2014 China Auto Finance Report Emerging Auto Financial …

2014 China Auto Finance Report Emerging Auto Financial Services

Deloitte Automotive Service January 2014

Introduction

This report, built on the China Auto Finance Report released in December 2012, examines new yet popular approaches to innovation initiatives and efficient financial services in the auto industry, and gives an overview of the industry's most recent developments over the past year. Auto finance, in its broadest sense, refers to financing activities in the manufacturing, distribution, purchase, and consumption of automobiles. Its narrow definition comes down to financing or other financial services offered to consumers or dealerships, involving making loans to dealerships for the construction and equipment input of a showroom and inventory financing, as well as consumer loans, financial leasing, and insurance. According to empirical research, automobile manufacturing processes generate a mere 30% of the total profits created, while distribution and aftersales service departments contribute the other 70%. Financial services rest on the most valuable and energetic part of the auto industry's value chain, and demonstrate the hugest potential in China. They have proved to be a huge engine driving the auto industry and its consumption activities. Auto finance was invented in the 1920s in the United States as instalment arrangements offered by automakers to buyers. In China, however, the practice was lagging behind, and wasn't initiated until the People's Bank of China published the Administrative Rules Governing the Auto Financing Company in October, 1998. Despite the auto finance companies established earlier, the core of auto finance ? wholesale finance and consumer finance ? has been existing for no more than 30 years in China. In 2013, 22,116,800 automobiles were manufactured and 21,984,100 sold, among which passenger vehicles respectively accounted for 18,085,200 and 17,928,900, up by 16.5% and 15.7% compared to 2012. For all the huge potential, adverse factors like the growing industry capacity and sales, along with gradually satisfied inelastic demand, are expected to slow down the industry's growth rate. Deloitte expects, for years to come, China's passenger vehicle market to grow at a yearly 7% or more, and its used vehicle market at more than 15%. Auto financial services will prosper through market challenges in the future. Given auto purchase financing and leasing combined making up 50-80% in well-established markets, the fact that the proportion remains below 20% in China has reserved much room for the country's auto finance. A constant watcher over China's auto industry, Deloitte extends its predecessor's focus on wholesale and retail lending, both essential parts of auto finance, and in this report looks further at financial innovation and examines the development of a few new major models in China, including car leasing, used vehicle finance, auto insurance, and the Internet finance. In China, the auto industry has been marching towards an "Internet era". No longer a buzzword that emerged in recent years, the term maintains its potential. The trend is bound to attract more funds and establish the Internet finance as the backbone of auto finance. We hope that, by this report, we can help readers look closer at the major participants and business models of China's auto financial services. By examining the industry's development, at present and in the future, we wish to facilitate the continuous innovation and healthy development of the auto finance in China.

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Contents

Car leasing

4

Car leasing in China has huge potential

5

Categories of market participants

6

Industrial practice analysis: car leasing business models and

prime examples

7

Predicaments & changes

13

Used Vehicle Financing

16

Industry overview

17

Regulations governing the used vehicle industry

18

Competition in used vehicle industry

20

Financing fuels consumption of used vehicle

20

Business models of used vehicle financing of different companies

21

Status quo & visions of used vehicle financing

22

Auto Insurance

23

Industry overview

24

Product analysis

25

Regulations governing auto insurance

27

Analysis of auto insurance sales channels

27

Development of auto insurance extensions

28

Effects of big data on auto insurance

29

Conclusion & expectation

30

Booming auto sales decelerate, and value chain is noticeably

shifting to the aftermarket

31

More and more companies are participating in the auto aftermarket 31

The Internet finance will have far-reaching effects on auto finance

32

Contact

34

2014 China Auto Finance Report Emerging Auto Financial Services 3

Car leasing

Abstract: ? China's car leasing services are currently going through their early stages of development

featuring a low penetration rate. However, the next few years are expected to come with high growth and huge potential. ? Leasing companies, auto manufacturers, and dealerships are actively engaged in the market, specializing in short and long term rental as well as financial leasing. They have been exploring applicable business models to seize opportunities of future market growth. ? Rapid growth of the market has also uncovered the rising trends towards centralization and merger. Well-financed companies with sufficient resources have been busy expanding their presence across the country and diversifying their operations to absorb more market shares. On the other hand, concerns remain for small-sized car leasing businesses at a disadvantage for uncompetitive services, management, capital resources, and pricing that result from lack of scale effects. ? Uncertainty is ubiquitous in the car leasing market, involving government regulation, engagement with used vehicles, and residual value evaluation. Companies are expected to face multiple challenges in the future.

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Car leasing in China has huge potential. China's car leasing industry is currently going through its early stages of development featuring a low penetration rate yet huge potential. Car leasing is categorized according to its nature as financial leasing and operating leasing, the latter subdivided into short-term and long-term. Currently, vehicle leases are mostly short-term, which makes the arrangement the mainstream.

Deloitte's research into China's car leasing market finds that, by the end of 2012, there had been hundreds of players, more than half of which are based in first-tier cities like Beijing, Shanghai, and Shenzhen, in contrast to limited presence in second or third-tier cities. In light of market shares, the top ten share 12% of the market, which was more centralized compared to 2011, but rather low compared with mature markets. In terms of the distribution of each group, regionally operating small-sized companies offering long-term leases comprise the majority. Except few big competitors, an average leasing business has a fleet of only about 50 vehicles, which is impossible to benefit from an economy of scale. Financial leasing companies are not great in number, and very few of their vehicles are leased. Although there have been over ten short-term leasing companies of a considerable size, like China Auto Rental, eHi Auto Services, and Yestock Rental Car,

their market shares combined appear to be rather low compared to those in mature markets.

Another defining indicator of early stage is the lower penetration rate (the proportion of leased vehicles to the passenger vehicle parc) compared with that in the United States and Europe. Currently, the leasing market is basically closed to non-corporate players. Even for companies, the ratio remains below 10%, where their clients are mostly foreign-funded. In mature markets like Germany and France, almost 50% of companyowned vehicles are sold in the form of leasing contracts.

In major leasing markets like Shanghai and Beijing, there have been regulations imposing nominally tough limitations on the car leasing business. Shanghai, for example, controls corporate leasing registration and license plates (beginning with Y) with a heavy hand. In practice, however, the enormous demand for car leasing services has allowed a number of unregistered vehicles to compete in the market ? the grey area has thus become the mainstream without the government's crackdown measures. According to the market demand and the government's attitude, regulations are expected to remain unchanged in the short run, which will eventually loosen up in the long term.

In the future, China's economy is to continue its steady development, pushing up national incomes. Positive factors, like increasing vehicle parc and sales, supply chain improvement, more asset-light management strategies, rapid development of car leasing companies and their maturing products, and more open-minded leasing regulations, have been providing impetus for the development of China's car leasing industry.

2014 China Auto Finance Report Emerging Auto Financial Services 5

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