BEIJING -- A move by Volkswagen AG to finance auto loans in China will boost sales of upmarket models from Europe's largest car maker in the world's fastest-growing car market, a senior executive said on Thursday, Oct. 21.
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 non-performing 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 to 50 percent of cars sold per year by 2010, compared to 10 percent now, Breiing said.
That figure compares to between 60 percent and 80 percent in mature European countries.
Car makers who sped into China with dreams of selling a vehicle to every family may need the boost from car loans.
Firms ranging from world leader General Motors to China's biggest car maker 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 start-up 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 car loans.
Klaus-Uwe Schaffrath, general manager of VW Financial's China business, said the Chinese default rate was between 3 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 firm 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 and 20 percent this year from last year's 2 million sales, as government credit curbs curtail consumer spending.