Credit makes inroads on China forecourts

The Financial Times, December 26, 2012

Click here to read the article at FT.com

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.

Competing in the China Truck Market - An Introduction

December 17, 2012

by Bill Russo

Driven by strong economic growth and infrastructure investment, the China auto industry has enjoyed explosive expansion in the past decade, at a compound annual growth rate of 25% over this period.  However, the year-over-year growth rate slowed down to 2.5% in 2011 due to a combination of policy and economic factors, such as the termination of the tax incentive policy, the credit crunch, purchase restrictions in China’s largest cities, supply-chain disruptions and the global debt crisis. 

This market slow-down has continued into the first seven months in 2012.  According to the China Association of Automobile Manufacturers (CAAM), year-to-date automobile sales are 10.98 million units in the first seven months, only 3.6% higher than last year.  Although CAAM maintains their optimistic forecast of full year growth as 8% higher than 2011, few analysts doubt that China’s automotive sector has arrived at an inflection point where future sales will expand at a more stable and moderate growth rate.

Commercial vehicles in China consist of trucks and buses, which have been negatively impacted by the economic slow-down.  While declining by 7% from 2010 to 2011, the commercial segment has seen a further decline of 9.4% in the first seven months of 2012 to 2.24 million units sold.

Over the past decade, the truck sector has grown to meet the demands from China’s expanding economy.  Historically, the sales of MDT and HDT accounts for 30% to 35% of the truck sector, which tripled in size from 409,000 units in 2001 to 1,287,000 units in 2010.  This growth momentum has not been linear.  Instead, several waves of fluctuations have occurred caused by macroeconomics and policy changes which directly impact the amount of capital available to businesses that typically invest in commercial trucks.  Government policies, which directly determine the levels of investment in infrastructure, along with measures to introduce stricter emission standards, have resulted in big fluctuations in the market.

In particular, the large stimulus package launched in 2009 sharply accelerated demand.  “Cash-for-clunkers” schemes introduced in 2010 helped drive replacement demand as well as improve the quality of the overall vehicle parc. When nearly all government stimulus measures expired in 2011, the truck segment entered a downward cycle and is expected to go down to 869,000 units sold in 2012.

Contrary to the US and Europe, where most sales are replacement sales, in China MDT & HDT are predominately new sales which increase the size of the fleet.  Though the parc of HDT and MDT has reached 3.9 million units by 2010, there is still a large gap relative to the developed markets in terms of per capita vehicle ownership.  Moreover, several fundamental drivers will prevail in next few years to push forward the demand for MDT & HDT.

First, industrialization and urbanization in China drives higher fixed-asset investment.  Fixed asset investment of China (adjusted by Purchase Power Parity) is 1.3-1.6 times higher than that of Western Europe and the U.S.  Such huge investment is mostly spent on the railway, highway and other infrastructure projects, which in turn drives demand for more commercial (mainly heavy duty) trucks.  Meanwhile, China’s current urbanization rate is about 50%, and this will increase to over 60% by 2020.  Clearly, these trends will continue to fuel higher demand for commercial vehicles for the foreseeable future.

Second, cargo transportation demand of China is larger than that of the U.S with a higher growth rate.  High cargo transportation demand is a result of inefficient logistics, urbanization and the size of country.  All of these factors will push higher demand for Long-Haul HDT.

Third, the replacement cycle of HDT/MDT in China is much shorter than that of the developed markets.   This will create significantly more replacement buying in China than international markets.  In China, line-haul HDT can typically only be used for 0.9 to 1.1 million Km while in the US, the number is as high as 1.5 to 1.7 million Km. As a result of such differences, the average age of MDT/HDT in China is only 6 years, much lower than 11.3 years in US.

Taking a broader look at the global context, several macroeconomic and sociopolitical developments are altering balance of power in the automotive industry.  These include the recent financial crises, which have effectively resulted in a redistribution of global economic power, altered the global trade balance, and have renewed concerns with energy security and environmental issues.   The growing size and influence of the Asian economies – especially China – are triggering a transformation of the automotive business model, with automotive enterprises seeking to leverage the momentum of the region.  The recent shift underscores the importance of the Asian economies to the future growth and profitability of the global auto industry.

Most of the recent growth in the world’s auto industry has been in the Asia-Pacific region, and more than half of that growth over the next decade is forecasted to come from China.  Similar regional demand migration also applies to the MDT/HDT sector. 

Driven by continuous industrialization, urbanization and cargo transportation demand, China’s MDT/HDT market is anticipated to come through the current down-cycle and experience a strong rebound thru 2015.  As illustrated in Figure 4, by 2020 the parc will increase by almost 7 million to 10.7 million units (up from 3.8 million) and sales forecast for 2020 is 1.7 million units (up from 1.3 million in 2010).

Going forward, several overarching market trends will shape the MDT & HDT demand structure: 

1. Line-haul HDT demand will be even larger than vocational trucks in China resulting from the comparably lower professional level and lower operational efficiency of the logistics infrastructure.   This creates opportunities for international entrants who have a strong on-road tractor line-up.
2. A push to meet stricter fuel economy and emissions standards will drive a need for advanced technology and accelerate the truck manufacturers’ emphasis on technology upgrades and alternative fuel application. 
3. The source of OEM’s profitability will increasingly shift from new truck sales to after-sales services, including vehicle logistics, value-added services, parts sales, and auto finance, etc.  

All of the trends noted here will raise the level of interest among China’s local truck manufacturers to form alliances international truck manufacturers.

The growing influence that China wields is not simply derived from the size and scale of its domestic market, which is an increasingly important focus in a growth-challenged industry.  Increasingly, financially weakened automotive companies and their suppliers must strive to deepen their participation in the China market if they hope to remain viable. It only stands to reason that companies that have weakened positions in their domestic market would benefit by redistributing some of their focus to the growth markets and in particular China.

In summary, China’s HDT/MDT market is expected to come through the short macroeconomic cycle into a sustainable growth track from now through 2020, and global truck makers should position themselves to participate in the market by forming alliances to leverage their unique capabilities in the areas of product, technology and after-sales services.

This is the first installment in a series on the China Commercial Vehicles market.  Click here to read the second installment.

China’s vehicle sales pick up speed

The Financial Times, December 10, 2012

Click here to read the article at FT.com

Vehicle sales in China, the world’s largest market, picked up speed last month as the mainland economy showed signs of recovery and the decline in sales of Japanese cars, hit hard by a Sino-Japanese territorial dispute, appeared to have slowed.

Wholesale deliveries of passenger cars to dealers rose nearly 9 per cent last month year on year, to 1.46m units, boosting year-to-date growth to just above 7 per cent, the China Association of Automobile Manufacturers said on Monday.

Total vehicle sales, including trucks and buses, rose 8.2 per cent and could exceed 19m for the year, CAAM said. Last year, China sold a total of 18.5m vehicles, compared with 12.8m light vehicles sold in the US.

Sales of Japanese cars also showed some signs of recovery in China, although motorists still remained reluctant to buy Japanese brands in the wake of street protests in September that were sparked by friction over a chain of islands in the East China Sea.

Sales of Japanese cars rose 72 per cent in November from October but for the month were still down 36 per cent compared with the same period last year, CAAM figures showed.

“It will take a long time to establish the consumer belief that Japanese cars are once again fashionable,” said Bill Russo of Synergistics car consultancy in Beijing. He said a recovery will depend on resolution of the underlying political dispute and will take years rather than months.

Domestic carmakers in China also saw November sales boosted by a surge in exports, which rose 23 per cent year on year with a total of 91,700 units shipped, said Namrita Chow of IHS Automotive in Shanghai.

Car market analysts expect a strong finish to the year as carmakers deepen discounts in an effort to hit their annual sales targets.

December car sales should be “ideal”, judging from the momentum gained in November, said Chen Shihua, CAAM head of statistics.

The strong figures for China contrast with India, where slowing economic growth, high interest rates and rising fuel costs damped demand. Sales of passenger cars fell 8.3 per cent in November year on year, according to the Society of Indian Automobile Manufacturers.

Carmakers had expected strong sales during the annual Hindu festival season, which this year peaked later than usual, in November.

Sales of motorcycles – an indicator of the economic strength in rural areas – were also flat in a year where income for many farmers was hit by a delayed monsoon. The only bright spot was sales of utility vehicles, favoured by India’s rich, which were up nearly 70 per cent over the same time last year.

China’s carmakers crank up exports

The Financial Times, December 2, 2012

For the first time, China is expected to export 1m vehicles this year. Faced with rising competition in their home market, the largest in the world, Chinese carmakers are finding it easier to go abroad and sell cars in less sought-after markets such as Iran and Iraq.

China’s car market has slowed along with the domestic economy and passenger car sales rose only 6.9 per cent in the year to October. Domestic carmakers have been particularly hard hit by the abolition of government tax incentives that favoured them, losing market share to US, European and Korean rivals.

Japanese carmakers in China have been forced to cede market share due to a Sino-Japanese territorial dispute that caused public protests against Japanese cars. But very little of that market share has gone to Chinese carmakers who have less than 30 per cent of the market by volume.

They have responded by cranking out exports to some of the world’s less prestigious markets: China’s top car export markets for the first three quarters of this year were Algeria, Iraq, Iran, Russia and Chile. By the end of October, China’s total vehicle exports for the year exceeded the total figure for 2011, and passenger car exports rose 43 per cent year-on-year in October alone.

“It is really a function of domestic demand,” says Bill Russo, head of Synergistics auto consultancy in Beijing and former head of Chrysler in China. “As the market slows, the pressure on inventory goes up and the natural safety valve is to direct cars to the export market.”

“Passenger vehicle exports have become the main driving force for growth for Chinese domestic automakers,” says Namrita Chow of IHS Automotive in Shanghai, adding that “Chinese automakers are foraying into markets generally outside regions targeted by international automakers, allowing them to achieve growth” and offload excess inventory.

With a few notable exceptions, like Great Wall Motors, a well-respected privately owned Chinese group best known for its sport utility vehicles, most Chinese car companies are targeting the lower end of export markets. They have no choice, because they lack products outside that segment.

But it is a risky strategy, says Lin Huaibin of IHS Automotive. “If you enter overseas markets at a low price level, then it is very hard to climb up later . . . they do not want to repeat the mistake they made in China where (domestic) brands are associated with low prices and are finding it hard to move upmarket”.

After decades of exporting mostly cheap, low quality products – and several scandals involving death or injury caused by Chinese exports of pet food, toothpaste and other products – the country’s manufacturers in a range of sectors face the same problem: how to combat the bad image of brand China overseas.

Haier, one of the world’s largest home appliance manufacturers, has partly solved that problem by choosing a name that sounds more German than Chinese. But that will not work for everyone.

Chery, the largest car exporter with 165,000 foreign sales in the first ten months of the year, says 30 per cent of its sales come from overseas, where the company’s lower priced models are the best sellers.

Geely, owner of Volvo and the second-largest exporter so far this year, denies that pressure at home is forcing it to seek export markets. With Geely’s domestic sales expected to grow 10 per cent this year “we don’t need to shift our focus to exports,” says a company spokesman.

Overseas sales now account for about a fifth of Geely total sales “and the proportion will continue to grow as the growth of sales overseas will still be much higher than that at home – we still have a huge market out there to expand in,” the company says. Previously Geely has said it plans to sell as many cars overseas as at home.

Great Wall, the fourth-largest and most upmarket of the Chinese exporters, has a different strategy. “We aim at quality rather than quantity for overseas markets,” a company spokesman says, adding that many Great Wall products overseas are priced at or near the level of similar Western and Japanese products. “We want to build the brand image of Great Wall and change the impression in overseas markets that Chinese cars are low in quality and sell cheap.”

Like Chery, which has started construction of a factory in Brazil, Great Wall is increasingly producing cars overseas for foreign markets. By 2015 Great Wall expects to have 24 overseas production facilities with capacity of 500,000 units.

But Klaus Paur, global head of automotive research at Ipsos, says that for many Chinese automakers, focusing on exports “is not a sustainable strategy” and they must first concentrate on the challenges of increased competition they face back home. “If they are selling well outside China, that may distract them from fixing the problems they have in the China market itself,” he says.

Click here to read the article at FT.com