China’s Traffic Congestion is Inflating Demand for Mobility Services

Some urbanites living in dense cities across the United States may be able to ditch their cars and rely wholly on public transit, shared mobility options, and rideshare services. However, most consumers are still very dependent on vehicle ownership.

In 2015, car-free households comprised 9.1% of the total U.S. population, whereas, in New York City, a whopping 54.5% of households reported car-free status. The national percentage of households ditching cars is increasing for the first time in nearly half a century.

But at this point, few manufacturers are worried that consumers outside the Big Apple will wake up tomorrow morning and decide to trade in their vehicles to live a life of Uber rides and rental cars.

However, despite a widening urban-rural divide, Chinese consumers are increasingly finding the barriers to car ownership onerous. Instead, they are opting for alternatives in the mobility space. “From a willingness point of view, Chinese consumers still want to own a vehicle,” Jeff Cai, general manager of auto quality at J.D. Power China, told Auto Finance News.

“Owning property and a decent car are what most Chinese consumers chase. But, for some reason, many are choosing the path of car-sharing rather than being a sole owner. The challenges to become a car owner — along with the cost — can be significant.” Traffic congestion and air pollution caused by car ownership are at the heart of China’s most pressing automotive issues — and the financing and mobility space are gaining momentum.

In the past 10 years, China’s vehicle fleets have increased to 170 million units on roads across the country, at a pace four times faster than the country built its roads, according to a Deloitte report entitled, The Future of Shared Mobility in China. The solution seemed obvious: Build wider roads and expand existing roads.

However, this road expansion naturally increased consumers’ eagerness to own vehicles and made transportation by car more desirable, according to Deliotte. For all the government’s efforts to improve road infrastructure, traffic congestion was unchanged and commuting hours did not decrease.

For example, the density of road networks in Tokyo reached 7.2 square miles — more than three times that of Beijing and Shanghai — despite a similar number of cars per 1,000 people. “There are 13 cities in China with populations of over 10 million,” a spokeswoman with rideshare company DiDi Chuxing told AFN.

“With a car ownership rate of only about 10% — compared with 80% in the U.S. — these cities are already facing a major shortage of space and roads for cars. Beijing alone has only 2.3 million parking spots for 6 million vehicles.”

In response, China’s urban centers have turned to strict and expensive license plate registration systems to control the flow of traffic. The price of a license plate in Shanghai today has soared to $14,000, J.D. Power’s Cai said.

Additionally, street cameras track plates to regulate who can drive on certain days of the week. “Currently, China’s largest cities manage traffic by having drivers use their cars every other day,” Chas Roscow, an auto finance consultant, told AFN. “It’s a wonderful idea, actually, and I often wonder if any American city would experiment with this tactic.”

These licensing restrictions are just one of several factors widening the gap between car ownership and the number of consumers with a driver’s license. Some are turning to ride-hailing, others to car-sharing, and many are indulging in the country’s “advanced and omnipresent” public transportation system, Roscow said.

Auto lending is growing, but the trend will force lenders to rethink business in the fastest growing market in the world.

Used Cars as a Path to Ownership

Whereas mobility options in the U.S. can largely be ignored so long as you own a car, mobility is the reality of transportation for Chinese consumers, said David Yu, adjunct professor in New York University Shanghai’s Department of Finance. “In Beijing, you have a lottery for license plates, and in Shanghai, you have bidding for plates — so even if you want to own a car, you can’t necessarily get one,” Yu told AFN.

“People have to go out and find alternatives, and mobility is definitely a growing factor, whether that’s in the form of [ridesharing company] DiDi or a model where you can rent the car like ZipCar in the U.S.” Aside from the license plate restrictions, owning a car can be burdensome.

Most Chinese consumers buy new cars, Yu said, for a few reasons. For one, a customer who can shell out an extra $14,000 to get a license plate is likely interested in buying a luxury vehicle. Second, consumers are worried that if they opt for a used car, they’ll buy a “lemon,” especially since vehicle histories are less accessible than they are in the U.S. These obstacles haven’t stopped China from becoming the largest car sales market in the world, with more than 28.8 million new vehicles sold in 2017.

However, the growth rate slowed to 3% year over year down from 15% growth in 2016, according to the government-backed China Association of Automobile Manufacturers. Wei Fan, senior vice president of China business development at RVI Group, told AFN used-car dealers aren’t even allowed to transact at their own dealerships. Both interested parties have to meet at an approved government location.

“If they do have [a used vehicle] on their lot, they can have a consumer come in to look at it, but to complete the transaction they have to take the car to the centralized market,” Fan said. These hurdles make the sale of used vehicles at franchise dealerships difficult, he added, “And dealerships are saying, ‘I’m not really interested in selling used cars right now.’” There’s no Carfax to check vehicle histories or NADA Guides to ascertain pricing, so the safer bet is to buy new. Still, the used market is growing, despite obstacles.

“I don’t see a fast track to get there,” Fan said. “I think about how NADA has been able to collect data from all the U.S. auctions … Dealers are the ones who have the data, so auction houses have to submit data or else the [dealer] customer will no longer come to your auction house anymore. That dynamic is not quite there yet in China.

“In fact, it’s the reverse dynamic, in which the dealer who goes to auction to buy cars — not franchise dealers, small dealers — they don’t want to have transparent data because once it’s transparent, it prevents them from making profits,” he said. “Consumers would actually know the proper value of the vehicle.” Of course, there’s the question of what happens when the cars used for mobility need to be sold at auction. But, those solutions are still being hammered out, according to Toyota Motor Corp.

“At this stage, we are still gathering and analyzing the impact of ridesharing on residual values in the region and around the world,” a company spokesperson told AFN.

Financing Drives Mobility Growth

Financing could lift the burden of car ownership, but penetration rates remain low relative to U.S. figures. In 2017, the penetration rate of auto financing in China was 43%, half the rate achieved in the U.S., said Xiaojun Zhang, co-founder and chairman of the dealer financial transaction platform Cango Inc. But the rate is growing.

“In recent years, auto financing has been gaining acceptance among Chinese car buyers,” Zhang said. “One public survey once showed that over 60% of car buyers noted that they’ve had basic knowledge of the various car financing means when purchasing a car, and some would even proactively ask for relative financing products available for consideration.”

However, while the financing market finds its legs, consumers may find that rideshare and other mobility options provide an easier path. Toyota is actively spending in the space, namely with a $1 billion investment in Southeast Asia’s Grab platform, which seeks expansion beyond Singapore.

“Cars will be used more, and there is a possibility that we will see even more opportunities for maintenance and repairs,” the Toyota spokesperson said. “With higher car-utilization rates, there is room for Toyota to differentiate itself through a difference in quality.”

Additionally, Toyota said car-sharing will lead to the creation of demand for its brand, particularly among customers who drive less often. “The needs of customers are diversifying,” the spokesperson said. “Toyota will promote business development that allows us to respond to the need for car-sharing through transformation into a mobility company.”

The Urban-Rural Divide

Of course, with fewer public transit options and lower population density in rural areas, car ownership will likely continue to grow, Cango’s Zhang said. The Chinese government classifies its cities into tiers based on population and economic output, and even those on the lower end of the tiered system are expected to contribute as much as 75% of growth in China’s new-passenger car market through 2021, he said.

“Even if some of the need to own cars is replaced by car-sharing, it will not completely disappear,” the Toyota spokesperson said. “In particular, establishing car-sharing infrastructure is difficult in certain regions, and the need for cars as a tool in daily life will not disappear.”

In fact, Volkswagen Financial Services is targeting these rural parts of the country for future growth, the company reported in its latest earnings report.

“We took efforts to increase the penetration rate in lower-tier cities, where car sales potentials are blooming due to fast development and huge demand of family vehicles in China,” a Volkswagen spokesman told AFN. “For example, the local subsidiary Volkswagen Finance (China) has conducted regional marketing strategies from metropolises to the sub-urbans to focus on all potential customers.”

Although there are no plans to institute licensing restrictions in these lower-tier cities, they still have sizable populations — many with similar population densities as European cities — that could benefit from the rise of rideshare, Zhang said.

“[Lower] tier cities in China have burgeoning consumption demands that may not be widely understood by audiences outside of China, as residents in these cities have more disposable income due to lower housing and public service costs,” the DiDi spokeswoman said. “In addition, due to less advanced public transportation or poorer-managed taxi systems, these cities tend to have higher demands for reliable, stable mobility services with transparent and straightforward pricing.”

For example, many of lower-tier cities have unlicensed, underground taxi services, so the introduction of DiDi’s safety and licensing procedures is welcome in these areas, the spokeswoman added. DiDi offers financing and remarketing solutions through its subsidiary Xiaoju Auto Leasing & Retail, which was formed in August through a $1 billion investment.

Although challenges remain for finding financing solutions to get these drivers in reliable cars, there’s also the challenge of trying to move the industry away from the century-old concept of ownership.

“People are increasingly willing to pay for the trips they actually need rather than for a car that sits in a garage 95% of the time,” the spokeswoman said. “Carmakers are also embracing this trend. We are working with carmakers to develop cars for shared fleet networks that will be financed and managed by operators like us — these cars will be designed for sharing and passenger efficiency, not for ownership.

“We are seeing a switch from a culture of car ownership to car access,” she added. “And that is happening for more than just financial reasons.”

Editor’s note: This story was originally featured in the September issue of Auto Finance News, out now.