New trends in auto parts industry: "Big fish in small ponds, small fish in big ponds" - the industry will be more and more polarized.

Under the uncertainties caused by COVID-19, the auto parts supply chain is still in a shadow, and the industry faces three major challenges. From another perspective, this situation intensifies the survival of the fittest in the industry.

At this time, the logic of "big fish in small ponds, small fish in big ponds" is further strengthened. The so-called "big fish in small ponds" means, in a small pond, you must strive to turn into a big fish in local market, while in a large pond, you should "slim down" and turn yourself into a number of small fish to compete flexibly.

Three major challenges the auto parts supply chain faces under COVID-19

The sporadic COVID-19 outbreaks, along with different local control measures, have cut apart the logistics chain and the interconnection between cities, and it seems that this situation will continue for a period of time. In such a situation, the eco-system of auto parts supply chain, which is highly dependent on logistics and labor flow, faces a series of severe challenges.

Product supply challenges: The uncertainty of manufacturers' resumption of production has directly affected the supply cycle of products.

Timeliness challenges: When the product is produced, due to different epidemic prevention policies between different cities, logistics needs to be reported and arranged several days in advance, and therefore the timeliness is challenged.

Sales challenges: Different epidemic prevention policies between cities make the mobility of logistics vehicles fall off a cliff, and many companies' business trips have been disrupted. The frequency of previously road-trip business trips declined; the repair shops business fell by 1/3 in March, and might drop by nearly 1/2 in April, and this trend would be actually passed upstream in May.

The Matthew Effect of Big Fish in Small Ponds

As we all know, in the business experience of the industry, the product boundaries of auto parts manufacturers are clear: there exist various players such as consumable suppliers, model parts manufacturers, oil suppliers, battery makers, tire manufacturers and so on. In the lower-tier county-level market, however, the situation is changing rapidly.

The author once visited a county-level city in central Jiangsu province, where I found such an auto parts supplier, who is the top player in the local market, with a monthly output value of 900,000 yuan and more than 500 cooperative outlets. Although there are nearly 10 local auto parts manufacturers, the output value of the second, third and fourth players put together is barely equal to the first, truly reflecting the logic of big fish in small ponds.

After taking a close look at the supplier, you will find that such a top county-level player has no product boundaries. Its products cover Type I and Type II consumables, oil and electric parts, and even involve popular model parts such as engine cylinder heads, bumpers, glass regulators, etc., and basically 80% of the demands from local repair shops can be quickly responded to and met. This sort of auto parts suppliers has broken product boundaries; they just insist on two points: The first is the demands from local repair stores, and the second is the local turnover rate of certain products.

This seems to show us the ultimate scene of a county-level big fish, that is, a full-line parts service supplier. The upper you are in the supply chain, the more your product category needs to be narrowed and focused; and the lower you are, the more you need to widen your category to meet the diversified needs of lower-tier markets: this trend is further verified.

The county-level market has another feature. I once visited a county-level city in northern Zhejiang province, and found there is such an auto parts supplier, who serves more than 200 shops. With a single month output value of 600,000 yuan, it's basically the largest fish in the pond of this county-level market. Although it also extends its product category to Type II consumables, it does not have full-line coverage like the above-mentioned Jiangsu counterpart. Its logic is to vertically provide the local market with most complete choices for one or two items.

For example, it has a saturated inventory of filter elements (a Type I consumable), and a full-line inventory of shock absorbers (a Type II consumable). Local repair shops only need to contact it for a solution when they think of these two items, and just through this chain ability, it enhances the stickiness of repair shops, and naturally introduces other products to them. Such a "big fish in small ponds" model is extremely popular in Jiangsu, Zhejiang and other southeast regions.