Financial services in auto industry in China: opportunity and obstacle

It was not uncommon to see people come to car dealers and pay their cars by cash. The story depicted by this article published on Wall Street Journal could happen quite frequently. Customers came in with ¥300000 ($50000) of cash.

As our government keeps cutting expenses, less government’s money is used on purchasing new vehicles. Today, car dealers that previously relied on government expenditures have to attract more individual consumers to keep their businesses going. In fact by 2020, the size of middle class in China will be much larger than today’s. It is a question of “how” instead of “why” to attract more individual customers. One way to do this is through discount. GM provided employee discounts to everybody in 2005, as an approach to reduce its inventory level. It ended up really well: GM reduced its inventory level and increased its cash flow. However, Chinese dealers are not concerned about their inventory levels yet. Also, issuing discounts is not sustainable in the long run, and may lead to price war. Another way is to provide financial services. Financial services, if conducted in the right way, can generate huge amount of profits. For example, Ford Credit, the financial services arm of Ford, once contributed 80% of Ford’s total profits.

To attract more customers, car dealers should be able to provide financial services. Financial services from car dealers include used-car sales, leasing, and car loan. There are both opportunity and obstacle for providing financial services in China.

Car dealers in Germany provide discounts to customers when they come to trade in their used cars and get new cars. This can attract new customers, while keep old customers coming back. Used-car sales became increasingly important in China because of a policy that limits the amount of new vehicle registration in major cities. Under this policy, it is extremely hard for one to get a new plate, and without a new plate, one cannot buy a car. However, if one is willing to trade in his old car and buy a new car, he can keep his original plate. Therefore, there are plenty of opportunities and potential profits in used-car sales business. Under the current policy, it is extremely attractive for people to trade in their old cars and purchase new cars.

Sometimes car dealers are unable to provide attractive car loans to customers because of the high interest rate in China. A typical interest rate varies from 8% to 12%. In comparison, US customers can enjoy much lower interest rate. I remembered when one of my friends purchased a Ford Focus in US last year, he had the opportunity to enjoy 0% interest rate. High interest rate means a higher portion of payment is used to pay for interest expense, rather than principal. The longer the loan is, the more the accrued interest expense is, and the less attractive the loan is. Therefore, most current car loans in China are short term loans. If car dealers can offer long term loans, they will be able to attract more customers.

 

http://cn.wsj.com/gb/20140429/bch105817_ENversion.shtml

2 comments to Financial services in auto industry in China: opportunity and obstacle

  • Peter Wittwer

    Interesting view on what’s happening in China. Long term loans with lower interest rates would definitely make purchasing cars more affordable for the average or even less wealthy person in China. The used car trade in policy practiced by car dealers in Germany also seems like a good strategy to attract customers. It would obviously be attractive for all Chinese people because of the strict vehicle registration laws, but also, as the middle class grows, a growing used car market could be very beneficial for the consumer market. As dealerships begin to take on used cars, first time car buyers, specifically in the middle class who aren’t looking to spend a lot of money on a brand new car, could buy a used car. This could not only be a good way get repeat car customers, but also as a way to expand the used car market in China.

  • mayolj16

    At home, the dealerships so take advantage of these financial services to attract customers as in most of the other countries in the world. What is interesting about Argentina, is that the interest rate is usually lower than the inflation (the real one, not the one that the government announces), making car sales even more attractive. Monthly payments allow people to buy cars (and anything that can be paid with this financing system) to pay a cheaper price than when they pay straight with cash. This helped car companies increase their sales, but in the long run it gives them a loss from the difference between inflation and interest rate.

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