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China's Auto Industry Moves into the Fast Lane

After a slow start, China's vehicles industry and support sectors now look set to finally take off, writes RUBY ZHU

China's vehicles industry finally switched into high gear in 2002 after several years of sluggish growth. In the first nine months of this year, total vehicle production (cars, vans, lorries, busses, etc) in China jumped 36 percent over the same period last year, while sales rose 30 percent. Production of private cars surged an astounding 87 percent, while sales soared 69 percent. The robust development of the Mainland economy is expected to further push up demand for vehicles, to the extent that Hong Kong businesses really can't afford to ignore it.

Hong Kong firms do not manufacture cars, but a few companies that set up factories across the border do produce auto parts. Hong Kong's comparative edge lies in its services. The recently signed Closer Economic Partnership Arrangement (CEPA) allows Hong Kong retailers to set up wholly-owned vehicle outlets in the Mainland. In early October this year, the Central Government announced the "Administrative Procedures for Automobile Financing Institutions," which opens the door to foreign investors to offer loans to potential car buyers. Car exhibitions, rental and insurance sectors also offer opportunities for Hong Kong enterprises.

Sales and marketing

CEPA provides Hong Kong service suppliers with new advantages in this field. Presently, the sale of branded cars in China is monopolised by state-owned firms, making it an extremely seller-driven market. Dealers responsible for the "4S" (selling, spare parts, services and surveys) rely heavily on what auto manufacturers supply them, but as the sector matures, buyers will drive the market -- a development which China's home appliance market recently went through.

In relatively wealthy Mainland cities, the so-called 4S stores are required to have fixed assets of between 10 to 15 million yuan, as well as an annual cash flow of 10 million yuan.

When China's car buyers start driving the market, dealers are expected to be able to increase their control in the design, production and selling of vehicles, which will challenge their current 4S business model. As a result, car dealerships will tend to sell more than one brand, while the second-hand car market will gain momentum and stimulate support industries.  

As Mainland retailers' service and management skills are still comparatively weak, industry annalists believe now is the right time for Hong Kong firms to establish a foothold in China's burgeoning car industry.

Financing

China is required to open its car loan market under its WTO commitments. Recent statistics show that only 30 percent of cars sold globally are bought with cash. The remaining 70 percent are bought with a car loan, while in the U.S., the figure is about 80 percent.

By comparison, China's car financing market remains small. From 1998, the big four state-owned banks started offering car loans on a trial basis. In 2002, less than 20 percent of the banks' customers who bought cars used the service. This can be attributed to insufficient regulations for commodity loan installments and the obsolete personal credit system in China, as well as residents' lack of understanding of such services. Nonetheless, the market potential cannot be ignored.

On November 12, the China Banking Regulatory Commission announced that car loan interest rates can float within 10 to 30 percent of the official interest rate set by the People's Bank of China. With the asset requirement for market access set at 4 billion yuan, it is projected that car financing multinationals will start providing this kind of loan facility in China no earlier than mid-2004. Foreign-owned commercial banks won't be able to operate until 2006.

Large-scale car financing firms are mostly subsidiaries or associates of big car manufacturers, such as General Motors and Volkswagen. To take a slice of the growing market, Hong Kong financial institutions could consider entering into some form of partnership with auto manufacturers in the Mainland and contribute their management expertise in a joint venture.   

Leasing and insurance

The scope of car leasing services in China might appear to be limited to car hire services, with customers generally hiring cars from a few days to several weeks. However, more and more foreign firms are getting involved in the car rental business partly because of the relatively controllable costs and low risks. They also don't need to deal with unknown regional rules governing car licenses, annual checks and penalties.

As car sales in China continue to rise, car dealers' client base is expanding beyond what used to be predominantly foreign clients to include Mainland enterprises and consumers. Take Beijing for example, the average car rental rate this year has been around 90 percent, and approaching 100 percent during weekends. More consumers are leasing cars as rental fees drop, but car rental companies are increasing their risks to satisfy this demand.

Earlier this year, China's car insurers suffered a blow due to the local industry's lack of experience in managing associated risks. By offering high compensation rates, insurance premiums have been forced up. Falling car prices have also increased the number of drivers they have to cover and their overall risk. But despite this, the car insurance market offers rosy prospects over the long run.

In China, demand for car and other vehicle-related services have just begun to accelerate. Although Hong Kong enterprises have yet to fully tap into vehicle manufacturing in the Mainland, they can still try to profit from the fast-growing sector.

Ruby Zhu is the Chamber's Assistant Economist. She can be reached at, ruby@chamber.org.hk