Consumers switch from cash to credit to buy new cars
In a country where owning a car has long been a symbol of luxury and success, 85 percent of Chinese car buyers still buy cars with cash.
But people like Chinese accountant Grace Mi and her peers in their 20s and 30s are changing the car financing game. They are catching the attention of global carmakers looking to boost revenue and defend profit margins in an increasingly competitive market.
These young people are willing to buy big-ticket items like a car on credit -- a behavior unheard of 15 years ago in China -- and have led carmakers to boost their financing units in the mainland.
The push by automakers to steer more people to buy on credit is part of their broader effort to protect profit margins in China at a time when companies are cutting prices to entice buyers. Other key revenue sources include maintenance and repairs, vehicle leasing and sales of accessories and parts.
Mi, a 27-year-old accountant in Beijing, did not have enough cash on hand to outright buy her dream car, a Nissan Sylphy, with a price tag of about 150,000 yuan ($24,200). Instead, she saved enough money for a down payment and took out a loan.
"I didn't want to take a penny from my retired parents," Mi said, adding that owning a car had become increasingly important for her personal and work life. "I didn't have to wait for years to own a car."
Mi has been repaying 2,500 yuan, or one-fourth of her monthly wage, since November for her Sylphy. While the loan payments are not small, she says she doesn't feel burdened.
"Accountants are needed everywhere so I'm not worried about job security. I don't think I am enslaved by the car loan."
Moving to credit
Seventy percent of car buyers in the United States and other developed countries take out loans, according to a Deloitte report in 2012 and the reason global carmakers are trying to seize on the rise in auto financing in China is because the sector is highly profitable.
The financing unit of Ford Motor Co. contributed nearly a quarter of the Dearborn, Michigan-based company's overall profit last year while rival GM saw 12 percent of its profit come from its finance unit.
"China's car market remains primarily a cash market, but it is starting to move to credit," said John Lawler, head of Ford's operations in China. "It's a demographic and generational phenomenon. Those people who finance cars are primarily younger buyers."
In June, China's central bank gave the sector a boost when it cut the amount of money auto financing firms need to set aside as reserves.
Global carmakers have been funding their financial units' expansion by selling off their loans in the form of asset-backed securities to beef up their operations in China. That frees up money they can use to lend to Chinese consumers.
So far this year, the financing units of Ford, BMW AG, Volkswagen AG, Nissan Motor Co. and Toyota Motor Corp. each have issued approximately 800 million yuan ($129 million) worth of asset-backed securities.
Low risk
The country's automobile association forecast that automotive financing would more than double to 525 billion yuan ($85 billion) by 2025.
GMAC-SAIC Automotive Finance Co., the financing joint venture of General Motors in China, said in an e-mail to Reuters that auto loans will be "integral in facilitating sales" in China.
Bankers and analysts say the chances of car loan defaults are limited in China because the country requires a large down payment - 20 percent for new cars. Consumers here also have a higher savings rate compared with other countries like the United States.
"It is viewed as a future source of income rather than a source of default and losses," said Patrick Steinemann, co-head of Asia Industrials Investment Banking at Bank of America Merrill Lynch in Hong Kong.
Indeed, GM's China chief, Matt Tsien, said financing has proved a "steady business" in China.
"One of the characteristics in the Chinese market that's very good for the financing business is that default rates tend to be very low," he told Reuters in Detroit. "So the risks are pretty good in that sense. People tend to pay up," Tsien said.
Such a rapid expansion in auto financing does have risks, since Chinese consumers have a short credit history.
One executive at Toyota said the Japanese carmaker encountered some fraud cases involving fake IDs that first appeared last year ago in southern China and spread to other parts of the country.
Toyota uses risk assessment tools modeled on those used in other countries and refined to local practices in China, said two Toyota executives who declined to be identified.
Toyota has further beefed up its loan assessment process and on occasions turn to the old-style approach of home visits, they added.
"Home visits are still the most direct way of verifying customer addresses, but due to time and labor requirements we can only use it sparingly," one of the executives said.
These young people are willing to buy big-ticket items like a car on credit -- a behavior unheard of 15 years ago in China -- and have led carmakers to boost their financing units in the mainland.
The push by automakers to steer more people to buy on credit is part of their broader effort to protect profit margins in China at a time when companies are cutting prices to entice buyers. Other key revenue sources include maintenance and repairs, vehicle leasing and sales of accessories and parts.
Mi, a 27-year-old accountant in Beijing, did not have enough cash on hand to outright buy her dream car, a Nissan Sylphy, with a price tag of about 150,000 yuan ($24,200). Instead, she saved enough money for a down payment and took out a loan.
"I didn't want to take a penny from my retired parents," Mi said, adding that owning a car had become increasingly important for her personal and work life. "I didn't have to wait for years to own a car."
Mi has been repaying 2,500 yuan, or one-fourth of her monthly wage, since November for her Sylphy. While the loan payments are not small, she says she doesn't feel burdened.
"Accountants are needed everywhere so I'm not worried about job security. I don't think I am enslaved by the car loan."
Moving to credit
Seventy percent of car buyers in the United States and other developed countries take out loans, according to a Deloitte report in 2012 and the reason global carmakers are trying to seize on the rise in auto financing in China is because the sector is highly profitable.
The financing unit of Ford Motor Co. contributed nearly a quarter of the Dearborn, Michigan-based company's overall profit last year while rival GM saw 12 percent of its profit come from its finance unit.
"China's car market remains primarily a cash market, but it is starting to move to credit," said John Lawler, head of Ford's operations in China. "It's a demographic and generational phenomenon. Those people who finance cars are primarily younger buyers."
In June, China's central bank gave the sector a boost when it cut the amount of money auto financing firms need to set aside as reserves.
Global carmakers have been funding their financial units' expansion by selling off their loans in the form of asset-backed securities to beef up their operations in China. That frees up money they can use to lend to Chinese consumers.
So far this year, the financing units of Ford, BMW AG, Volkswagen AG, Nissan Motor Co. and Toyota Motor Corp. each have issued approximately 800 million yuan ($129 million) worth of asset-backed securities.
Low risk
The country's automobile association forecast that automotive financing would more than double to 525 billion yuan ($85 billion) by 2025.
GMAC-SAIC Automotive Finance Co., the financing joint venture of General Motors in China, said in an e-mail to Reuters that auto loans will be "integral in facilitating sales" in China.
Bankers and analysts say the chances of car loan defaults are limited in China because the country requires a large down payment - 20 percent for new cars. Consumers here also have a higher savings rate compared with other countries like the United States.
"It is viewed as a future source of income rather than a source of default and losses," said Patrick Steinemann, co-head of Asia Industrials Investment Banking at Bank of America Merrill Lynch in Hong Kong.
Indeed, GM's China chief, Matt Tsien, said financing has proved a "steady business" in China.
"One of the characteristics in the Chinese market that's very good for the financing business is that default rates tend to be very low," he told Reuters in Detroit. "So the risks are pretty good in that sense. People tend to pay up," Tsien said.
Such a rapid expansion in auto financing does have risks, since Chinese consumers have a short credit history.
One executive at Toyota said the Japanese carmaker encountered some fraud cases involving fake IDs that first appeared last year ago in southern China and spread to other parts of the country.
Toyota uses risk assessment tools modeled on those used in other countries and refined to local practices in China, said two Toyota executives who declined to be identified.
Toyota has further beefed up its loan assessment process and on occasions turn to the old-style approach of home visits, they added.
"Home visits are still the most direct way of verifying customer addresses, but due to time and labor requirements we can only use it sparingly," one of the executives said.
