decrease by more than 20%, otherwise, they will replace the battery for free. However, there are typically two restrictions: the owner must be the original purchaser, and the vehicle cannot be used for commercial purposes.
Car manufacturers have implemented corresponding guarantee measures, but they are only available to the first owner of the vehicle. Second-hand car owners cannot enjoy these services, meaning buying a used electric car equals losing the battery warranty. Although car manufacturers guarantee that the battery health will not drop below 80% during the warranty period, in the event of an accident, it's almost equivalent to scrapping the entire vehicle, considering that replacing the battery in an electric car costs tens of thousands to over a hundred thousand CNY, enough to buy another used car.
Domestic car manufacturers like NIO and XPeng have introduced battery leasing plus swapping schemes, shifting the risk of battery degradation onto themselves, which might be a suitable solution. However, with NIO's six-year battery leasing plan, the cost is basically the same as buying a battery. Considering the residual value of the battery itself, the shorter the vehicle replacement cycle, the more advantageous leasing the battery becomes. If the vehicle replacement cycle exceeds six years, then purchasing the battery would be a better option.
Car manufacturers frequently lowering prices is another key factor affecting the range of electric vehicles. Just as the Chinese New Year began, many automakers such as BYD and Wuling simultaneously reduced prices, instantly unsettling the second-hand car dealers. The primary reason for price reductions in the automotive industry is the need for manufacturers to enhance their product competitiveness in the face of increasingly fierce market competition. By the end of 2022, Tesla had lowered its prices three times in just over two months, leading to the peculiar situation where new cars were sometimes cheaper than used ones.
Additionally, new energy vehicles are still relatively new, undergoing rapid technological advancements and upgrades. The release of new generation models also impacts the value of older models.
Industry competition forces car manufacturers to lower prices, which undoubtedly deals a severe blow to the second-hand car market. Second-hand car dealers become more cautious in acquiring vehicles, fearing they might not be able to sell them.
Intervention by relevant authorities, promoting vehicle exchange programs and involving car manufacturers, can improve the second-hand electric vehicle ecosystem, boost the circulation rate of used cars, increase new car sales, and ultimately promote domestic economic circulation and growth.
Official vehicle buyback and refurbishment programs by manufacturers are not uncommon in the Chinese automotive market, although they are usually not large in scale. Since cars are high-value commodities, manufacturers typically rely on 4S dealerships to share inventory and financial pressures, making it difficult to scale up the process of buying back used cars. Currently, the purchase of used cars is mainly dominated by local dealerships.
It is foreseeable that in the era of new energy vehicles, the share of official buyback and certified used cars will continue to increase. The rationale behind this is that the used car market offers significant profit margins, tempting sufficiently powerful car manufacturers to venture into it.
The core principle for used car dealers is to buy low and sell high. However, to sell used cars at a high price, necessary refurbishments are indispensable. Regular used car dealers are often eager to make a quick sale, leading to overlooked safety hazards and insufficient funds for hardware replacement or repairs. On the other hand, automotive manufacturers have extensive after-sales service systems and can procure hardware internally, resulting in lower refurbishment costs. From the perspective of the original car owner, the buyback price offered by automotive manufacturers is likely to be more fair compared to that offered by used car dealers.
It's worth noting that while most automotive manufacturers currently offer used car buyback and sales services, they primarily collaborate with third-party platforms, which adds unnecessary costs. Driven by relevant authorities, automotive manufacturers are likely to establish vertical channels in the future. Although this may increase financial pressure, it enables them to capture all profits.
For automotive manufacturers, once official used cars become the trend, competing on price and services becomes inevitable. Integrating vertical resources and bidding farewell to third-party platforms also helps improve product and service quality.
Used electric vehicles can also be sold to regions like Southeast Asia and Latin America, where the level of consumption is relatively weaker. These regions are still dumping grounds for overseas automotive manufacturers, and low-priced used cars are in line with their demands. Domestic brands can leverage low-priced used cars to enhance their influence locally, laying the groundwork for the sale of new cars in those areas.
One more aspect to consider is the battery recycling and energy storage industry, which holds great potential but currently faces significant market gaps. Expanding business scope is one pathway to enhance a company's resilience, especially for new forces in the automotive industry like NIO, which offers battery leasing and swapping services, as well as well-established car manufacturers with strong financial backing. After ensuring profitability, they can certainly venture into battery recycling and energy storage.
BYD stands out as one of the most suitable domestic car manufacturers for vehicle recycling, given its high sales of electric vehicles and its position as the world's second-largest power battery company. Recycling electric vehicles and batteries can effectively reuse lithium resources and reduce battery production costs.
In November last year, BYD launched the Sincerity Certification Second-hand Car Mall, initiating its foray into the second-hand car recycling and sales market. Now, after more than three months, the platform's features have become increasingly rich, accepting old vehicle models from various brands. This demonstrates that BYD's vision extends beyond its own products, aiming to become a leader in the domestic second-hand car platform market.
The car industry's own used car trading platforms are gradually improving, with relevant departments continuously promoting them. Perhaps, the time for "freedom to change cars" is really coming.
According to authoritative research institution J.D.Power's statistics on the automotive industry, the average car replacement cycle in China is about five years, with 14% of consumers changing cars within one year.
The data does not distinguish between traditional fuel cars and electric cars. Considering that China holds over 60% of the global market share for electric vehicles, car manufacturers are in intense competition. As Zero Run CEO Zhu Jiangming pointed out, electric cars need to be updated every year, with a new generation every one or two years. If you can't keep up, you'll fall behind. The average car replacement cycle for electric vehicles in China is likely to be less than five years.
In 2023, the domestic trade volume of used new energy vehicles reached 763,000 units, marking a remarkable 42% year-on-year increase. Particularly noteworthy was the December transaction volume of 87,300 units, showing a staggering 115% year-on-year growth, indicating a robust market demand.
With the determination from relevant authorities to propel the development of the used car industry, ordinary consumers find it convenient to sell their old vehicles to manufacturer-backed recycling platforms, thereby avoiding arbitrary price cuts by used car dealers. Purchasing a used car not only ensures better quality but also comes with official warranties, providing consumers with added peace of mind.
With this dual support, consumers will find it easier to switch vehicles, thereby facilitating the growth of domestic automobile sales. This could potentially serve as an opportunity to accelerate the growth of the domestic automotive industry.
Another reason why consumers like me eagerly anticipate official used cars is the prevalence of irregularities in the used car market. Previously, I browsed cars on a certain used car platform and found many vehicles priced ridiculously low. Some relatively "conscientious" car dealers would mention "three certificates," implying that the car is pledged as collateral and lacks all necessary documents. Meanwhile, some dealers don't even bother with such annotations.
Official used cars from manufacturers can help mitigate these irregularities, while also putting pressure on used car dealers to operate in a more transparent and accountable manner. This fosters a healthier industry environment, providing consumers with greater assurance and promoting the overall development of the industry.
