Credit makes inroads on China forecourts

The Financial Times, December 26, 2012

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In China, cash is still king at the car dealership. But many younger car buyers in the world’s largest auto market are rapidly taking on western habits – including using credit to buy a more expensive car than they could otherwise afford.

Carmakers, both foreign and Chinese, are keen to encourage a more profligate attitude in a country whose financial conservatism sets it apart. Some have recently set up finance companies in the hope that credit will play the role in China that it plays in Europe and the US: boosting demand for their products.

Many homes are paid for in cash in China, so buying a car with cash is considered no big deal. The idea of paying by credit is catching on among the younger generation, though older Chinese still abhor the notion. As recently as five years ago the percentage of buyers using credit to buy a car was tiny. But that is changing, say auto analysts.

Eva Chan, who is buying a new car, says she could afford to pay cash but has decided to use credit because a local bank is offering an interest-free loan as part of a dealer promotion. She ends up with a Rmb200,000 ($32,000) car, bought with Rmb120,000 of credit.

“The vast majority of customers throughout China continue to pay in one lump sum,” says John Lawler, head of Ford Greater China. But, in the past few years, “the benefits of financing have become much better understood . . . although [it is] still well below other markets around the world”, he adds.

General Motors, the market leader in manufacturer finance through its GMAC-SAIC Automotive Finance joint venture, has had its customer base more than double since 2010 to nearly 900,000 in August. GMAC says the car finance market is growing faster than the car market itself – where sales are expected to end the year up 5 to 10 per cent – and forecasts that market penetration will as much as double by 2020 to about 30 per cent.

Minsheng Bank, in a report this month, says outstanding consumer car loans last year totalled Rmb300bn, about a quarter from car finance companies, a quarter from credit card loans and 40 per cent from commercial banks. That was double the figure for 2010 and could exceed Rmb1tn within 10 years, the report says.

But GMAC says that, while market penetration in China could reach that seen elsewhere in Asia, it is unlikely to match US or European levels.

Bill Russo, head of the Synergistics auto consultancy in Beijing, puts the penetration rate of all forms of auto finance – provided by manufacturers through their credit companies and by banks – at 15 to 20 per cent, compared with 92 per cent in the US, 70 per cent in Germany and 74 per cent in the UK.

“The Asian mindset about credit is quite different,” Mr Russo says, noting that market penetration in Japan is still below 50 per cent. “Maybe 40-plus per cent is the ceiling in China.”

Global carmakers are eager to extend the availability of finance in China, he says, because credit expands the pool of potential buyers and shortens the life cycle of car ownership because those who lease a car will often change it when the contract ends.

South Korea’s Hyundai Motor this year set up a car financing joint venture with Beijing Automotive Industry Corporation. Lee Kyo Chang, chief executive of Beijing Hyundai Auto Finance, says that while only 15 per cent of buyers use credit, 30 per cent say they would be willing to. Commercial banks, Mr Lee says, approve only half of applications, so car financing companies, which have less conservative approval policies, can step into the breach.

BMW launched a Chinese car finance joint venture in 2010 with Brilliance China. Kirk Cordill, its chief executive, says establishing a credit history for potential buyers is not easy. “Sometimes we have to do home checks to make sure the customer really lives where they say they live,” he says. In the west, most car finance companies would only visit a customer’s home to repossess a vehicle in default.

The shift in China’s attitude to credit is only beginning, say market analysts such as Klaus Paur, global head of automotive research at Ipsos. “In the past five years there has been a tremendous change in how people approach their lives in China, and this extends to buying a car, and using a car, and financing a car, and that is a very significant change,” he says.