China Ripe for Auto Finance Boom as Consumer Penetration Rate Rises

Since 2009, China has surpassed the United States as the largest market for new-vehicle sales, according to Deloitte Consulting LLC. And now, auto finance is starting to catch up.

For many years, the Chinese automotive market has been propped up by government incentives like tax breaks, which encouraged customers to purchase cars. So far, this incentive has led to more than 2 million cars being sold a month, with growth running up 15% last year, the Wall Street Journal reported in March. But as the tax breaks are expected to wind down, auto lenders have a greater opportunity to step in and capture marketshare in China, where penetration rates remain lower than other developed nations.

In the U.S., for instance, 84% of new cars in the U.S. were financed in 2014 compared with 20% in China, according to Experian. The Chinese auto finance rate rose to 38% in 2016, and is expected to rise steadily in the next few years — reaching an estimated 55% in 2021, according to ReportLinker.

While the pace of auto finance adoption among Chinese consumers is growing, there are several ways to fund a vehicle purchase — including banks, captives, peer-to-peer lending, credit cards, and a growing number of third-party payment apps such as Alipay and Ola Money. But with so many institutions offering finance options, competition will only intensify.

A Growing Market With Growing Pains

China’s laregely cash car market is starting to move to credit.

Commercial banks were the first to benefit from the emerging credit market, according to Deloitte Consulting. “Commercial banks’ auto consumption credit held a dominant position in the early stage of market development,” a 2015 report stated, adding that in recent years captives have been able to expand their foothold “due to relaxed access controls and improved regulatory environment.”

One example of relaxed controls is the China Banking Regulatory Commission, which no longer approves issuances of securitization products on a case-by-case basis, giving way to allow auto finance companies to issue collectively more than $23 billion in personal auto loans in 2014.

Consumer preference also plays a key role in seizing marketshare. Daimler AG, for example, saw 79,700 new leasing and retail contracts in the third quarter, increasing year-over-year revenue 45% to $2.8 billion, according to earnings. “Daimler Financial Services anticipates significant growth in new business and further contract volume based on the strong sales development of the automotive divisions, especially Mercedes-Benz cars,” Bodo Uebber, head of finance and controlling at Daimler Financial, said during the company’s earnings call.

“We have a 40% to 50% penetration rate [in China],” Uebber said. “Leasing is not yet as big, but it’s already double digits. We could, of course, imagine doing more as the market in China gets more mature.”

Volkswagen AG also has its eyes set on penetrating the Chinese market, albeit in the electric vehicle division. “Starting next year, we aim to build attractively priced electric cars in China for the domestic market together with the Chinese automaker JAC,” Matthias Müller, Volkswagen chief executive, said during the OEM’s shareholder’s meeting in May.

But at the moment, “attractively priced” does not include the automaker’s captive VW Credit — yet. “Right now, our focus is [beginning] production by 2018, and then we will look at the role of VW Credit,” a VW China spokesman told Auto Finance News.

But that doesn’t mean smooth sailing for all luxury brands, as China continues through its growing pains of improving the financial regulatory market. For instance, BMW Financial Services reported lower originations in the third quarter due, in part, to restrictions placed on the Chinese financial sector, according to its earnings report. BMW’s Chinese leasing contracts for the third quarter were down 2.7% year-over-year, while new credit financing contracts fell by 9.1%. BMW did not break out specific numbers. The decline in contracts “is attributable to a limitation in the volume of new business in China imposed by the People’s Bank of China as part of its strategy of regulating the banking and financial services sector,” according to the earnings report.

Healthy Competition for Marketshare

Another factor impacting the market is increased competition from internet juggernauts that have been able to tap into the online consumer market. In 2016, during retailer Alibaba Group Holding Ltd.’s “Singles Day” — a cultural celebration of single people in China, known as the country’s version of “Black Friday” — about 100,000 cars were sold in the 24-hour period on Alibaba’s platforms, according to the South China Morning Post. This was the equivalent of the typical sales volume of 1,000 Chinese auto dealerships in one month.

And not only is Alibaba capable of selling cars, it is increasingly getting into the financing game. Alibaba led a $335 million Series E funding round for Chinese car-trading website SouChe.com in November. SouChe also raised $100 million in a Series C round in November 2016 led by Ant Financial, an Alibaba affiliate. SouChe.com provides financing for customers to buy new vehicles for a year, which they can then purchase outright, trade in for a new model, or return.

Meanwhile last April, Baidu Inc. — which is sometimes referred to as the Google of China — together with Tencent Holdings and JD.com invested $1 billion in Bitauto Holdings, an e-commerce site for automobile users, manufacturers, and dealers. Internet initiatives are also gathering a foothold with OEMs such as SAIC Volkswagen starting to sell new vehicles online, according to an April 2016 McKinsey report.

“These developments confirm that cross-sector collaboration and partnerships between Chinese OEMs and private enterprises are not only inevitable, but serve as an opportunity for the industry to grow and develop in unchartered territory,” PwC said in an April report.

China is a “really hard nut to crack,” ZestFinance Chief Executive Douglas Merrill told Auto Finance News. “If you think about it, you simultaneously have an underwriting problem and a marketing problem.”

People need to be convinced to purchase on credit, then companies have to figure out if those people are creditworthy, Merrill explained. “To really change the game for credit and financing in China, we’re going to need to find a way to share that data more effectively,” he added. That being said, there are “a lot of opportunities for financing,” Merrill said.