Game of Ants and Elephants: Fragmentation of Construction Machinery Aftermarket, Part 2/2
Under the long-term domination of foreign giants, domestic SMEs have gradually realized product substitution.
Every stakeholder in the supply chain is fragmented
Fragmentation of complete machine buyers
Take the excavator as an example. Over the past ten years, the sales volume of new machines reached about 1.5 million units. If we include the sales of the whole machine 10 years ago and the second-hand ones imported in the past year, the market stock is about 2.5 million units, of which about 95% are purchased by individual households.
Fragmentation of component manufacturers
With the rise of China's manufacturing industry, about 10,000 parts and components manufacturers in the aftermarket of construction machinery are SMEs (rabbits and ants). Quite a few of them have been transformed from 'substitute' production to 'genuine' manufacturers to supporting machine manufacturers, especially for domestic host manufacturers.
Fragmentation of the parts supply chain
Take the excavator as an example – there are about 20,000 rabbits and ants in the parts sales and supply chain, and more than 100,000 employees. About 80% of the parts are supplied by non-elephant systems.
Fragmentation of after-sale services
There are about 300,000 people working for all types in construction machinery repair and other after-sales services in China. Among them, about 200,000 people are providing service for excavators.
Fragmentation of second-hand machine transaction
Take the excavator as an example. There are more than 120,000 people in the country with second-hand construction machines. More than 95% of the second-hand excavator transaction value is completed by the ants. In 2017, the transaction value was about CNY 150 billion.
Fragmentation of the operator
The number of construction machinery operators in China is more than 10 million, of which about 2.5 million are excavator operators, almost all of which are independent individuals without fixed workplaces.
Fragmentation of training system
Various brands of technical information, repair manuals, parts manuals and various maintenance and technical training are provided by the data ants at a very low charge.
Fragmentation of accounting systems
A considerable part of the spare parts and second-hand machine transaction scene are non-invoicing.
Fragmentation of after-sales claims litigation recovery business
During the market downturn in 2013, the overdue rate of financing leases was generally over 30%, and in some regions was around 70%, with overdue amounts of over RMB 20 billion. About CNY 15 billion have passed through legal proceedings, and most of them have taken more than 5 years.
As shown in the above diagram, judging from the number of operators, the total number of domestic and foreign elephant service personnel is about 35,000, and the maximum service capacity of each person in the aftermarket service personnel is 25 sets/man, the elephant can cover about 870,000 sets of after-sales services, only accounting for about 10% of the total market, and the remaining 90% have to be provided by the ants and rabbits.
The complexity of aftermarket fragmentation
1. Competitive advantages of the ants
The end-users of construction machinery and equipment are very scattered in China, from the coastal to the mainland to the border, the construction sites, climate, regional culture and lifestyle differences are huge. So, the demand for flexible service and supply is growing.
-Self-driving force and dedication
-Zero distance service with customers and high coverage
-Communication tools and operation flexibility
-Logistics and inventory
-Online payment platforms
-Technical professional service level
-Financial fragmentation and low finance cost
-High operating profit and personal income
From the above, it can be seen that, in every aftermarket operating element, the ant's business models and work efficiency have strong vitality, which is of great benefit in appealing to end customers. The elephants' business system has no advantages, even very serious disadvantages.
2. Fragmentation of second-hand machine and the platform transaction model
The scale of the second-hand machine and equipment transaction of construction machinery in China is more than CNY 400 billion, and the transaction involves three issues:
-Information asymmetry, that is, how to maximize the transaction efficiency between decentralized equipment and buyers.
-The cyclical pattern of demand and price for second-hand equipment
It can be seen that the characteristics of non-standardized trading are exactly the advantages of the ant's business model, and bring a high-profit opportunity. The fragmentation of the second-hand machine and equipment transaction provides the ant and the customer with greater bargaining power and has a strong vitality.
3. Fragmentation of rental business and rental companies
At present, the market size of construction machinery rental in China is around CNY 2 trillion. The vast majority of rental companies are SMEs, and more than 90% of them are rabbit-level small companies and tens of thousands of ants.
-The ownership of rental equipment is fragmented:
There are more than 7.5 million sets of engineering equipment in China, most of which are the property of the ants or rabbits, especially earth and stone equipment such as excavators and loaders. Even if the initial concentrated purchase of large companies, most of them will be traded to ants and rabbits after 3000 hours of work.
-Fragmentation of rental companies:
The market has seen the fragmentation of equipment owners，operators, on-site construction management, amid growing complexity of management and increased management costs.
-Obstacles to large rental companies:
The existence of the above fragmentation is a constraint on the emergence of elephant-level rental companies.
4. Fragmentation of parts supply and platform supply chain
At present, the annual demand for construction machinery parts is about CNY 300 billion. In order to solve the fragmentation of parts supply, platform-based Internet companies have emerged. Now there are more than 30 platform companies in China engaged in parts service business. Most are rabbit-level platforms. The pain points are:
-Uncertainty with the sustainable profitable business model of the supply.
-The solution for the last mile is uncertain.
-Extremely complex product types – the conservative estimation of the parts SKU is at least 100,000.
-Establishing a parts database and parts warehouse requires a huge investment.
The fragmentation has a huge impact on elephant-level businesses and their agents.
The operating profit margin of foreign elephants and their agents dropped sharply.
a. The foreign elephants are losing their market share.
b. Fragmentation provides huge business opportunities for domestic brands.
-The second-hand transaction market accounts for an increasing proportion in the whole construction machine industry.
-From the national operating data in 2018, the share of foreign giants has fallen sharply, especially Japanese firms.
c. The development trend of the construction machinery industry towards major appliances.
The rise of China's manufacturing industry and the emergence of aftermarket fragmentation have broken the all-round closure and monopoly of foreign elephants' business models in the Chinese market. It is foreseeable that, within three to five years, the total market share of foreign elephants, will be less than one third, is a high probability event.
For a longer period of time, the market distribution pattern of major appliances may appear in the field of construction machinery.
1. The essence of fragmentation in the aftermarket of construction machinery is the socialization of various resources and supply chain allocations. With the rise of China's manufacturing industry, the phenomenon of fragmentation will continue, and the trend of socialized resource allocation is unstoppable.
2. The monopolization of the aftermarket industrial chain by all kinds of elephants, especially foreign brands, including their agents, is gone. Fragmentation and socialization of the supply chain have caused foreign elephants to lose huge profits.
3. The existence of ants and rabbits is the objective demand of the market. In the future, ants, rabbits, and elephants will dance together and this will be the main theme of the construction machinery aftermarket.
4. Without solving the pain point of turning traffic into profits, the Internet companies cannot survive in the current business environment of the aftermarket.