In recent years, both the production and sales volume of automobiles in China have shown sustained growth, and the number of automobiles in use has also continued to increase. China has become the world's largest automobile producer and consumer market. From the perspective of automobile sales, after 2000, China's automobile industry entered a stage of explosive growth in demand, and new car sales grew rapidly. The scrappage period for automobiles is usually 10-15 years. It can be expected that China will enter a peak period for automobile scrapping after 2015.

According to predictions by relevant institutions, China's automobile ownership will reach 150 million in 2015 and exceed 200 million in 2020. Based on the level of scrapped vehicles accounting for 6%-8% of automobile ownership in mature markets, the number of scrapped vehicles in China in 2015 will reach 9 million to 12 million, and in 2020 it will reach 12 million to 16 million. Based solely on statistics of the content of scrap steel, scrap tires, scrap plastics, and scrap non-ferrous metals in scrapped vehicles, the industry scale will reach approximately 177.8 billion yuan by 2015. If component remanufacturing and related equipment demand are included, the overall industry scale will far exceed 200 billion yuan. Therefore, the market space for China's automobile dismantling industry is very large. Some experts believe that the market size of China's automobile dismantling industry is likely to reach US$70 billion, or 450 billion yuan, within 10 years.

Furthermore, the rectification of yellow-label vehicles will provide a huge increase for the formal automobile scrapping market. Industry integration has begun, and the lifting of restrictions on the remanufacturing of the five major automobile components is worth anticipating. In 2014, the country planned to eliminate 6 million yellow-label vehicles. Local enforcement was strong, and the actual elimination of old and scrapped vehicles reached 7 million. The number of vehicles entering formal scrapping channels experienced explosive growth year-on-year. In addition, the lifting of restrictions on the remanufacturing of the five major automobile components is an inevitable trend. New policies supporting the lifting of restrictions have been continuously introduced in recent years. In the future, the profit model of dismantling enterprises will break away from the current steel recycling model and shift towards remanufacturing + circulation, and the profitability of the industry is expected to be significantly improved.

However, compared with developed countries, the domestic scrapped vehicle dismantling and processing industry is still in its infancy. On the one hand, China's overall automobile scrapping rate is only about 4%, significantly lower than the 6%-8% level in developed countries. On the other hand, China's capacity for formal dismantling and processing of scrapped vehicles is also low. The capacity for formal dismantling and processing of scrapped vehicles is far from enough to meet the processing needs of 10 million scrapped vehicles in 2015. In addition, the amount of scrapped vehicles currently dismantled and crushed through formal channels is still very small. A large number of scrapped vehicles are illegally modified and assembled before being sold directly in third- and fourth-tier cities and rural areas. At the technical level, domestic scrapped vehicle dismantling and processing technology is still mainly manual dismantling, with limited capabilities, low recovery rate of valuable resources, and serious environmental pollution.

“Recycling difficulties” have become an industry bottleneck.

“Recycling difficulties” have always been a pain point plaguing China's scrapped vehicle industry. Although the volume of scrapped vehicles in China has maintained rapid growth, the automobile scrapping rate remains low, at only about 4% of the total number of vehicles in use, significantly lower than the 6%-8% level in developed countries. The recycling rate is even lower, at only 0.5%-1% of the total number of vehicles in use, far lower than the 5%-7% level in developed countries.

From the perspective of the amount of scrapped vehicles in China, China has begun to gradually enter the peak period of automobile scrapping. Data shows that from 2010 to 2014, the registered volume of automobiles in China was approximately 3.64 million, 4.48 million, 4.68 million, 5.35 million, and 8.8 million, respectively. However, the registered dismantling volume during the same period was more than 2 million, more than 1 million, 600,000, 1.37 million, and 5.1 million, respectively. Part of the difference between the registered volume and the dismantling volume has entered the gray area, illegally flowing back into the automobile market as used parts and assembled vehicles.

“China's automobile dismantling industry started in the 1980s, and currently, the profits of formal automobile dismantling enterprises are extremely low. The low automobile recycling rate restricts the development of formal dismantling enterprises. The phenomena of ‘fake transfers’, ‘fake changes of registration’, and ‘fake out-of-town scrapping’ still exist. Theoretically, 3 million scrapped vehicles will enter the scrapping cycle each year, but in reality, only 40% of scrapped vehicles enter the scrapping and recycling process each year. Currently, 50%-60% of scrapped vehicles in China each year flow into the black market and illegal automobile recycling and dismantling enterprises,” said Fan Ruowei, an analyst at Zhuochuang Information, in an interview with reporters.

Currently, Chinese automobile dismantling enterprises generally dismantle 1,000-2,000 vehicles per year, while in mature foreign markets, the average annual dismantling volume is 60,000-80,000 vehicles. At the same time, low refinement not only affects enterprise profits but also causes a vicious cycle.

“Automobile dismantling methods are manual dismantling and manual cutting. Low dismantling efficiency seriously affects enterprise profits, which leads to smaller profit margins, causing enterprises to lower the price of purchasing scrapped vehicles. With low-price purchases, it becomes more difficult to collect vehicles, leading to a vicious cycle,” said Fan Ruowei.

“Formal enterprises” starve while the black market thrives.

It is understood that there are not many qualified scrapped vehicle dismantling enterprises in China at present, and problems such as small scale and low level of professionalization are particularly prominent. Although the central government has previously allocated funds for the upgrading and transformation of dismantling enterprises, due to weak supervision, the implementation effect is not ideal, and some enterprises have not used the funds for equipment transformation.

In contrast, the black market for scrapped vehicle dismantling is exceptionally prosperous. High profits are the main reason for the prevalence of “bandits” in the automobile dismantling industry. Because the profit obtained from formal dismantling of used vehicles is low, generally around 5,000-6,000 yuan, selling vehicles about to be scrapped to the used car market can yield a profit of 30,000-40,000 yuan. Due to the temptation of high profits, consumers choose the latter. These vehicles, after entering the used car market, either flow to more remote areas to continue driving or flow into the black market for dismantling.

Scrapped vehicles are “treasured all over” in the black market for dismantling. Selling the dismantled parts can easily earn tens of thousands of yuan.

“After a scrapped vehicle enters, the more sought-after parts like headlights, windows, and logos are usually removed first. Then, interior parts, instruments, etc., are dismantled separately, and finally, the A, B, and C pillars and power components are dismantled. Of course, it doesn't necessarily have to follow this order; generally, they start wherever it's easiest,” introduced a dismantling worker working in the black market.

A small dismantling plant owner who wished to remain anonymous said: “If according to regulations, the only things that can be sold for money after dismantling a scrapped vehicle are aluminum, steel, and rubber tires. Even including dismantling costs, there's not much profit. For example, according to the ‘Pricing Principles for the Purchase of Scrapped Vehicles’ formulated by the state based on the prices of the old metal market, the purchase price of scrapped vehicle steel is 450 yuan per ton, and enterprises can fluctuate by 20% based on the vehicle condition and local market steel purchase price. In other words, all the steel from a regular small car can only sell for five or six hundred yuan, which is really too little. We have to find ways to make money elsewhere.”

Currently, the lack of linkage and cooperation between upstream automobile manufacturers and downstream recycling and remanufacturing companies is also one of the problems causing scrapped vehicles to flow into the black market. In developed countries, scrapped vehicles must be sent to specialized scrapped vehicle recycling and utilization enterprises for processing. After dismantling the parts of scrapped vehicles, recyclers send the parts with remaining value to professional manufacturers for repair and refurbishment, and then transport them to repair shops for reuse. However, in China, manufacturers do not bear the responsibility for scrapped vehicle recycling, nor do they manage and control restricted substances in automobiles. Providing society with dismantling information and environmental protection requirements is even less feasible.

Generally speaking, the three main profit sources for mature market automobile dismantling enterprises are: profits from the remanufacturing and reuse of parts such as "five major components"; government subsidies for automobile dismantling enterprises; and finally, profits from the sale of materials obtained from dismantling. Chinese law stipulates that engines, steering gears, transmissions, front and rear axles, and chassis can only be sold as scrap metal to steel enterprises for recycling. No enterprise, even pilot enterprises engaged in remanufacturing, can obtain "five major components" from automobile dismantling enterprises. In addition, government policy subsidies were discontinued shortly after implementation, so formal automobile dismantling enterprises in China can only rely solely on the sale of automobile dismantling materials for profit.

“The government should introduce specific policies to rectify and regulate the chaotic automobile dismantling market. The chaos and the thriving black market are driven by "profit," so subsidies and protection for dismantling enterprises and consumers should be increased. Consumers are not all profit-driven; as long as subsidies are in place, consumers will generally choose formal dismantling enterprises, because allowing scrapped parts to re-enter the market or even the road poses many safety hazards, ultimately harming consumers themselves,” said Guo Xiaokang, chairman of Shaanxi Nuoyu Automobile Trade Co., Ltd., in an interview with reporters.

Policies to rectify the situation and promote growth are urgently needed.

Currently, China's automobile dismantling industry is still in its development stage, and institutional safeguards are very inadequate. Existing policies are not very effectively implemented. Formulating practical and feasible policies and strengthening enforcement are issues that need to be addressed next.

Fan Ruowei, a senior analyst at Zhuochuang Consulting, told reporters that the profits of formal automobile dismantling enterprises in China are currently severely hampered, and the development of the automobile dismantling industry still needs policy support.

In 2009, the state stipulated that anyone who handed over their vehicle to a designated scrapped vehicle recycling and dismantling enterprise and purchased a new vehicle could receive a subsidy of between 3,000 and 6,000 yuan. Following this policy, the number of vehicles sent to designated enterprises for dismantling increased significantly in 2010. Unfortunately, this policy only lasted one year.

Due to incomplete relevant laws and regulations and mismatched provisions, a large-scale, standardized, and modernized scrapped vehicle recycling and dismantling industry has not yet been formed in China, and the small, scattered, chaotic, and poor market conditions remain unchanged. The level of resource utilization and environmental protection is still not high. Cai Shengjian, chairman of Chongqing Chuanshi Investment Co., Ltd., pointed out that the automobile dismantling business is divided into two parts: the reuse of used parts and the recycling of raw materials. Currently, the reuse of used parts in China is basically not carried out, and the utilization of raw materials only utilizes some scrap steel and some non-ferrous metals through manual dismantling methods.

Following the development trend of the automobile market in other countries, as people's living standards improve and new car prices continue to fall, the condition of scrapped vehicles to be recycled in the future will be increasingly better. If some recyclable parts are still sold as scrap steel and iron, it is not only a loss of economic efficiency for enterprises but also a waste of resources for the country. How to strengthen the supervision and management of these scrapped vehicles to ensure they enter the dismantling process, and how to maximize the regeneration and reuse of these scrapped vehicles, which are "urban mines," has become an urgent problem that needs to be solved by relevant government departments and scrapped vehicle dismantling enterprises.

Industry insiders call on relevant government departments to introduce strong measures to regulate the market, ensure that scrapped vehicles are processed through formal channels, and eliminate safety hazards. From the current perspective, relevant policies in various provinces are being successively introduced, which will further regulate the procedures and management of scrapped vehicle recycling and dismantling and crack down on illegal activities in the various links of scrapped vehicle recycling and dismantling, used car transactions, and automobile repair. At the same time, mature market experience should also be learned from: the US market focuses on leveraging market-oriented operating mechanisms, achieving a scrapped vehicle circular economy system through recycling mechanism innovation, recycling technology upgrades, and the creation of smooth circulation links, with a market size exceeding US$70 billion. Japan, Europe, and other countries attach importance to the responsibilities of car manufacturers and consumers, creating a complete scrapped vehicle recycling system through the implementation and enforcement of laws.

(Article source: China Economic News)