In China, car financing is a lot like the unification of North and South Korea. Just about everyone wants it to happen. But before that can happen, first you need to sweep away the landmines.
For evidence, consider what happened to Zhao Wenhui, a Volkswagen dealer in Beijing. When China permitted car loans for the first time in 1998, the 29-year-old general manager linked up with local banks and insurance companies to underwrite new sales. Financing - nonexistent in China just months earlier - jumped to 20 percent of Zhao's volume. 'I was happy, the customer was happy, and the bank was happy.' Zhao explains. The insurance company, which ultimately insured the bank loan, was happy, too - for a while.
Then the bad news occurred. When people came to buy their new Santanas, Zhao had insisted that they be a Beijing resident, show copies of their bank accounts and turn over proof of their salaries. 'If something went wrong,' Zhao explained, 'we knew we'd find them at their homes.' Or so he thought. Months into the new financing campaign, customers started to miss payments. His teams went to people's homes to collect - only to find no house at all. People and their cars had vanished. In the end, bad debts killed the experiment. 'I got paid,' recounts Zhao, 'but the insurance companies got burned.'
Today, Zhao's eyes still brighten when the subject turns to financing. But he is a lot more cautious. Of the 500 orders he took for the new Passat last July, every one was paid with cash. Government authorities no longer allow insurance companies to experiment in financing. And Zhao is not prepared to go it alone. Most other Chinese car dealers feel the same way. For every hundred cars sold in China, only five involve loans. Just how low is that rate? In Thailand, car financing occurs in 60 percent of new car sales. In the United States, the rate exceeds 90 percent.
For now, conditions in China discourage car financing. Beijing does not have legal procedures for repossessing vehicles. In a market economy, additional risk may be offset by raising lending rates. But in China's socialist economy, the Bank of China sets interest rates on car loans. Without freedom to adjust rates, most banks conclude that it is better to make no loan than a bad one.
Chinese state banks, left alone, are content to struggle with more car financing, step by deliberate step. But in China's reforming economy, the state no longer operates alone. Private investors and foreign companies - including General Motors Acceptance Corp., Ford Credit and Volkswagen Financial - are doing more business there.
Leading the charge is Guo Jiyuan, a 50-year-old entrepreneur from Shanghai. Guo is founder and president of Yafei, China's largest independent car retail chain. Guo shakes his head at government bureaucracy. 'They are missing the market,' he says waving his hand. 'We finance one of every three new-car sales since we started (financing) in 1998.' Yafei also leases vehicles in 60 cities.
Yafei, which means 'Asia soars,' was started by Guo and Chinese domestic banks in 1992. Yafei is a franchise of 230 car dealerships covering more than 100 Chinese cities. Guo typifies today's Chinese entrepreneur. After spending time in Japan and Italy, he came back to China with a driving desire to make a difference. Each day he wakes at 4 a.m. to work on his latest book (he has already published two). And no hour is too early or late for work. 'I get an idea at 11 p.m., call my staff for a meeting at 1 and have a plan laid out and written up by 5 in the morning.'
In a meeting with potential investors in Beijing, Guo speaks with the conviction of an evangelist. But why does Yafei excel at consumer financing while everyone else is slow to start? Guo offers two reasons: First, Yafei has a meticulous system for screening customers. All applicants must join a Yafei member club. 'That gives us a chance to know them, to know their habits, to see them at home,' Guo says.
When it comes time to make a loan, Yafei dealers visit the homes of the prospective buyers, talk to their employers and their neighbors to verify creditworthiness. Second, most Yafei customers are buying vehicles as a way to make money. Yafei examines the buyer's business and business plans to see that they are solid. 'It's not like America here,' Guo says. 'If a guy comes in and says the car is for personal use, we are immediately skeptical.'
Because of this screening, bad loans at Yafei are kept at less than 2 percent nationwide. That is a rate comparable with that in North America and Europe. What Guo does not mention is his other advantage. Because of his special relationship with the Beijing government, Yafei enjoys exclusive support from the China People's Life Insurance Co. Following instructions from Beijing authorities, People's Life underwrites most Yafei car loans. Beijing's selective support allows Yafei to go where others cannot. As a result, Yafei car loans account for more than 90 percent of the industry total.
`THE RISK IS REAL'
Yafei's success raises a big question. Is it really risky to finance cars in China, as the Volkswagen dealer's experience seems to illustrate? Or does Yafei prove that China is ready for car loans on a massive scale?
'The risk is real,' says Scott Reno, director of General Motors Acceptance Corp's business unit preparing for China business. Reno has been building a business plan to support GM car and trucks sales in China since mid-1999.
Two things have to be in place for the loans to succeed, he says. First, there has to be a legal process in case of default. Now, the legal process is in the arbitrary hands of the local public security bureau - not the courts. Second, the lending rates have to be deregulated to allow for some profit. The rate now is fixed at 5.5 percent by the central bank. There is no correlation between risk and reward in this still-to-be-reformed part of China's economy.
Further complicating the lending is the absence of a formal credit rating system. The City of Shanghai in July established the first credit rating system in China. But even that will take time to get established. Local news agencies report that Shanghai citizens are taking out small personal loans on Monday, and paying them back in full on Wednesday. Thinking they have established a good credit record, they return Friday asking for a loan for a new car or home.
Foreign finance companies such as Ford Credit, GMAC and Volkswagen Financial take this behavior in stride. They find China's potential irresistible. Imagine a market where, this year, 15,000 customers each will pay $60,000 cash to buy Audi A6s. In total, some $10 billion will be spent on new cars and trucks. That is China's powerful allure.
But the wealth is concentrated in tiny pockets. 'People who have money pay cash,' says Zhao of Volkswagen. 'Lending money to people who have a little bit of money is asking for trouble.'
Tight circles of wealth help explain why loans are concentrated in just a handful of cities. Shenzhen, a city of 3 million near Hong Kong, accounted for 35 percent of all car loans made in China last year.
CITY IS A MODEL
Why does financing work in Shenzhen? Workers there earn three times the national average. As immigrants to this new experimental city, most people buy their own homes. Housing provides tangible collateral. And not like their mainland counterparts, Shenzhen insurance companies are free to underwrite new-car loans.
In short, Shenzhen has a stable middle class and a near-market economy. It is the model that officials in Beijing hope other cities copy.
But key mainland markets lag. Beijing, Shanghai and Guangzhou account for 40 percent of national car sales, but car loans there still are rare.
'In Beijing, you tend to be either a Mandarin or a pauper,' says Li Bin, a local Honda dealer. Loans figure in only 3 percent of car sales. Shanghai, for its part, shows strong signs of an emerging middle class. But Shanghai grants a limited number of personal car licenses in order to contain the car population. This also caps the potential for car loans.
In China, sweeping regulatory reforms do not occur quickly. So consumer loans for cars are expected to account for only 10 percent of sales by 2002. To reach 50 percent penetration, the auto industry will have to wait until after 2010, experts say. While Beijing dismantles economic and regulatory obstacles to personal car loans, Guo makes the most of his privileged position.
At an industry conference in Beijing in June, co-sponsored by Automotive News International, Guo listened as speakers from finance companies declared that car loans in China are too risky and the procedures too complicated.
'That's when I smiled to myself,' Guo says, 'and said, `That's good news; that's very good for us'.'
You can e-mail free-lance writer Mike Dunne at [email protected]