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 But people like Chinese accountant Grace Mi and her peers in their
20s and 30s are changing the car financing game and are the ones
catching the attention of global carmakers looking to boost revenue
and defend 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 some 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 comes
as part of their broader efforts to make up for sliding margins on
new-car sales in China where more 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
Around 70 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 <F.N> contributed nearly a
quarter of the Deerborn, 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," John Lawler, head of Ford's operations
in China, told Reuters in an interview. "It's a demographic and
generational phenomenon. Those people who finance cars are primarily
younger buyers."
China's central bank gave the sector a boost in early June when it
cut the amount of money auto financing firms need to set aside as
reserves in a bid to stimulate the economy which is showing signs of
slowing.
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 <BMWG.DE>,
Volkswagen AG <VOWG_p.DE>, Nissan Motor Co Ltd <7201.T> and Toyota
Motor Corp <7203.T> have each issued around 800 million yuan
($128.85 million) of asset-backed securities.
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GROWING SECTOR, RELATIVE LOW RISK
The country's automobile association forecast the auto financing
industry to more than double to 525 billion yuan ($84.55 billion) by
2025.
In an email to Reuters, GMAC-SAIC Automotive Finance Co Ltd, the
financing joint venture of General Motors Co <GM.N> in China, said
auto financing will be "integral in facilitating sales" in the
world's biggest auto market.
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, coming at
a time when worries are mounting over the country's corporate and
government debt. These include the fact that, relatively, Chinese
consumers have a short credit history.
One executive at Toyota said the Japanese carmaker has encountered
some fraud cases involving fake IDs that first appeared about a year
ago in southern China and then began spreading to other parts of the
country.
Toyota uses a set of risk assessment tools modeled around those used
in other countries and refined to local practices in China that are
being used by global carmakers, two Toyota executives said. Both
declined to be identified because they were not allowed to speak the
media.
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. ($1=6.21 yuan)
(Additional reporting by Shanghai newsroom, Jane Lee, Norihiko
Shirouzu and Paul Ingrassia; Writing by Kazunori Takada; Editing by
Norihiko Shirouzu and Matt Driskill)
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