Mainland China Takes Over

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EDITOR'S NOTE: Power Products Marketing, a Minneapolis research firm, has been tracking the nontraditional ATV market for nearly 10 years. This market consists of distributors of quads made in China, Taiwan and, to a lesser extent, South Korea that do not report sales figures to the Motorcycle Industry Council. It does not include the youth models that OEMs such as Arctic Cat, Polaris, Can-Am, Kawasaki and Suzuki source from Taiwanese manufacturers. This report was prepared by Matthew Camp, an analyst with the firm. Send questions and comments to PPM via editors@dealernews.com.

U.S. retail sales of nontraditional ATVs continued to grow sharply in 2006 to nearly 400,000 units. This is about a 50 percent increase over 2005's figure of approximately 260,000 units.

This margin of increase is more than 2004's total sales number of around 130,000 units. Include the approximately 750,000 ATVs sold in 2006 by reporting members of the Motorcycle Industry Council, and the total ATV market last year reached 1.15 million units. This was up from around 1.04 million in 2005 when combined traditional and nontraditional sales of ATVs breached the 1-million-unit mark for the first time. So while the MIC reporting members saw a decline in the ATV market in 2006, the overall market, including youth models, continued to grow at more than 10 percent.

Although there are about 200 distributors importing ATVs into the United States, only a handful are driving the bulk of the sales volume. The top 10 distributors in 2006 were, in alphabetical order: Baja Motorsports, BMX Powersports, Fushin USA, Galaxy Motorsports, Goldenvale Roketa, Kazuma Pacific, Maxtrade, Redcat, SunL and Tierra Motorsports.

Many of the pioneer distributors that carried Taiwanese brands have dropped out of the market. The changes in emissions regulations in 2006 forced some distributors to become dealers because they did not want to go through the expense of certification.

Some significant distributors, however, entered the market, notably Galaxy Motorsports in Dallas and Tierra Motorsports from City of Industry, Calif. The early-2007 merger of Redcat and Tank may herald a period of increased consolidation as the market matures further and the high retail sales volumes of some distributors no longer compensate for low wholesale margins.

Of the established Taiwanese brands, only KYMCO appears to be holding its own. Market share of the Taiwanese segment of the nontraditional ATV market has fallen steadily since 2000, but in the past couple of years that decline has increased dramatically. As late as 2003 Taiwanese ATVs represented 65 percent of the retail sales volume from the brands not reporting to the MIC. In 2006 they represented less than 4 percent.

The situation for a number of distributors of Taiwanese products has become so serious that they are now offering cheaper Chinese-produced units to provide their dealers with competitively priced products. Although the Taiwanese have a reputation for better product quality, they appear to be increasingly unable to compete on price with the mainland-produced units, especially those sold by distributors aiming for high-volume sales.

Distribution Channels

Drop shipping and Internet sales have characterized the nontraditional ATV market for years, and these channels still appear to compose a significant proportion. On average, distributors that operate these channels derive between 10 percent and 15 percent of their total sales from them. Most of the distributors we spoke to at Dealer Expo in February expressed a desire to reduce these sales in favor of their dealers.

The distributors can be split into three categories: those companies following the Japanese and U.S. model with full-service dealerships and established brand identity; those that aren't yet at that level but aspire to be there; and those driven solely by a desire for huge sales volumes, with a modest level of support. In the past couple of years most market-leading distributors have appeared to belong to this third category.

It also appears that the sub-150cc youth ATV is perceived as a commodity or toy; here, consumers are driven more by price than brand name or perceived quality. Many distributors have responded by rushing to offer the lowest price possible, with 50cc ATVs being sold to consumers for as little as $350. We have even heard reports of some dealers asking their distributors to raise the MSRPs to make retailing the units more viable.

Larger Displacements

The nontraditional ATV market continued to shift toward the higher displacements in 2006, with the 50cc-and-under segment slipping to 17 percent of sales from 27 percent in 2005. Much of the growth in the import ATV market occurred in the 90cc-to-110cc range. Approximately 46 percent of Chinese and Taiwanese ATVs sold in 2006 were in this category, up from 36 percent the previous year.

While it might comfort the established OEMs to consider that the majority of Chinese and Taiwanese ATV sales are still below 150cc, 23 percent of the nontraditional ATV sales are now in the adult entry-level segment of the market (above 150cc). They should easily break the 100,000-unit mark in 2007.

To put this development in perspective, the Chinese and Taiwanese distributors are now selling 12 percent of the sales volume the MIC OEMs record in this segment, and most of the distributors to which we have spoken already report significantly increased sales for 2007.

Chinese and Taiwanese distributors are continuing to climb the displacement scale. Machines in the 200cc-to-300cc range are becoming more popular, and increasingly distributors are offering units in the 400cc-to-500cc range. Utility ATVs are also growing in sales volumes. This segment of the market increased from 15 percent to 20 percent largely due to the significant sales increases of 90cc and 110cc utility models.

Buying Trends

Consumer surveys suggest that the majority of the buyers of these ATVs are price-driven, and they are purchasing either as a new entrant into the ATV market or as a rider in want of an additional machine. The Chinese and Taiwanese are expanding the market to reach buyers who couldn't afford to participate in prior years.

Based on our research, it appears that youth ATV sales of the MIC reporting members have declined noticeably, but have not collapsed. The import brands are undoubtedly taking some sales from the major OEMs, but a significant majority of enthusiasts still want a brand-name machine.

Summary

Established OEMs are battling the influx of Chinese and Taiwanese units in a number of ways. A couple of the most visible cases have been attempts to expand the regulation and enforcement of safety standards, as well as lawsuits pertaining to patent and trade infringements, such as the Yamoto suit Yamaha filed in 2005.

To date, mainstream OEMs have had some impact on slowing or deterring a few of these new players, but they may be fighting a losing battle. Their efforts are having a positive impact on those distributors that want to play by the rules and become respected companies.

There has been an explosion in nontraditional ATV sales in the past two years, but this level of growth is unlikely to continue. Still, the nontraditional ATV market will continue to grow at a considerable pace, and import ATV sales could exceed 500,000 units this year. The adult segment of units with displacements of 150cc and over will continue to grow, possibly to well over 100,000 units.

We expect that the Chinese and Taiwanese will continue to chip away at the consumer base at the bottom of both the youth and adult segments of the established brands.