Posted on: Sunday, June 20, 2004

GM plans to offer car loans in China

By Jeff Green
Bloomberg News Service

BEIJING — When General Motors Corp. starts selling cars on credit in China later this year, the world's biggest automaker plans to screen potential borrowers the old-fashioned way: by interrogating their neighbors and bosses.

Checking customers' credit history will be like "hiring a private detective" in a nation with no central credit database, says Christian Weidemann, head of General Motors' finance unit in China. "Even then we don't know what we can rely on for sure, but we're ready to take the risk."

Detroit-based General Motors bets that offering loans will attract new customers in China, where urban incomes average about $1,000 a year. That may help sustain sales growth in a market that expanded 76 percent last year and where General Motors faces competition from Volkswagen AG, Toyota Motor Corp., Ford Motor Co. and Nissan Motor Co.

"You've now made that vehicle acquisition more affordable and let that first-time buyer stick their toe in the water," said Dan Genter, chief investment officer at Los Angeles-based Genter Capital Management, which holds $1.6 billion of debt securities, including General Motors bonds. "It's a natural extension of the model they've used in the U.S."

General Motors, the second-biggest overseas carmaker in China after Germany's Volkswagen, was the first to apply to offer loans. The company expects to win government clearance by early November, said Weidemann, 43. The finance business will add to sales even though China has fewer protections for lenders than other markets, he said, without giving a forecast.

Japan's Toyota, Volkswagen and Ford also have pending applications to start finance businesses. Munich-based Bayerische Motoren Werke AG paired up with China Merchants Bank Co., the nation's largest publicly traded bank, last month to provide financing.

General Motors intends to replicate the success of its finance unit, General Motors Acceptance Corp., in China. The world's most populous nation has only about 16 passenger vehicles for every 1,000 people, compared with about 700 in the United States, according to Global Insight Inc., an auto consulting firm based in Lexington, Mass.

"There is a huge correlation between car financing and car sales," Weidemann said. "Definitely it will improve car sales."

General Motors' profit from China almost quadrupled to $162 million in the first quarter. Its main China venture has 200 dealerships selling models including the Buick Regal, Sail and Excelle sedans and the GL8 minivan.

The absence of a nationwide consumer credit-rating system similar to the TransUnion LLC and Equifax Inc. credit bureaus in the United States is one of the obstacles General Motors faces as it prepares to start lending in China, a nation of 1.3 billion people.

Fewer buyers will qualify for loans than in the United States as a result, especially given China's lower incomes, says Donald Straszheim, an economist and president of Straszheim Global Advisors Inc., based in Santa Monica, Calif.

"Perhaps only 10 percent might qualify, since there's no real way to do background checks," he says.

The Chinese government also prohibits finance units from having branch offices.

To get around that restriction, General Motors and its local partner, Shanghai Automotive Industry Corp., will send traveling salespeople to dealerships to drum up loan business, says Weidemann, who helped start General Motors auto-finance units in the former East Germany and Poland.

He declined to say how much the carmaker is investing in the China finance business.

China doesn't have laws to allow companies to repossess cars when buyers default on payments, according to Stella Leung, a lawyer at O'Melveny & Myers LLP in Shanghai. The absence of a national car registry means a car bought in one province can't be tracked in another, Weidemann says.

Interest rates fixed by the government at a minimum of about 5 percent mean car-finance companies can't undercut banks with incentives such as zero-percent financing. China's government — which curbed bank lending to carmakers this year to cool an economy that grew 9.7 percent in the first quarter — may place limits on car-financing businesses, Weidemann says.

"The government is not interested in mega-growth of auto sales and does everything to control that, including growth of car loans," he says.

Car companies expanding into financing will compete against local banks that are established as consumer lenders, says Liu Xiufang, a Beijing Volkswagen dealer who sells about 140 cars to 150 cars a month priced from $12,000 to $18,000.

"People trust their local banks more," Liu says. "They might not be as sure about a car company and it will be hard for them to compete if they can't offer longer terms or lower interest."

China, which is letting carmakers start finance businesses under the terms of its 2001 admission to the World Trade Organization, restricts car loans from all lenders to maximum five-year terms and requires down payments of at least 20 percent of the vehicle's cost, according to a government policy statement on auto loans published in February.

Approximately 18 percent of the 4.6 million vehicles sold in China last year were bought with loans, General Motors' Weidemann estimates. With car-financing companies entering the market, that figure will rise to at least 40 percent by 2010, almost the same rate as Japan, he says.

There's more room for growth, said Yoshinori Ando, a managing director at A.T. Kearney Asia-Pacific, in a Beijing presentation on auto loans in China. In the United States, about 92 percent of cars are sold with loans or leases.

Buying a car without a loan requires years of savings. A mid-ranking professional needs as long as three years to save the cash needed for a small General Motors car like a Corsa, or five years for a larger Volkswagen Passat or Honda Motor Co. Accord, according to a June report from Global Insight.

Zhang Bin, who sells General Motors Buick sedans in Beijing, says about 60 percent of buyers at his dealership pay cash upfront for cars with a sticker price of about $30,000.

"It's hard to get bank loans," says Zhang, 23, who expects sales to rise by a third when General Motors starts offering loans along with its cars.

Zhang rides a motorcycle to work because, he says, he can't afford a car on his average monthly salary. He may be among the prospective buyers applying for a loan when automakers start offering them.

"I'd like to own a sports car, or maybe an SUV," he says.