GM enters local auto financing
By Wang Yu (China Business Weekly)
Updated: 2004-08-10 10:22

The China Banking Regulatory Commission (CBRC), the country's financial watchdog, last week gave the green light to General Motors Corp (GM) to launch China's first auto loan company, rekindling hopes about a new wave of expansion in car sales.

"So far, it is still hard to make a judgment about what kind of impact the move of GM will generate, and how big the impact will be, because it is only one company's initial entry into a brand-new business field," Wayne W.J. Xing, a renowned independent auto analyst and publisher of China Business Update (CBU), said last week.

"The newly-launched auto loan operation will surely spur GM's sales in China. However, since the firm only accounts for around a 10 per cent market share in China, the impact on the overall market will remain limited," Xing commented.

Of course, Xing added that if the other two giants -- Volkswagen AG (VW), which commands 33 per cent of the Chinese market, and Toyota Motor Corp (Toyota), who also won government approval last year to gear to provide car loans -- can also take part in the loan business, then it will be a totally different situation.

"In that case, there will be a substantial effect on auto sales. After all, these firms are dominating China's auto market," Xing stressed.

CBRC sources last week confirmed the latest development regarding GM's auto loan business, also implying that there might be more information about other firms' new steps in this regard.

Insiders indicated that VW and Toyota were already well prepared to launch similar auto loan business.

An industry insider said that "both VW and Toyota" could also take some initial steps into the nation's fledgling but promising auto-financing sector.

But Xing is more cautious in this regard, pointing out there are still some major obstacles for auto loan providers to overcome.

For instance, the lack of an individual credit system will make the business vulnerable.

"Just like banks that have confronted mounting non-performing loans due to handing out auto loans, auto financing firms will face the same situation."

And more importantly, the immaturity of the market and fluctuations in automobile prices in China will hamper the business prospect of loan firms.

"If the price of a particular sedan falls just one month after one buys it through auto financing, how can the buyer keep cool?"

In Xing eyes, the latter problem is even more damaging to auto sales than the lack of a credit system.

"If the situation continues as it is now, people will still hold the money and adopt a wait-and-see attitude, even though car loans are available. They will not buy until China's auto prices fall to international levels," Xing commented.

Agreeing with Xing, Jia Xinguang, a top auto market analyst at the China National Automotive Industry Consulting and Development Corp, said last week that more time may be needed for the market to truly benefit from the auto giants' financing business, because they have to be fully prepared to fend off potential risks.

"Even though they are ready to start business now, they have to adopt a prudent policy and to do business step by step, because of the immaturity of the market and the difficulty to find or track potential consumers' credit information," Jia commented.

According to Jia, financing arms of these auto giant may have to follow a more stringent risk-control system in China to keep a close watch on the amount of money loaned.

"Because of the difficulty in finding buyers' credit information and keeping tracking of this, they have to slow down the pace of expansion and be careful every step of the way," Jia suggested.

In Jia's eyes, besides providing loans to potential consumers, another important purpose of setting up such financing branches is to guarantee a stronger fund chain for these auto giants.

"Under the condition that giving auto loans to ordinary car buyers is not easy, at least now, these financing firms may turn to major car dealers in terms of money. That will make their sales networks stronger," Jia analysts.

China has no central credit rating agency, no laws to repossess cars from errant borrowers, and -- after just a few years -- a swelling pool of non-performing auto loans.

Analysts said these uncertainties mean providing credit will not necessarily translate into an immediate sales increase.

"It's still very difficult to check people's credit and there's no easy answer to this problem," said Yale Zhang at auto consultants CSM.

"The auto loan market is still very small, it's going to take time to develop."

GM won final approval last week to begin operating China's first auto financing company, beating foreign rivals who are queuing to enter the largely untapped market.

"GM's success in being approved to carry out auto financing business is a milestone in our business expansion here in China. We will bring our experience here to China, and also our latest financing products as well," Philip F. Murtaugh, chairman and chief executive officer of GM China Group said last week.

GM's experience in successfully doing auto loan business in mature auto market, plus China's partner's local strength, will male the firm a success, sources from the newly set-up finance arm of GM implied.

Auto financing has proven to be a big money spinner for GM in more developed markets in the United States and Europe.

Its financing unit, General Motors Acceptance Corp, earned a record US$860 million in the second quarter to June, up from US$834 million previously, accounting for about 64 per cent of GM's total earnings.

Fewer than 20 per cent of new cars sold in China are financed, with large State banks dominating the market, but auto makers are hoping car financing will fuel the next stage of explosive growth in the country even as car sales slow.

GM, the world's largest auto maker, expects that in 10 years up to half of all Chinese car buyers will be financing their purchases with loans, but executives have said the industry still needs a national credit rating system and procedures for repossessing cars when loans are not paid back.

GM said it did not know exactly when the venture would formally start offering loans to consumers.

"I think it will be safe to say in the next couple of months," said spokeswoman Daphne Zheng.

"Some of the next steps will be administrative. It might be very quick, or it might take some time. This is really in the hands of the government."

The new finance company, a joint venture between the finance units of GM and long-time Chinese partner Shanghai Automotive Industry Corp, will have 500 million yuan (US$60.4 million) in registered capital.

GM's finance arm will contribute 300 million yuan, with the remainder coming from the Chinese partner, the regulator said in a statement.

Rules allowing non-bank institutions to set up car financing were issued last October by the central government, fulfilling its World Trade Organization membership pledges.

Chinese banks have only been offering the service since 1998, but the service was rapidly scaled back after an explosion in bad car loans.

Volkswagen and Toyota Motor Corp already have initial approval to enter the Chinese auto loan arena.

They, together with other foreign automakers, plan to spend some US$13 billion tripling annual production capacity in China to 6 million cars by the end of the decade, prompting fears of a margin-sapping glut.

But China's market is still expected to become the world's second largest, after the United States, by 2010, according to consultants McKinsey.

Growth in China's car sales is expected to slow to just 20 per cent this year after sales nearly doubled to 2 million units in 2003. Industry-wide sales slowed in June for the third month in a row as Beijing clamps down on credit to curb soar away economic growth.

The finance arm of Ford Motor Co also got the nod last week from the CBRC to gear up to provide loans to vehicle buyers in China, the world's fastest-growing car market.

Ford Credit -- which finances new, used, and leased vehicles and also offers fleet financing -- said it had won regulatory approval to begin setting up financing operations in China and plans to invest an initial US$60 million in the country.

It will offer loans to consumers and over 100 Ford dealers already doing business in the world's most populous nation, the company said.

"China is an important market for Ford Motor Co. and Ford Credit's approach is to build a foundation that will support the company's commitment to China," Mike Bannister, Ford Credit's chairman and chief executive officer, said in a statement.

Ford will begin providing car loans in mid-2005, said Mike Kozel, president of Ford Credit's Asia Pacific operations.

Close