Auto Financing Shifts Into Gear

Foreign multinationals are now in the driving seat, as auto financing revs up for action

By FENG JIANHUA

The first Peugeot store in northwest China opens in Xi’an in 2003. Beginning from November 13, foreign auto groups can apply to set up auto financing service companies in the country

Chinese car lovers with their eye on that sleek metallic machine can now afford to smile as auto financing becomes a reality, offering another option to cash or bank loan auto buying.

Foreign auto groups had continuously encountered difficulties when it came to enlarging their market share on China’s mainland, as they were not allowed to provide the vital selling component of supportive loan services. The good news for the giants of the motor industry and consumers alike is that change is in the air.

The Detailed Rules for Implementation of Measures for Administration of Auto Financing Companies (the Detailed Rules), promulgated by the China Banking Regulatory Commission (CBRC), which became effective on November 12, removed the last “obstacles” in this regard.

The Measures for Administration of Auto Financing Companies (the Measures) were released on October 3, and the Detailed Rules, as a supplement to the Measures, provide specific stipulations on the application for establishing auto financing companies in China.

Many multinational auto groups have reacted swiftly. On November 13, the day after the promulgation of the Detailed Rules, the General Motors Acceptance Corp. (GMAC), a subsidiary of General Motors (GM), submitted an application to the CBRC for conducting auto financing services in China. It plans to cooperate with the Shanghai Automotive Group Finance Co., Ltd. (SAICFC) in establishing the Shanghai GM Auto Financing Co., Ltd. The GMAC is the first foreign auto-credit company applying for a license to engage in auto-credit services in China.

At a news briefing on December 1, CBRC Chairman Liu Mingkang disclosed that apart from the Shanghai GM Auto Financing Co., the Toyota Auto Financing (China) Co., Ltd. and the Volkswagen Auto-Financing Service Co. (China) had also submitted applications to the CBRC.

Zhu Lihua, Public Relations Official of the Beijing Representative Office of Ford Credit, told Beijing Review in a telephone interview that her company is making preparations for the application so that it can obtain the license for auto financing business “in the shortest time.”

Why the Rush?

China now has the fastest-growing auto market in the world. At present, about 8 million Chinese families are capable of buying automobiles, and it is predicted that the figure will reach 42 million in five years. According to a GM forecast, by 2010, China will become the third largest auto market after the United States and Japan. By that time, 50 percent of the automobiles in China will be sold in the form of loans.

At the moment, however, the size of auto loans in the country is far from able to meet the demand, which has restricted the capacity of auto consumption to a large extent. According to reports from Xinhua News Agency, less than 20 percent of autos are sold through loans, compared with 70 percent in other countries. GM revealed recently that of its autos sold in China, only 15-20 percent are sold through loans, compared with 85 percent in the United States and 70-80 percent in Britain and Germany.

Over the past two years, with more and more people buying autos through loans, auto consumption loans, which approached 115 billion yuan ($13.89 billion) in 2002, have become the second largest consumption loan market in China, following housing loans. The country’s auto loan services started in 1998, which are primarily provided by commercial banks, accounting for 95 percent of total auto loans.

Because of the incomplete credit system in China, deliberate defaults or obtaining auto loans through fraud and deception are common despite many measures against risks. Commercial banks providing auto loan services are bent with the burden. Reportedly, about 30 percent of private auto loans are in default and 10 percent of auto loans are unlikely to be recovered.

As there are no effective measures to control risks, commercial banks require consumers to buy insurance for honoring the loan contract when applying for auto loans. That means when a consumer defaults the loan repayment or swindles loans, all the risks will shift to insurance companies. But insurance companies are also unprofessional in individual credit rating, so defaults and frauds have kept rising. Under such circumstances, in early August this year, insurance companies, including the People’s Insurance Company of China (PICC), suspended insurance for honoring auto loan contracts in many areas. As a result, auto loans have been on the decline since August.

Given the immature auto loan market in China, foreign auto groups can boost their sales in the country through establishing their own auto financing companies. Moreover, the loan service itself can bring about generous profits. For many auto groups, auto loan service has become a stable main source of profits.

Is Time Ripe?

People flock to an auto exhibition in Sichuan Province. Auto loans have become the second largest consumption credit market in the recent two years

The Measures and the Detailed Rules for their implementation have explicitly stipulated the market entry of auto financing companies, their business scope and legal responsibility. Then, are conditions ripe for the entry of foreign auto financing companies into China?

“Ford has been in China for seven years and it has long expected the opening up of the country’s auto financing service. In view of the policies so far, although there are some restrictive stipulations, it is crucial to take a foothold in the Chinese auto financing market, which is enticing with its huge potential. And this is an important reason for the swift reactions of most foreign auto companies, including Ford,” said Zhu Lihua.

Article 14 of the Measures stipulates that foreign auto financing companies shall not establish branches. This means that foreign auto financing companies can hardly compete with their rivals, namely, Chinese commercial banks with densely distributed outlets, according to Liu Yan, a researcher with the International Cooperation Department of the China National Automotive Industry Consulting and Development Corp.

In addition, the Measures exclude auto leasing from the business scope of auto financing companies. Yet auto leasing is believed to be a main part of foreign auto financing companies, which generates a large portion of profits for such companies. “This stipulation cripples foreign auto financing companies, because it blocks a main channel of profits,” said Liu.

Of course, compared with overseas auto financing markets, which have developed for nearly 100 years, it is normal that the Chinese auto financing market has some obstacles at its infantile stage, according to Zhu Lihua. “After they enter China, foreign auto financing companies will gradually expand their business by relying on their experiences and professional staff, and in the meantime, their operations in China will help the country improve its relevant policies,” she told Beijing Review.

As to the “conservative‚” policy, the Chinese Government has its own considerations. At a press conference, the spokesperson for the CBRC said that China still lags behind developed countries in the business scope and regulation of auto financing. But “this is a choice out of prudence after giving consideration to the reality of China’s auto consumption loan market, such as incomplete operational environment for operations, weak risk-control capacity and inadequate experience in financial regulation.” Even though, “with the formulation and improvement of the individual credit rating system, guarantee laws and regulations, and the vehicle pledge and registration systems, the operational environment will improve accordingly and auto financing companies will gradually take on the track of sound development.”

What’s the Benefit for China?

The entry of foreign auto financing companies into China will break down the long monopoly of commercial banks in the country’s auto consumption loan market, thus promoting the diversification of market players. Some people believe that foreign auto financing companies will pose a great threat to Chinese commercial banks and probably force them out of the field of auto consumption loans.

In the face of such assertions, some people in the banks remain calm. “Foreign auto financial companies won’t impose significant impact on the current business of commercial banks, not to say forcing commercial banks out of the field of auto consumption loans,” said a manager at the headquarters of the Bank of China.

But worries do exist. “Although (foreign) auto financing companies won’t make a big impact on commercial banks in the short term, there might be the possibility in the long run that commercial banks will exit from the market of auto consumption loans,” said a manager of China Merchants Bank Beijing Branch.

Undoubtedly, the presence of foreign auto financing companies will exert positive far-reaching influence on the development of the Chinese auto industry. As most of these companies are subsidiaries of international auto magnates, they provide a series of supportive services involving product inquiry, registration, auto parts supply, repair and maintenance, claims filing, used auto dealing, etc., in addition to loans. This will greatly raise the interest of consumers in applying for auto consumption loans, thus pulling along the auto consumption market and promote the sound development of the entire auto industry.

Furthermore, the entry of foreign auto financing companies marked the introduction of market mechanism into China’s financial regulation. Both the Measures and the Detailed Rules stipulate that all corporate entities hoping to establish an auto financing company, whether they are domestic or overseas companies, can enter the market so long as they satisfy the stipulations. All auto financing companies will operate according to law and compete fairly; neither domestic companies nor overseas ones are to be granted special treatment.

“This is of great significance for further linking China’s financial regulation with international practice,” noted a CBRC official.