As the Chinese auto market is gradu- ally maturing, the auto service market represented by auto finance is gradually stressed by auto companies.
According to the research, in matured foreign auto markets, the auto service can contribute to 30%-50% of the auto companies’ profits, but in China, this sector is still in low valley as most of auto service companies in China cannot see profits.
In middle May, the results of the 4th round of Sino-US strategic and economic dialogue were published, which contained the apparent signal of gradually opening the field of auto finance. After opening the compulsory traffic insurance to foreign insurance companies, the Chinese government also promised to allow auto finance companies (including foreign companies) to issue bonds and securities in China if they are qualified after going through legal examination procedures.
The Management Methods of Auto Finance has already been carried out for almost ten years since 2003, but most of auto finance firms are either haunted by loss or fortunate enough to “enjoy” tiny profits. It is mainly due to the limited financing channels of these companies. Though the new Management Methods in 2008 allowed auto finance companies to issue financial bonds but few of them were approved.
The data shows that the penetration rate of the auto finance was less than 15% in 2011. According to Volkswagen Finance (China) Co., Ltd, the penetration rate in the auto loans in the U.S. market is close to 100% and in Europe the rate also reaches 70%.
Prior to that, the new Stipulations about the Compulsory Insurance for Automobile Accidents officially took effect on May 1. The new Stipulations removed the limitation in the identity of participants by allowing foreign companies to get engaged in the business of compulsory insurance for automobile accidents. This signifies that the auto insurance market in China is going to be fully opened.
A series of policies show that China is gradually opening its financial market, but this does not mean that the auto finance market in China can be fully opened instantly. Wang Wei, general manager of auto finance department at the Bank of Communication, said that the spread of relevant business and promotion needs some time, but no prominent growth is hard to get in a short while. “However, the trend of opening this field is unstoppable,” he finally stressed.
Auto Finance Likely to See Progress First
“The Chinese government promised that the auto finance companies, including foreign companies, are allowed to issue financial bonds if they are qualified after going through examination procedures.” This promise undoubtedly serves as the signal for opening the auto finance market in China and ending the phenomenon that auto finance companies provide the loans with an incredible 11% interest rate.
Guy Broekmans, general manager of Volkswagen Finance (China) Co, Ltd once said that the “financing cost is the largest cost expense”. During the past seven years after foreign auto finance companies’ entry in China, they were hard to get fast development thanks to the limitation of the policy.
Early in 2009, Toyota Financial Services Co., Ltd tried in vain to issue bonds. “The vague policy orientation and the limitation on foreign financial companies” were mainly blamed. One year later, Shanghai GM Finance Co., Ltd got the password to issue bonds, making it the first auto finance company issuing financial bonds in China.
After that, there was no successful case of foreign-funded auto finance companies to issue bonds in China. Broekmans said: “Presently, the auto finance companies in China only have one channel of raising funds, which is the inter-bank lending. This is very unhealthy for an auto finance company.” That’s why the interest rate from auto finance companies is higher than the interest rate of bank loans.
Compared with the 2008 version of the Management Methods of Auto Finance Companies, the new document gave a clear definition to foreign companies. Analysts said that the auto finance is likely to be first section seeing progress among all financial segments when the entire financial market in China is gradually open. As the detailed measures and relevant implementation methods are further defined, the bond issuance of foreign auto finance enterprises, which have been laid aside for long, is very likely to be greeted with new development opportunities.
“We have been preparing for a go in this market for years. When the policy goes more lucid, the issuance of bonds for fundraising will be added onto our schedule very soon,” said an insider from Toyota Financial Services Co., Ltd.
Globally, auto finance companies have four channels to raise funds: 10%-15% come from inter-bank lending; 25%-30% come from banking deposits (auto finance companies attract deposits as banks); 30% come from bond market by e.g. issuing corporate funds; and 30% come from assets mortgage bonds.
Though the signal is very clear, the problems still exist when it comes to the detailed procedures of implementation, which determines that it is hard to solve the problem of financing in a short while. “Against the current financial environment, the indirect finance represented by banking loans is still the main channel for auto finance companies to raise funds,” said an insider from an auto finance company.
Profits Move to Rear Market
“According to the international norms, the auto finance should be a great source for auto enterprises,” said Xing Haizhi, an analyst from Xinda Securities. With the opening of the financial sector, the profits of the auto industry will gradually move from sales to other markets including financial services.
Despite the bright outlook, we cannot deny the unimpressive status quo of the auto finance sector in China, especially twhen he development of domestic auto finance companies which are largely suffering losses.
Jia Xinguang, a senior analyst in the auto industry, said that the risk is hard to control and the capital strain of auto finance companies determine that auto finance companies in China cannot have fast development at this moment and will not become the mainstream business in the market in a short while.
Presently, Toyota Financial Services Co. Ltd’s overall pen- etration rate is about 12%. As an insider said, “the penetration rate of auto finance in China is lower than the one in Europe, America and Japan, but the credit-based consumption is now widely accepted by consumers and thus the penetration rate is going to increase at a fast pace”.
Jia Xinguang said that the small amount of operating capital is the major problem for auto finance companies in China. The insufficient capital leads to the high cost of capital operation and the failure to promote high-quality credit products for auto consumption.
Wang Wei also said the current strict financial supervision neutralized the possibility for the financial companies’registered capital to get its operating capital through additional stock issuance. Therefore, in his opinion, auto finance companies contribute a little to the auto industry. “Obviously, our auto service industry represented by auto financing is far behind our auto industry.”
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