China, the world's third largest and fastest-growing auto market, is not just attracting an increasing number of car manufacturers.
Like bees to a honey pot, it is also pulling in their auto financing subsidiaries.
"With a population of 1.3 billion, even if only 10 per cent of Chinese opt to buy cars on finance, the market is considerable," Xu Guozhen, vice-president of Ford Motor Company (China), tells China Business Weekly.
This reasoning well explains why so many auto-financing giants have begun jumping on the finance bandwagon.
The latest to hop on board is DaimlerChrysler Financial Services, the finance arm of the German-US auto giant, which opened a wholly-owned subsidiary in Beijing in early November.
With a registered capital of 500 million yuan (US$61.7 million), DaimlerChrysler Auto Finance (China) Ltd is the fifth global car manufacturer to make the move, following General Motors, Volkswagen, Toyota and Ford.
DaimlerChrysler is the first manufacturer to offer financing for both cars and trucks in China, according to Till Becker, chairman and chief executive officer of the group's Northeast Asian operations.
"Whether you are financing a Mercedes-Benz sedan, a Chrysler mini van or a whole fleet of Mercedes heavy-duty trucks, DaimlerChrysler Auto Finance (China) Ltd will make it easy to put our customers behind the wheel," Becker says at a press conference in Beijing.
Like Ford, DaimlerChrysler Auto Finance (China) is joining forces with its dealers to offer loans to customers.
The company aims to have some 3,000 retail contracts next year, says Wolf Bay, managing director of DaimlerChrysler Auto Finance (China).
Ford, which kicked off its financing operation in Shanghai in April, also works closely with its dealers.
According to Ford's Xu, a solid relationship with dealers is a massive advantage for auto financing companies.
"With the assistance of car manufactures and dealers, we can offer a package of professional services rather than a mere loan provided by banks," says Xu. "And, our payment terms are more flexible."
As Chinese auto dealers are newcomers to the world of auto finance, training them will be a major long term burden.
Xu acknowledges the most pressing task is to equip dealers with financing know-how as quickly as possible.
Although the potential market is huge, experts say China's auto financing business still faces plenty obstacles.
Currently, only 10 per cent of new vehicles in China are financed, compared to more than 70 per cent in Europe and the United States.
"The biggest hurdle is the lack of a sound credit information system," Xu tells China Business Weekly.
"Auto financing companies don't have enough channels to get customers' financial information, we find it extremely hard to establish customers' credit rating."
In fact, some banks and insurance companies have already entered and retreated from the auto financing sector because of the mountain of bad debts their ventures accumulated.
Increasing initial payments and raising interest rates are two ways of mitigating the problem, but finance companies still have to resort to rigorous investigation procedures. In some cases, they even make door-to-door enquiries.
Although the lack of a sound credit information system brings great inconvenience to auto financing companies, Xu believes the situation will gradually improve over time.
"Establishing such a system is a time-consuming process in any country," he says.
Xu is also confident that Chinese customers will increasingly prefer to buy cars using loans, citing Japan as an example.
"Around 50 years ago, most Japanese would prefer to wait and buy a car only when they had saved enough money for it. Now, 50 per cent of cars there are bought through car financing," Xu says.
And he hopes the government can help open the door for the car financing industry.
The Chinese Government released a management rule on auto financing companies in 2003, with a series of restrictions on their business.
"It is understandable that the government should guide a new and emerging sector with strict regulations at the very beginning. However, once the sector is on track, we hope we can be given more freedoms in some areas, especially regarding capital sourcing and the setting up of branch companies," Xu adds.
According to the management rule in 2003, auto companies' capital comes from their registered capital, bank loans and their domestic shareholders' three-month or above deposits. As a result, auto-financing companies are forced to turn to banks, their competitors, for help once they have a big deal and run short of cash.
The rule also prevents auto-financing companies from setting up branches and subsidiaries. This means Shanghai General Motors Finance (China) Co Ltd should restrict their business to Shanghai and Volkswagen Finance (China) Co Ltd can only operate in Beijing, a severe restriction on company development.
(China Daily 12/19/2005 page4)
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