It’s clear that China’s auto finance market is vastly different from the United States, but it’s hard to conceptualize those differences until you’re on the ground facing them head-on.
In hosting the Auto Finance Summit Asia earlier this month, the AFN team learned a lot about the industry as it exists in China from difficulties present in the used car market to innovations in leasing that are right around the corner.
Here are four takeaways from the conference.
Profit Margins Aren’t Tight
Right now, the auto finance business in China is about making the cake bigger, rather than lenders fighting to get a piece of the cake, William Shen, an industry consultant, said during a panel discussion.
Attendees were engaged with the panel, which featured executives from U.S. Bank and Westlake Financial Services sharing their experience operating in a tight margin environment.
“In order to be successful in a really thin margin business you have to understand your expense table and where you’re spending,” said John Hyatt, executive vice president of dealer services for U.S. Bank. “Then set an expectation to automate and innovate to a place where every year your gaining leverage on the expense base.”
Although the Chinese market is not developed enough to where lenders are fighting over a few basis points of growth like U.S. Bank is with its competitors, there are lessons to be gained, Shen said. For example, Chinese lenders could look to U.S. lenders for their compliance management and how to deal with on-site inspections.
David Gaynoe, Vice President, Global Sales & Marketing, RMS Automotive, A Cox Automotive Company
Used-Car Market Has a Long Way to Go
Dongfeng Nissan Auto Finance Co. is one captive that sees excellent opportunity in the used space.
“A lot of those customers are paying cash, but maybe you can put a proposal to them that they can put some money away and pay monthly payments,” said George Leondis, president of Dongfeng Nissan Auto Finance. “That’s an opportunity that the whole ecosystem could use.”
The perception in China is still that second-hand cars are unreliable in part because there’s no central database for the car’s servicing history. Additionally, license plates in major cities are prohibitively expensive, so if the consumer that can overcome those costs is also likely to jump for the more expensive newer model.
There are a couple of ways OEMs, and their captive arms can help overcome these perceptions through marketing campaigns, Leondis said. Specifically, the OEM’s site should be linked to the captive, and both companies should make a case for the cost saving benefits of financing.
“Instead of putting 200,000 RMB or more on a Tiana they’ll put — according to our regulations — 40,000 RMB down cash and then you finance the rest, and it frees up cash,” he said. “Chinese people tend to spend more money on travel than any other country in the world. [With this free cash] they can go shopping, they can eat at the best restaurants.”
George Leondis, president of Dongfeng Nissan Auto Finance Co. (Photo by William Hoffman)
Leasing Is Vital
Another way to build up the used market is through off-lease vehicles, executives noted at the conference.
“Captives, because they are attached to the OEM, are going to have the most information on the vehicle and the consumer,” said David Gaynoe, vice president of global sales and marketing at Cox Automotive’s RMS Automotive. “It’s a controlled data set where you have motivations by the captive to maximize that portfolio but also have the consumer retention piece.”
Leasing is a good way to build the future infrastructure of the market, but it’s also just a good financial product for captives to promote. Dongfeng Nissan Auto Finance is using it as a way to build customer retention with its brand.
“In the US, I can tell you every other day a Nissan Finance Company customer is getting a letter that includes an offer from Nissan about a new car that’s launched with a loan. This is not happening here in China,” Leondis said. “We have a huge opportunity to manage this customer through the lifecycle.”
Yet, there are others who believe China could “leapfrog” leasing and go straight to newly created subscription models that are being tested in the U.S. right now.
“In many markets (the US and Europe), the transition from full ownership usage was leasing, and here I’m not sure you will need leasing at all,” said Sebastian Pfeifle, partner at Deloitte. “Or, in a broad sense, will leasing become more of a short-term usage?”
Steve Cochrane, Chief APAC Economist, Moody’s Analytics
Macroeconomics Present Challenges
U.S. tariffs on Chinese goods could decelerate the economy more than it already is, according to Steve Cochrane, chief APAC economist at Moody’s Analytics.
The worst case scenario would be if the U.S. put a blanket 25% tariff across all Chinese goods. The effect would be a global slowdown because of the interconnectedness of trade and cause Chinese manufacturers to shift supply chains from the U.S. to Southeast Asia.
“Worst case scenario, it would bring GDP growth down by about a percentage point,” Cochrane said. “We’re predicting GDP growth of 6% in China next year so the worst-case tariff scenario would bring that down to 5% — still growing but a percentage point change would be significant for China and the region.”
Passenger car sales in China have started to slow — although it remains the largest market for new car sales — and overall the economy is expected to decelerate from its days of double-digit GDP growth.
“Long term, we have to expect that the Chinese market is going to slow as it becomes a more mature economy as it shifts from low value-added goods to high-value, and as it switches from goods to services,” Cochrane said.