BEIJING -- A move by Volkswagen AG to finance auto loans in China will boost sales of upmarket models there, a senior executive said Thursday.
But the going will be tough, in part because of the lack of consumer credit data and high default rates, Burkhard Breiing, chairman of the VW Financial Services board of management, told reporters.
"It will be a slow start relative to other markets," he said at the China venture's launch in Beijing. "We develop everything ourselves, including the credit risk control mechanisms.
"It is our wish that in China the infrastructure will be in place in the future. The government has understood it, but it takes long," he said.
China has no central credit rating agency, no laws to repossess cars from errant borrowers and a rising pool of nonperforming car loans.
Chinese newspapers regularly report on people defrauding car dealers with fake identification papers and running away with the goods after the first payment.
Still, VW Financial expects the number of cars financed in China to grow to about 40 percent to 50 percent of cars sold per year by 2010, compared with a scant 10 percent now, Breiing said.
That figure compares with between 60 percent and 80 percent in mature European countries.
Carmakers who sped into China with dreams of selling a vehicle to every family may need the boost from car loans.
Companies ranging from world leader General Motors to China's biggest carmaker Shanghai Automotive Industry Corp. warn investors about weak growth in the country.
Breiing, who declined to discuss Volkswagen's sales in China, said the financing venture that has startup capital of 500 million yuan ($60 million) was expected to break even in five years.
"Customers who have the flexibility which we provide usually go for a higher-priced car. That is a huge help for the manufacturers," he said.
Volkswagen, the market leader in China, started offering car financing in the country in September, following in the footsteps of GM.
Ford Motor Co. and Toyota Motor Corp. have initial approval to start offering car loans.
Klaus-Uwe Schaffrath, general manager of VW Financial's China business, said the Chinese default rate was between 3 percent and 5 percent, according to independent studies, which he called "very high."
"I think it's higher in China than it should be," he said.
For now, the company offers financing through just nine Volkswagen dealers in Beijing, but executives expect to expand to cover all the major domestic markets within five years.
Analysts expect China's car market to rise between 10 percent and 20 percent this year from last year's 2 million, as government credit curbs curtail consumer spending.