China Auto Repair and Servicing the Big Thing for 2011

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Op-Ed Commentary: Chris Devonshire-Ellis and Richard Hoffmann

Dec. 20 – While China’s auto market has grown in leaps and bounds fuelled by cheap credit and increasing middle class wealth, one aspect of the auto industry is strangely absent in China. There are very few auto repair and service stations.

In fact, even in car crammed cities such as Beijing and Shanghai, finding a gas station can be troublesome – the market penetration just is not there yet. Buying a car in China – and increasingly these are domestic produced models – typically comes with a three year warranty, usually arranged and organized by the dealer, who will have a service station on site just to provide warranty services to those vehicles that the specific dealership sold. However, as vehicles become older, thrift and the advent of a reliable quality, secondhand vehicle market are starting to appear in China. The nation now has a bare handful of second hand car dealerships, and a monthly magazine (in Chinese) has recently been launched to cater for the second hand automobile resale market.

With that, and as warranties run out, a need for more car repair workshops will start to arise. China’s boom in auto sales has been developing for some time, but it has only been in the last two years that a mass market has been created on a truly national scale. Beijing, wanting to provide fiscal stimulus to the Chinese economy while America foundered in debt due to the financial crisis, made billions of dollars available at cheap rates to buy cars, houses, and upgrade agricultural and domestic appliances. It was tremendously successful – but part of the infrastructure is lacking – what to do when all those warranties expire?

The answer is, of course, the development of a sizeable second hand vehicle and auto repair and service industry to cater for all the vehicles that are now becoming in excess of three years old. The buying auto boom began in 2008. This was fueled in part by subsidies, include vehicle sales tax breaks, and the extension of an auto replacement subsidy (to replace older vehicles), however these schemes expire early in 2011. This will make new vehicle purchases that much more expensive and better fuel the need for first time buyers to look to the used car market. The development of this will trigger a mass national requirement for repair and service centers.

Foreign investors can make use of this market development. The provision of auto repair services are permissible under a wholly foreign owned enterprise license, although additional approval prior to the WFOE application being made must also be obtained from various departments of the Ministry of Transport. These are as follows:

  • The pertinent regional Transportation Administration Municipal Commission of Transport (20 business days)
  • The Ministry of Transportation (generally 90 days)
  • The pertinent District Bureau of Transport to get the approval certificate (10 business days)

Having obtained pre-approval, it is then required to apply at the pertinent regional Commerce of Commission for the Approval Certificate (90 business days), and then to the AIC. The total process should take about six to eight months from start to finish (including the WFOE application) for completion. There are no specific requirements on registered capital amounts.

Foreign investors may also import and export auto parts under a foreign invested commercial enterprise (FICE) registration, without the need for the pre-approval requirements listed above.

The market conditions are right for foreign investors to move into this field. And with China’s auto industry continuing to churn out millions of vehicles each year, that trigger point of three year warranty expiration looks likely to provide momentum behind the second hand, and auto repair market for some time to come. It seems 2011 is a prime time to be getting into this industry to take advantage of the glut of second hand vehicles needing maintenance from mid next year onwards.

Chris Devonshire-Ellis is the principal of Dezan Shira & Associates and Richard Hoffmann is a senior legal associate with the practice. The firm assists with the registration and tax planning of foreign invested enterprises in China and has many years of experience within the China auto industry. Please email the firm at legal@dezshira.com for assistance or advice over planning for market entry in this field. The firm’s web site may be accessed at www.dezshira.com while the firm’s brochure may be downloaded here.

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