Snobbery dampens used car market in China

Author : David Friesen, a writer from London who has lived in Beijing for five years.

Unless you are particularly after that new-car smell of glue and unblemished seat upholstery, it often makes sense to buy used cars. As soon as you buy a new car and drive it out of the showroom, you have lost at least 10 percent of its value before you have got home. Drive it for a few years, particularly if it is a strange color or an odd brand, and you won't get much back at all. Conversely, if you buy a used car, it can still be extremely reliable and you save money on the initial deprecia-tion.

Sure, you don't get to pick the exact color or toys you might want, and someone else has driven it, so there is always the risk it could break down quicker than you would like. However, with so many used cars available in Western countries, you can usually get your hands on exactly what you want at the right price.

Not so in China. Analysts have been saying that the used car market is beginning to pick up in China, with a market increase of about 20-25 percent over the last year. This might be positive, but there are still huge barriers facing the used car market in China. There were 4.1 million used cars sold in 2009, but over 15 million new ones. This means that used car prices are still very high. In the US there are three used cars sold for every new one, but here it is the other way round.

High prices are a concern, because without lower prices you lose the real value in buying second-hand. However, this will certainly change as the market grows further and more cars enter the market in the coming years. The main problem is not with prices, but whether or not Chinese consumers will want to buy used cars, and if they do, where will they be sold.

Unlike in Western countries where almost all car dealerships sell used cars or offer part-exchange, this simply isn't the case in China. Only high-level brands such as BMW and Mercedes-Benz are offering limited part-exchange and used car deals. Even then, a mid-range Mercedes is over 1.2 million yuan ($177,000), far from the sort of deal the budget-conscious used car consumer wants.

There are large auto markets, such as the Beijing Used Vehicle Trading Market, located southwest of central Beijing off the South Fourth Ring Road in Fengtai District. The problem here is you really need to know about cars to get a good deal, with expensive new cars at high prices parked next to piles of junk that may fall apart the first time you get in for a drive. This means most of the used car market is exchange of cars between private buyers, which often adds risk to the purchase without proper car records and guarantees of reliability.

Again though, this is something that will develop and more car companies will offer used car sales if they know it is worthwhile. Still, the biggest problem is the Chinese consumers themselves and their snobbery. Many feel it is shameful or a sign of poverty to buy a used car, and would rather waste their money than get anything second-hand. You see the same thing in the housing market where many only want brand new properties, despite the fact it makes little difference whether it is brand new or a few years old once you put in your own furnishings. The whole idea of owning a car here is partially based on the fact it is an extravagance, given that imported cars cost two or three times as much as they would in Europe for the same model. Throwing away a bit of excess now and then is part of the game, and the used car market is antithetical to this concept.

This isn't likely to last though, as people will begin to see that getting something for less is a sign of shrewdness rather than financial weakness. Why buy a brand new Toyota when you can get a used BMW for the same price? When this important lesson is learnt, the Chinese used car market will rapidly increase. After all, those 15 million new cars have to go somewhere when their owners want the latest model next year.

Hopefully the used car market will increase to such an extent in the next decade that it will push the prices of new cars down as cheaper used alternatives are available. I daren't imagine how bad the traffic will be then!