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Secondhand, First Choice

by Timothy Ang

December 3, 2019

Illustration of the used car market in China.

Sales in China’s secondhand market are booming. What is driving the trend away from new? Buying a used car or anything else secondhand is still unusual in China, where consumers have a deep desire for the new. But low prices, online convenience and a slowing economy are changing things.

He Bin, like many men his age in China, started his search for a car on the showroom floors of car dealerships. It quickly became clear, however, that the shiny coupes he was eyeing had a few too many zeros at the end of their price tags. He Bin could just not afford to buy a brand-new set of wheels. That is when he decided to turn to the used car market for a better deal.

With a wife, two young children and a job based 45 minutes away from his rural home in Fujian, the southeastern province opposite Taiwan, the 26-year-old is now the proud owner of a secondhand Volkswagen.

“My dream was always to have my own brand-new sports car,” He Bin says. “But now is not the time. Luckily, I found my current car at once. It looks great and was a fraction of the original price.”

To people from developed countries, buying a used car, or other secondhand items, is perfectly normal. But for China, buying used bargains is still the exception and not something that you would necessarily want to brag about. Despite a deep cultural distrust toward anything that is not new, shoppers now have access to a number of efficient and accessible online platforms that offer big-brand items at low prices.

The value of recommerce

According to the China Center for Internet Economy Research, RMB 500 billion ($70.5 billion) was spent on secondhand goods in 2017 by 76 million active online users. This is a modest figure compared to Western economies—the used goods market in the United States is roughly four times as large—but as with many economic sectors in the world’s second-largest economy, growth is the real issue.

The number of users of online secondhand platforms in 2017 was up 55% year-on-year, as households latched onto the trend. Some analysts, such as investment firm Cyanhill Capital, predict that used goods will be worth RMB 1 trillion industry by the end of 2020.

“Secondhand is still a new thing,” says Ben Cavender, managing director of China Market Research Group. “It’s gone from zero to where it is now really fast. We can expect a lot of growth in the next three years.”

Like He Bin in Fujian, many buyers’ first experience is on one of the so-called “recommerce” apps. Given the centrality of mobile phones to Chinese commercial activity, from online payments to food delivery, it is not surprising that bright, appealing apps have become the epicenter for the secondhand market’s rise.

The platforms usually vary by product specialization, but three companies together occupy 90% of the market. Uxin targets the car industry, while industry leaders Zhuanzhuan (“Pass on”) and Alibaba-owned Xianyu (“Idle Fish”), have become the main trading posts for used bags, clothes and unwanted cosmetics from across the country.

“I use the app to find limited editions of lipsticks, mascaras and sometimes t-shirts,” says Zhixin, a recent graduate from Hebei. “I have a student budget, but I can normally still buy what I want.”

Young users like Zhixin are the engine of the recommerce trend. Not as hampered by the stigma surrounding used goods, a study by the Sootoo Research Institute found that half of recommerce users are under 24 years of age, with another third between 24 and 30. For the Xianyu platform, millennials under 30 constitute around 60% of the user base. The number is slightly lower for vehicle platform Uxin, for which the 30-and-under demographic contributed just 18% of total sales in 2018.

“Most of my friends use these apps. I’m trying to encourage my mom and dad to sell their old things on it,” says Zhixin. “They’re a bit resistant to downloading another thing that they have to figure out how to use.”

In the auto sector, while sales of new cars have fallen, used car sales have been steaming ahead. There were roughly 13 million used cars sold in China last year, according to official figures, compared to new car sales of around 28 million. In the first half of 2019, sales grew by 17.8% from a year earlier, with 2.04 million units sold in June alone.

“Secondhand car sales used to grow at a slower pace compared to the new car market, which until recently was growing at double digits,” says Jochen Siebert, managing director of auto market consultancy JSC Automotive. “But since last year, we’ve seen the reverse taking place.”

But Siebert adds that China still lags  industrialized nations when it comes to resales as a proportion of the total market. In the US and Western Europe, used car sales are typically double new car sales.

“The figures are large gross numbers because of the Chinese market, but we have to think in relative terms,” says Siebert.

The millennials

The rise of the circular economy comes at a time when many consumers, particularly the millennials, are increasingly strapped for cash. Media coverage tends to focus on the loaded pockets of China’s urban elites, but such people make up a small section of the population and are concentrated in a handful of coastal cities.

“The younger generations are not so sure about their economic prospects,” says Cavender. “However, they still want to live what they consider authentic lives and make certain purchases, so that’s where the secondhand platforms come in.”

Looking outwards to the rest of the country has proven to be a great e-commerce strategy. The success of Pinduoduo, since its founding in 2015, was in part due to 65% of its customers coming from smaller cities inland. Pinduoduo reached RMB 100 billion ($14.3 million) in gross sales after just three years, twice as fast as market leader Taobao took to reach the same milestone.

A tightening of consumer purse strings has, however, been balanced by the powerful drive of the younger generation to embrace consumerism. Smarter shopping is not only a matter of price and increased acceptance of used goods among youth—it also offers a solution to the impact of more extreme shopping habits. Xiangshan, a law student from China’s northeast, uses apps such as Xianyu to sell excess junk she accumulates over the year.

“I am addicted to online shopping, especially makeup,” Xiangshan jokes, saying she spends several thousand RMB per month on such goods. “These apps let me redeem at least some of my money. So, it removes more of the risk out of shopping in the first place.”

A key driver for Western consumers buying secondhand has been concerns about the environmental implications of buying everything new. The cultural legacy of excessive consumption that has dominated China may not be so easily done away with. However, some people see the beginnings of a heightened social awareness around the industrial footprint created by purchases amongst China’s middle class.

Market consultancy Mintel found that, in urban areas, over half of customers listed environmental concerns among their top reasons for going for secondhand products. This rose to 63% among the well-educated demographic, where environmental issues surpassed affordability as the number one factor.

“The trend has been aided by policy directions such as rubbish sorting and the explosion of shared economies, which are all app-driven,” says Ashley Dudarenok, Chinese marketing expert and the CEO of social media consultancy Chozan.

The used car market in China will be one to watch, though not for reasons of sustainability. The central government is working to free up the domestic used-car market, realizing that otherwise top tier cities will become overloaded with sellers unable to shift their vehicles. It has already passed legislation prohibiting protectionist policies by provincial governments, and in early 2019 green-lit the export of secondhand cars abroad. Despite this, the  market still has a long way to go to reach maturity.

“A big problem is trust,” says Siebert. “Buyers generally trust vendors less than in the US or Germany. They are much more likely to assume they’re crooks than give them the benefit of the doubt.”

That suspicion is well-founded. Even used-car directory Uxin was implicated in fraud earlier this year. This followed a damning report accusing it of overstating its transaction volume and charging extortionate operator fees. Uxin’s owner Dai Kun denied all claims.

A used car

Everything goes

Companies working in the secondhand space vary from trillion-yuan giants to community-level flea markets. Market leader Xianyu, for example, became Alibaba’s third business to break the nine-digit dollar valuation in 2017, after Taobao and Tmall.com. While yet to go public as a spin-off, Xianyu’s expansion to over 100 Chinese cities and continuous opening of new product channels, state clearly its ambitions.

Industry rival Zhuan Zhuan has tried to keep up. After its founding by online ad giant 58.com in 2015, Zhuan Zhuan has grown to 10 million user transactions annually, according to China Knowledge. Earlier this year, 58.com joined forces with Tencent to sink $300 million of investment into the business, indicating recommerce may be the next battlefield for China’s tech giants.

“The big players so far are all reliant on the e-commerce titans to some extent,” says marketing guru Dudarenok. “At this stage, market share is more important than profitability, so we may expect plenty of price competition.”

This association gives these apps the added advantage of being able to closely interweave their platforms with others under the same parent company. Unlike in the West, where sales and payments are provided by separate companies, a shopper in Chengdu browsing Xianyu can link her account to her Alipay account and WeChat wallet. She can also use the shortcut to Alibaba’s credit platform, Ant Financial, to quickly make short-term loans to fund purchases. Taobao, Tmall and Xianyu are all interconnected, like extensions of the same site.

Uxin is one of the few secondhand platforms to have gone public. Listed on the Nasdaq, its growth has been astronomical with revenue climbing 70% year-on-year in 2018 to $438.1 million, though, as mentioned earlier, the platform’s credibility has come into question. It counts Huasheng Capital, Tiger Global and Warburg Pincus among backers and has tallied $1.2 billion in venture capital funding.

Smaller companies, meanwhile, are trying to break into the market, often through diversification. Kogi is a fashion recommerce startup that has been in business since August 2018. The “Pinduoduo for younger generations,” as the company’s chief operating officer has labeled it, Kogi lets top brands set up their own in-app channel to sell out-of-season or left-over stock at steep discounts.

Many of the successful apps have social networking functions popular among young Chinese users. The clearest example are Xianyu’s yutangs (“fishponds”). These are gatherings of users based on shared product interests and geographical proximity. Shoppers interested in vintage handbags living in the district of Pudong in Shanghai, for example, can form chat groups and share reviews of purchases.

As Alibaba’s company blog Alizila pointed out, there is even a fishpond for recently dumped boyfriends and girlfriends, eager to shed gifts and ex-partners’ clothes.

Up-and-comer Xiangwushuo (or Happy Sharing to international customers) has created its own credit system for regular users. Its 25 million active monthly users can clock up “Little Red Flowers” every time they give away products, which can then be used as currency for future purchases.

Then there is the government’s view. The circular economy is a new trend and has so far enjoyed the same growth and freedom many nascent industries do. However, the clear potential threat to a manufacturing sector may trigger concerns of government regulation down the line, like the crackdown on peer-to-peer lending in 2018 after years of unbridled growth.

“This is a new tech play, and the government tends be ‘hands-off’ on these things until negative effects arise,” says Cavender. “But remember that recycling and sustainability are big focuses for the government, so it’s unlikely to be too interventionist.”

Early days

It is too early to pinpoint the repercussions of a booming used car market in China. In many key product categories, China lags well behind Western counterparts. Nevertheless, experts expect continued growth, and the main downside, on manufacturers, is yet to become evident in the data.

Take He Bin in Fujian. A few years ago, he would not have considered checking out the used market for his first car. “Now, I don’t understand why everyone isn’t doing it,” he says. Well, maybe soon they will be.

 

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