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.
2 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.
4 Car leasing in China has huge potential. their market shares combined appear to be rather China’s car leasing industry is currently low compared to those in mature markets. going through its early stages of Another defining indicator of early stage is the development featuring a low penetration lower penetration rate (the proportion of leased rate yet huge potential. vehicles to the passenger vehicle parc) compared Car leasing is categorized according to its nature with that in the United States and Europe. as financial leasing and operating leasing, the Currently, the leasing market is basically closed to latter subdivided into short-term and long-term. non-corporate players. Even for companies, the Currently, vehicle leases are mostly short-term, ratio remains below 10%, where their clients are which makes the arrangement the mainstream. mostly foreign-funded. In mature markets like Deloitte’s research into China’s car leasing market Germany and France, almost 50% of company- finds that, by the end of 2012, there had been owned vehicles are sold in the form of leasing hundreds of players, more than half of which contracts. are based in first-tier cities like Beijing, Shanghai, In major leasing markets like Shanghai and and Shenzhen, in contrast to limited presence Beijing, there have been regulations imposing in second or third-tier cities. In light of market nominally tough limitations on the car leasing shares, the top ten share 12% of the market, business. Shanghai, for example, controls which was more centralized compared to 2011, corporate leasing registration and license plates but rather low compared with mature markets. In (beginning with Y) with a heavy hand. In practice, terms of the distribution of each group, regionally however, the enormous demand for car leasing operating small-sized companies offering services has allowed a number of unregistered long-term leases comprise the majority. Except few vehicles to compete in the market – the grey area big competitors, an average leasing business has a has thus become the mainstream without the fleet of only about 50 vehicles, which is impossible government’s crackdown measures. According to benefit from an economy of scale. Financial to the market demand and the government’s leasing companies are not great in number, and attitude, regulations are expected to remain very few of their vehicles are leased. Although unchanged in the short run, which will eventually there have been over ten short-term leasing loosen up in the long term. companies of a considerable size, like China Auto Rental, eHi Auto Services, and Yestock Rental Car, 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 Table 1 Categories of Car Leasing Companies Categories of market participants Leasing companies, dealerships, and Category Examples Features manufacturers are actively engaged in the • Private companies, like • Convenient and efficient leasing market, which is noticeably being China Auto Rental, eHi Auto services to satisfy short-term centralized. Services, and TopOne rental needs As the automobile market growth rate returns Short-term • Larger fleets, more locations to normal and profits of new vehicle sales keep Rental across the country, and slipping, financial leasing effectively lowers more financially secure with the threshold for consumers to buy a vehicle, venture capital and pushes forward the sales of new vehicles • Systematic management while invigorating follow-up market services. Consequently, it has become a new source of • State-owned companies • Smaller fleets, regionally profits, which explains its popularity among like Shouqi Car Rental, and operating, and relying on corporate clients. Operating leasing is also Long-term Dazhong Leasing Car lasting partnerships with an effective approach to wholesale business. Rental clients • Foreign companies like Therefore, in addition to leasing companies, auto Avis-Anji and Arval manufacturers and dealerships are also actively • Auto financial leasing • Financial leasing instruments participating in the industry. companies like Herald Leasing to facilitate order processing Currently, the market is remarkably divided where Financial and minimize taxes Leasing • Financial leasing companies the top ten share only 12% of the market. A closer like CDB Leasing • Generation of interest look finds that short-term leasing companies makes incomes up the smallest proportion, requiring substantial Bank-affiliated • CDB Leasing • Well-financed financing, a large fleet, and a well-established Financial • Less-specialized network, while those offering long-term services Leasing account for almost 80%. However, the latter • ezucoo • Promotion of sales of new are mostly small-sized and operating in certain Manufacturer- • Mercedes-Benz and used cars regions. Financial leasing companies are not great affiliated • Volkswagen New Mobility • Increase of profitability from in number, clustered in first and second-tier cities, Services financial services and offer limited cars for lease. It’s worth noting that more and more large and • Pangda Leye Financial Leasing • Promotion of car sales medium-sized companies are exploiting their • China Grand Automotive • Increase of profitability of Dealerships dealership groups from advantages to expand product lines or business • eCapital financial services presence to seize market shares. Short-term leasing • China Automobile Trading • Full-swing industry chain companies own the largest fleets, so they’re trying to provide long-term services to ensure more Source: Deloitte Research preferential offers from sellers. Complemented by their well-established financing, marketing, and Table 2 Examples of Car Rental Companies management measures, they’re about to overtake traditional small-sized long-term service providers with more competitive prices in the future. Company Model Price Lease term Driver
RMB 7,000/ Monthly N/A China Auto Rental month (optional) GL8 2.4L Average long-term RMB 10,000/ 2-3 years Compulsory rental in Shanghai month
Source: Deloitte Research
6 Manufacturer-affiliated leasing companies are Table 3 Examples of Short-term Operating Leasing Companies prospering, which highlights the market’s high expectation. In 2011, Volkswagen launched Company Since Fleet Size Location its New Mobility Services and gave it a task of exploring the leasing business. In 2013, 50,000 vehicles of Over 700 locations Volkswagen took over a long-term leasing service China Auto Rental Sep. 2007 all popular models at 52 airports in 66 in Beijing, and another in Shanghai. Currently, the in China cities company is operating in four Chinese cities. More than 10,000 Almost 400 Companies as subsidiaries of dealerships are eHi Car Service Jan. 2006 vehicles of over 80 locations in over 50 availing themselves of the existing networks on models cities their fast track to the booming business, with fleet size and business volume outrunning those of In 153 cities; half Over 10,000 normal-sized leasing services. Yestock Rental Car Dec. 2005 of its business from vehicles It’s foreseeable that, as the leasing market keeps corporate clients growing, its centralization is sure to be more noticeable. Source: Deloitte Research Industrial practice analysis: Car leasing business models and prime examples Short-term operating leasing companies Short-term leasing companies didn’t emerge until Table 4 Business Model of China Auto Rental around 2006, but are now rapidly developing. Along with changing consumer habits and Department Details improving personal credit system, this group of From venture capital investment or privately offered funds: leasing services are booming, with agencies like Financing RMB 1.2 billion from Lenovo in 2010, and USD 200 million China Auto Rental, eHi Car Services, and TopOne from Warburg Pincus in 2012 establishing large fleets for rental. Direct strategic partnerships with auto manufacturers’ sales For them, substantial funds are required to put Procurement companies to get discount offers together different vehicle categories; the same is true of well-functioning online networks and brick Targeting private customers (over 70%); lease terms varying and mortar locations. As the number of car owners Marketing from days to years; roadside assistance and airport/station rises, short-term leasing seems to be a promising pick-up or drop-off business. The ezucoo service, affiliated to the auto manufacturer Nissan, is tied down to its online Over 700 in 66 cities; partnerships with 4S dealerships for Location store and limited range of available car models, repair compared with non-affiliated companies like China Auto Rental. Vehicles for short-term lease to be sold in 1-2 years to private Used Vehicles customers, auto recyclers, and auction houses; establishment As substantial funds are required for the of their own secondhand vehicle sales platform construction of brick and mortar stores, vehicle procurement, and systematic management, these Substantial investment in exclusive nationwide IT system to companies usually have financial support of venture IT System manage cars, locations, staff, and finance; introduction of a capital and banks. In the future, they’ll further smartphone client in 2013 expand and enrich their product lines, such as entering the long-term leasing market, offering Source: public information; corporate interviews; Deloitte Research more models and more flexible plans, establishing online stores, and reaching out to third and fourth tier cities.
2014 China Auto Finance Report Emerging Auto Financial Services 7 Long-term operating leasing companies Long-term leasing services were established as early as 1980s-’90s. Many of them are state-owned, great in number but little in scale, whose clients are mostly state-owned or foreign-funded. This category of leasing companies prefer corporate clients (mostly foreign-funded), which explains the popularity of foreign brands. Long-term leasing enjoys advantages of foreseeable and controllable profits and costs, which come with a well-established model that has been put in place for a long time. What’s undesirable, on the other hand, is that it charges more fares, not quite a good deal for companies if they don’t plan to buy their own vehicles. In the future, however, the service may become more acceptable as its costs drop and advantages (e.g. reduction of fleet management expenses) gain more popularity.
Table 5 Examples of Big Long-term Leasing Companies
Company Since Fleet Size Location
6,000 vehicles, mostly GM AVIS–Anji 2002 • In 38 cities and Volkswagen models
• Headquartered in Beijing with rental locations in Shouqi Car Nearly 10,000 vehicles, around 40 cities Apr. 1992 Rental mainly Hyundai models • Engaged in short-term & financial leasing • Well-connected with state-owned companies
• Headquartered in Shanghai with rental locations Dazhong Nearly 4,000 vehicles, mostly 1993 in 7 cities Leasing Car GM and Volkswagen models • Targeting corporate clients
Source: Deloitte Research A few small-sized players don’t seem to have good prospects for their lack of competitiveness in terms of vehicle procurement costs, fleet management, and product offers. Some of them, registered in Beijing and Shanghai, are facing possible acquisition cases. Well-financed big-sized players, on the other hand, are looking forward to further expansion into third and fourth tier cities.
Table 6 Business Model of AVIS–Anji
Department Details
Financing Directly by SAIC Motor and AVIS, both listed groups with abundant financial resources
Procurement A number of discounted vehicles from Shanghai Volkswagen and Shanghai GM
Marketing Targeting foreign companies, including a few important Chinese clients
Location Over 100 rental locations in 38 cities; partnerships with 4S dealerships for repair services
Used Vehicles Mostly sold to Avis Car Sales
Source: annual reports; Deloitte Research
8 Financial Leasing Companies It’s been a long time since financial leasing companies existed. Despite a well-functioning operational system, high financing costs and insufficient external support have been keeping auto financing products from attracting more attention than auto finance. Therefore, some of them have begun to seek external partners like dealerships and auto manufacturers, hoping to introduce more attractive products and walk out of the predicament. Financial leasing costs more than long-term leasing because of sophisticated procedures and high interest rates. However, vehicles from financial leasing are eligible to be reported as assets in balance sheets during their lease term, hence quite a deal of attraction to companies.
Table 7 A Comparison between Auto Financing Loans and Financial Leasing
Measurement Auto Financing Loans Financial Leasing
Ownership Buyer Leasing company, and then lessee after the lease term
Vehicle and any other related expenses including Coverage Vehicle only license plate, insurance, and purchase taxes
No 20% requirement; sometimes deposit worth Initial payment worth at least 20% Preconditions 5-20% of the total financing amount at the leasing of the purchase price company, which will be returned after the lease term
Interest rates Usually 9-10% without discounts Usually 3-5% higher than auto financing loans
Source: Deloitte Research
Table 8 Examples of Leading Auto Financial Leasing Companies
Company Since Yearly Leased Vehicles Location
1993 (certified by the Ministry Anji Leasing 3,000 In 38 cities of Commerce in 2006)
Separated from New Century In 20 cities, targeting Herald Leasing 2,000 International Leasing in 2006 foreign companies
eCapital 2010 (renamed eCapital in 1,000, mainly high-end models In over 20 cities Leasing 2012)
Source: Deloitte Research
2014 China Auto Finance Report Emerging Auto Financial Services 9 Bank-affiliated Financial Leasing Companies Table 9 Business Model of AVIS–Anji Traditional bank-affiliated financial leasing companies mostly accept capital goods like Department Details airplanes, ships, and heavy equipment as subject By parent company, including selling structured finance products to matters. Currently, some of them have been Financing utilizing their abundant financial sources to march banks into auto financial leasing business. It’s essential A number of discounted vehicles from Shanghai Volkswagen and Procurement that a fleet as large as hundreds or thousands Shanghai GM of vehicles requires a competent management system. Procurement Preferably mid-range and high-end brands like Audi
Take CDB Leasing. It was the first in China to enter Targeting foreign and state-owned companies; financial leasing Marketing commercial vehicle leasing business, combining through manufacturer-affiliated 4S dealerships and major clients leasing services provided by auto manufacturers and dealerships. Taking into account features of Location 17 offices in 12 municipalities and provinces different commercial vehicles and market needs for them, it has developed a systematic business model Source: Deloitte Research and, cutting sales costs for manufacturers, realized volume sales, thus offering professional financial Figure 1 Business Models of Manufacturer-affiliated Leasing and leasing services for domestic commercial vehicle Used Vehicle Sales manufacturers to engage in a virtuous cycle of
R&D, manufacturing, marketing, and development. After the lease term, the leased vehicle can be returned to Currently, CDB Leasing has leased out nearly 3,700 its manufacture for testing and then be certified for resale. vehicles in almost every part of the country. Good partnerships worth over RMB 8.4 billion have been forged with 11 auto manufacturers including Provide vehicles FAW Jiefang Automotive Company, Foton Motor, for operating leasing Dealerships Shaanxi Automobile Group, Dongfeng Motor Corporation, Beiben Trucks Group, SAIC-IVECO HONGYAN Commercial Vehicle Company, and
Hualing Xingma Automobile. Enrich dealerships’ inventory Manufacturers Deliver leasing services Clients Manufacturer-affiliated Leasing Companies of used vehicles for resale Leasing business is important for auto manufacturers to promote sales and earn more profits: Leasing 1. Promoting sales of new vehicles Provide vehicles for companies operating/financial leasing 2. Enhancing visibility on roads 3. Increasing used vehicle supply Source: Deloitte Research 4. Increasing profits from financial services Operating leasing and financial leasing are both main sources of used vehicles. A virtuous cycle complemented by leasing business and used vehicle sales will enable auto manufacturers to further explore business along the entire value chain. At present, a few manufacturers have set foot in the leasing business that includes operating leasing and financial leasing.anufacturer-affiliated
10 operating leasing Manufacturer-affiliated financial leasing Dongfeng Nissan, for example, launched its Take a rental service affiliated to a luxury ezucoo program in December 2009. It’s seen as vehicle manufacturer for example. Established a car rental service, built on the networks and in June 2012, it’s engaged in financial and expertise of the company’s retailers, providing operating leasing, acquisition of domestic and a full range of services through rental locations, foreign leased assets, residual value processing pre-order telephone reservation, and websites. of leased property and its maintenance, and By keeping a fleet of the latest Nissan models, it’s consulting and guarantee services concerning designed to offer the manufacturer’s existing and leasing contracts. The rental service, limited potential clients comprehensive and customized to financial leasing at the moment, plans to solutions that apply to all circumstances. It aims to launch operating leasing in 2014. build the company’s services along the entire value However, regulation tightened value added tax chain and highlight its vision of “Enrich people’s bases for financial leasing in August 2013, sale- life”. As of 2012, ezucoo has leased out over and-leaseback practices have been negatively 3,000 vehicles. affected so much, so that it was almost Auto manufacturers are well connected with brought to a halt. According to the new taxing dealerships, and it helps them establish a regulation, auto manufacturers are required to functioning service network. In case of a lasting pay additional value added taxes, which caused inactive inventory of vehicles, dealerships are massive losses considering that the singed inevitably challenged by lack of capital shortage; contracts with clients are based on the old on the other hand, persistent unavailability taxation and cannot be altered. certainly discourages consumers to enjoy the convenience brought by ezucoo. Introduction of Table 10 Example of Sale-and-leaseback VAT financial services will effectively lift the financial burden from dealerships and thus forge a virtuous Before After cycle. Category Aug. 2013 Aug. 2013 (RMB) (RMB)
Figure 2 Profit Analysis of Dongfeng Nissan ezucoo Monthly Rent 100,000 100,000
Dongfeng Nissan Dealerships Consumers Interests (10%) 10,000 10,000 •Innovation & brand •More profits from •More convenient elevation aftermarket business services VAT Base 10,000 110,000 •Promotion of sales •Effective enhancement •Exclusive services as •Improved client of client loyalty Dongfeng Nissan experience vehicle owners VAT Interest Rates 17% 17% •Utilization of nationwide presence VAT 1,700 18,700
Source: Deloitte Research Source: www.gov.cn.com
2014 China Auto Finance Report Emerging Auto Financial Services 11 Dealership-affiliated leasing companies Pangda’s extensive dealership networks, the As the proportion of new vehicle sales to total profits service has been engaged in financial leasing in slips, dealerships are paying more attention to the 21 cities, as well as short and long-term leasing aftermarket. As the financial strength builds up and in Beijing. the leasing market thrives, they’re one after another Financial leasing – China Grand Auto making high-profile entries to generate extra profits. Big dealership groups have been venturing Financial services, best known for leasing business, into the aftermarket offering financial services effectively promote sales and aftersales business, centering round used vehicle sales, leasing, and increase aftermarket profitability, and build immunity insurance. China Grand Auto, for example, was to periodic fluctuations. established in March 2011 and has become a Currently, a few well-established dealership groups financial service provider with the widest range have been exploiting their existing networks to of products offering one-stop leasing and sale launch their own leasing services. As follows are services. the prime examples: In terms of financial leasing, CGA has come Operating financial leasing – Pang Da ORIX up with a new model that integrates retail Auto Leasing purchase and wholesale procurement at In 2012, Pang Da ORIX Auto Leasing, a discounted prices. Its product line has proved joint venture of Pangda Automobile Trade to be even longer than that of an auto finance Company and Orix Corporation, was founded company. It’s worth noting that CGA is not only for financial and operating leasing. Relying on relying on its own dealerships, but also working with external partners and used vehicle sellers Figure 3 Operating Leasing Model of Pang Da ORIX to establish financial leasing business for used vehicles. However, the new business suffered 1. Client inquiry 1. Credentials 1. New vehicle 1. Rent payment 1. Expense 2. Quote screening procurement 2. Repairs & settlement major setbacks since August 2013 given its 3. Negotiation 2. Contract 2. Vehicle maintenance 2. Vehicle return similar nature to sale-and-leaseback practices. signing registration 3. Annual vehicle 3. Contract 3. Driver testing 3. Payment renewal recruitment 4. Accident 1. The buyers and seller agree on prices and ask management for CGA financing. 5. Insurance claim 2. CGA entrusts a local agent with the Contract Delivery of Vehicle in Return & arrangement. Negotiation signing vehicle service settlement 3. The agent tests and evaluates the vehicle
Source: Deloitte Research concerned, and reports the results to CGA for confirmation of loan amounts. Figure 4 CGA Financial Leasing for Used Vehicles 4. The buyer presents to CGA necessary paperwork. 1 5. CGA finishes an audit and signs with buyer a Buyer Seller leasing contract as well as a legal arrangement 7 taking the vehicle as collateral. 6. CGA provides the buyer with funds upon the 4 5 3 signing of the contract. 8 6 7. The buyer signs with the seller a vehicle purchase contract. 2 CGA Agent 8. The buyer repays the loan provided by CGA on a monthly basis. Source: Deloitte Research Recently CGA has narrowed its operating leasing service to internal clients for various reasons.
12 Predicaments & changes Regulations to be improved For the most part, the Provisional Regulations on the Administration of Auto Leasing Industry, promulgated in 1998, have proved to be outdated in terms of the industry’s recent developments. Regulation on financial leasing is even more flawed than that on operating leasing. Currently, the financial leasing have mounted and attraction Ministry of Commence is mainly acting on the plummeted, posing more challenges to financial Administration of Foreign Investment in the Leasing leasing companies. This is why Mercedes-Benz Industry Procedures, introduced on 5 March and China Grand Auto suffered massive losses 2005, and China Banking Regulatory Commission from their financial leasing operations similar to following Administration of Financial Institutions sale-and-leaseback. Provisions, Measures for the Banning of Illegal In first-tier cities like Shanghai and Beijing, Financial Institutions and Illegal Financial Business regulators are heavy-handed when it comes to Operations, and Measures for the Administration of corporate registration and license plate offering Financial Leasing Companies, brought into force on to companies entering auto leasing. Confusing 1 March 2007. The government also introduced the enough is that they’re not effectively stopping third revision of the draft financial leasing law to unregistered competitors or certified companies regulate financial leasing business, keep the market operating unregistered vehicles. The inconsistency in order, protect legitimate rights and interests has created a grey area in the busines. of parties concerned, and promote the industry’s healthy development. Development of social credit & risk management systems The government in principle is trying to support Leasing is a form of credit consumption that and protect the auto financial leasing industry, requires credit guarantee. Risks in auto financial especially the big companies. The Ministry of leasing would go beyond control without a good Transport made it clear in its 2011 Announcement social credit system in place. Those incompetent on Promotion of the Healthy Development of Auto systems in internal control are more vulnerable to Leasing Industry that local transport authorities, risks. Therefore, China’s financial leasing industry where companies in possession of over 1,000 is commonly inclined to direct leasing practices vehicles are setting up branches, are required to whereby lessors bear all the risk responsibility, streamline administration procedures and provide while leasing companies are confronted with, satisfying services. The instruction is indicative of among others, credit risks, or operational and the government that’s supportive of big companies financial challenges. expanding to nationwide presence. Creation of residual value market & improvement As part of its liquidity control, the government is of exit mechanisms committed to crackdown against shadow banking Off-lease vehicles are a major source of used system as well as industry regulation, which comes vehicles, of which the residual value pricing is with tougher taxation on financial leasing, to some a determinant of leasing prices. However, the extent frustrating auto financial leasing companies. pricing accuracy depends on perfect competition The 2010 No. 13 Announcement, 2011 No. 111 and inventory availability. Therefore, China’s Announcement, 2012 No. 86 Announcement, immature used vehicle market has contributed to and 2013 No. 37 Announcement, along with the flawed residual value pricing mechanism, and internal notices, all led to more limitation to further to the pricing of auto leasing products, financial leasing. Therefore, financing costs from whose advantages over other auto finance products are showered.
2014 China Auto Finance Report Emerging Auto Financial Services 13 Figure 5 A Virtuous Cycle of Leasing & Used institutions as an essential lease product pricing Vehicle Markets tool. Currently, the Chinese market is only served by few residual value data providers like RedBook, Vehicle availability contributes to the establishment of a functional residual value identification and thus maintaining databases inferior to those mechanism, which in turn benefits in well-established foreign markets. the competitive pricing of lease products. ••For financial institutions, ALG can evaluate their portfolios by analyzing residual value risks, rates of return, and market data, which helps them Well-established Provide used vehicles Well-established maximize their profits from auto investments of leasing market used vehicle market controllable risks. ••For auto manufacturers, ALG can enlighten them on the determinants of their residual value to prepare brand-specific strategies, and optimize Increasing penetration rate of lease products supports supply of off-lease vehicles for resale. product lifecycles. All is done to increase the residual value of their vehicles and promote their Source: Deloitte Research competitiveness for better sales. In the United States, Automotive Lease Guide ••For companies keeping a large fleet of vehicles, (ALG) specializes in auto residual value analysis. ALG can analyze their depreciation rates and Based on its data analysis, the agency provides resale value to help them more accurately control auto manufacturers, finance companies, and costs and increase profits. fleet management companies with consulting, tool modeling, and portfolio risk analysis. It However, in a well-established market housed by helps clients create their own residual value third-part residual value management agencies, workbenches, remarketing pricing models, and residual value risks remain as major challenges - real fleet residual models to increase profitability and residual value inevitably deviates from estimates. Take avoid risks. ALG has developed a professional and 2006 year model SUVs in 2008 as example. authoritative guidebook that has been accepted by a number of manufacturers and financial Table 12 Real & Estimated Residual Value of 2006 Year Model SUVs Table 11 ALG Products & Services 2006 Year Estimated RV Real RV (2008) Model Products Services Toyota Sequoia 55% 43% •Lease guides Fleet Financial Ford Explorer 43% 31% Manufacturers management •Estimate calculator institutions agencies Dodge Durango 39% 27% •Customized pricing Honda Pilot 53% 43% •Data Chevrolet •Residual value 42% 33% TrailBlazer •Lease calculator •Consulting estimate •Consulting Nissan •Portfolio analysis •Residual value •Portfolio •Residual value 51% 43% Pathfinder estimate analysis estimate •Depreciation estimator •Modeling tool •Consulting •Modeling tool Industry Average 46% 40% •Client application •Modeling tool Source: 2009 Automotive News •Data analysis
Source: www.leaseguide.com
14 More refinancing instruments & expanding auto sufficient funds, so much so that they have to finance purchase vehicles from external sellers. Despite Auto leasing business is representative of the asset- their disadvantages, leasing companies are leading heavy industry. It requires large investments in in fund sources, expertise, geography, and project location establishment and vehicle procurement information. Therefore, participants are seeking as well as massive input into marketing. Long-term partnerships with each other to exploit their strong contracts and languish capital retrieval, together points hoping to create a more competitive leasing with substantial follow-up funds for vehicle business model. Successful practices have been replacement, have added to the high debt ratio reported: typical of the industry. • Commercial vehicle manufacturers with financial Currently, leasing companies mainly rely on equity leasing companies: the latter, on the former’s and debt financing sources. Given limited domestic recommendation, buy products from dealerships refinancing, however, it’s impossible for the and lease them to clients who can pay by combination of equity and debts to be realized in instalments until the end of lease term. Financial the short run. Equity financing comes with good leasing companies, with their vehicle management governance structure and managerial expertise but, systems, asset management ability, and financial in the process, takes over a few shares owned by strength, have helped manufacturers promote founders and the management. In debt financing, commercial vehicle sales, and satisfy clients and leasing companies are required to work with banks their urgent needs. on detailed registration of financed vehicles unless • Dealership groups with financial leasing convincing collateral from shareholders or real companies: the latter buy vehicles from the former estate is provided. The procedures are so laborious who provide collateral for individually registered that they actually keep banks away. In the future, contracts. Dealership groups are responsible multiple financing options, like asset-backed for material collection, credit investigation, and securities, corporate bonds, and finance bills, will contract signing at early stages of financial leasing prove to be effective in cutting financial expenses and overdue payment collection. Financial leasing and broaden leasing business. products have lowered the threshold for vehicle In the meanwhile, one of the main reasons for purchase and increased sales for dealerships. financial institutions’ hesitation in stepping into Meanwhile, leasing companies are able to cut auto leasing is the risk in residual value estimate. costs of establishing locations by collecting As mentioned above, lack of a well-established materials and overdue payments. residual value market and competent third- At a time when the automobile market returns to its party evaluation agencies has disabled financial normal growth rate and sales of new vehicles keep institutions to evaluate the residual value of vehicles slipping, financial leasing is effective in lowering to determine specific financing. In the future, the threshold for consumers to buy vehicles, and with the improvement of used vehicle markets promoting new vehicle sales which in turn brings and establishment of professional residual value aftermarket services. As a new profit source, it also evaluation agencies, financial institutions, mainly helps operating leasing realize wholesale. However, comprised of commercial banks, can refer to reliable flawed regulations, wobbly social credit and risk residual value estimates and thus provide larger management systems, and lack of residual value amounts of more flexible financing for the leasing market and functional exit mechanism have been industry. preventing lease products from demonstrating its Facilitation of cooperation for development of advantages over other auto finance products. That auto leasing explains why China’s auto leasing industry remains Currently, different parties to the financial stuck in its early stages of development with a leasing business have their own advantages and small group of leasing companies, dealerships, and disadvantages. Manufacturers have established manufacturers as active participants. However, the widespread locations and service networks, but industry’s huge potential has encouraged its players their influence beyond their own brands is little. to engage in complementary partnerships in pursuit Dealerships are well-connected but lacking in of a more competitive business model.
2014 China Auto Finance Report Emerging Auto Financial Services 15 Used Vehicle Financing
Abstract: ••China’s used vehicle market maintains fast yet steady growth, presenting hug potential. ••Contributors and limitation to the market development coexist, and commercial innovation will surface as the regulation loosens in the future. ••Car-purchase restrictions are about to stimulate the used vehicle market, while tougher environmental policies will place limitations. ••China’s auto finance, still in its infancy, is in urgent need of business changes and financial innovation.
16 Industry overview China’s used vehicle market maintains fast yet steady growth, presenting hug potential. Since 2009, the market has been steadily growing. In 2012, 4,790,000 vehicles were traded, a 10.60% increase compared to 2011, worth RMB 263,626 million, a rise of 25.01%. By the first half of 2013, the national trading volume reached 2,312,900 vehicles worth RMB 112,918 million, up by 18.48% and 28.17% respectively. According to a recent estimate by China Automobile Dealers Association (CADA), used vehicles traded in 2013 would increase by 20-25%, or 6-6.5 million vehicles.
Figure 6 2005-2013 China’s Yearly Trading Volume of Used Vehicles
10,000 vehicles %
500 479 40 433 35 400 385 334 30 25 300 266 274 231 20 191 200 15 145 10 100 5
0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013H1
Traded used vehicles Yearly growth rate
Source: China Automobile Dealers Association
The supply of used vehicles mostly depends on the motor vehicle parc. By the end of 2012, recent years’ high growth had pushed the parc up to 120 million. Meanwhile, consumers are keeping their vehicles for a shorter time, which ensures the effective supply of used vehicles. On the other hand, as the market improves and consumer mindset changes, used vehicles are gaining more and more acceptance.
2014 China Auto Finance Report Emerging Auto Financial Services 17 Figure 7 China’s Motor Vehicle Parc
Motor Vehicle Parc Motor Vehicle Drivers Automobile Parc
240 million 260 million • Over one million in 18 medium-sized Including automobiles & motorcycles As of 30 January 2013 and big cities, as of 30 January 2013 As of 30 January 2013 0.6 • Over two million in Beijing, Shanghai, Tianjin, Shenzhen, and Chengdu, by 1.2 1.2 the end of 2012 2.0
Automobile (100 millions) Automobile drivers (100 millions) Motorcycles (100 millions) Others (100 millions)
Source: China Automobile Dealers Association
In well-established US and European markets, Meanwhile, the central government has traded used vehicles account for approximately launched initiatives to double the incomes 20% of the automobile parc, 2-2.5 times the of urban residents. In the context of vehicle new ones sold. According to data collected in prices remaining noticeably unchanged, a huge 2012, the proportions were respectively 4% and demand for used vehicles is inevitably growing. 20-30%, which to a great extent reflects the Consumers are more tolerant of used vehicles. market’s rather huge potential in the future. By According to a recent China Automobile the end of 2011, Tencent Auto and Sinotrust had Dealers Association study on potential buyers, found that nearly 80% of the interviewed Chinese nearly 80% of them said they would consider consumers would consider buying used vehicles. used vehicles, and only 5% ruled out the idea. Lower prices are the most attractive factor. Prospects of used vehicle market Also, new drivers prefer used vehicles to Multiple contributors to rapid development develop their driving skills. China’s vehicle parc has been soaring and reached The advance of financiale leasing has 120 million in 2012. The acceleration will continue contributed to the prosperity of used vehicle in the next few years: it’s expected to hit 25 markets. Amid ongoing financial reforms, the million around 2020, most of which are for civilian financiale leasing industry has been opened purposes. In the meantime, used vehicle sales will even wider. In May 2013, Ping An Leasing be stimulated. and Ping An Asset Management signed a Urbanization and income increases of urban memorandum of cooperation in Shanghai, residents are also important contributors. marking the first injection of insurance funds Judging from international experience, into China’s financiale leasing industry to urbanization will accelerate the transformation ensure its fast growth in the future. Of all to an automotive society and encourage vehicle market-based products, related financiale consumption. For new migrants in urban areas, leasing will facilitate used vehicle sales. On the affordable used vehicles are a better choice. other hand, auto manufacturers will advocate In 2012, as China’s rate of urbanization had financiale leasing to promote the sales of reached 52.57%, urban per capita disposable new vehicles. After the lease term, a group income had risen to RMB 24,565, making an of used vehicles retaining their ownership will average used vehicle worthing RMB 50,000 be handed over to dealerships for resale. This much more affordable. It’s estimated that, by extra vehicle source complements the market 2020, the urbanization rate would climb to supply which, along with rising demand, 60% along with an urban population of 800 increases the trading of used vehicles and million with its yearly increase of 13 million. promises prosperity.
18 The government may come up with more on the other hand, most of the owners would favorable policies to regulate and promote the chose an unauthorized garage, which makes it used vehicle market. In 2013, at the 4th annual impossible to track that part of information. All meeting of the Global Automotive Forum in that mentioned has disabled the used vehicle Wuhan City, Pang Qinghua, board chairman of to be properly priced, and contributed to the Pang Da Automobile Trade Co., Ltd., said that consumer mindset that prices of used vehicles are “The used vehicle industry is actually burdened a mess that lacks transparency. Without a reliable with existing taxation. The China Association evaluation agency, consumers unfamiliar with of Automobile Manufacturers has talked with automobiles are unable to get a detailed picture national authorities who may soon introduce of the vehicle concerned. favorable policies.” If and only when the promise Limited warranty coverage fuels customers’ is delivered, taxation will loosen up on used concerns over the vehicle conditions. Despite vehicle trading with more preferential policies, the Measures for the Administration of the giving further impetus to the booming market. Circulation of Second-hand Automobiles requiring Limitation to the market remains. dealerships to provide after-sale service, it’s It’s almost impossible for used vehicle companies common practice for them not to deliver such to grow into the size of a group to realize scale promises. It minimizes their risks at the expense effects. Currently, the government taxes a used of consumers’ lawful rights, and contains their vehicle at 1.48% worth of its estimated price. Tax acceptance of used vehicles. Even if dealerships rates may vary in different parts of the country, are willing, to say the least, they’re technically but they all fall under the government standards. incompetent to satisfy the needs of consumers. In To avoid taxes, dealerships choose to register this context, it’s difficult to develop authoritative the vehicles under private accounts, which and accurate estimates of the residual value, increases their own internal risks and proves to discouraging consumers to buy. be unattractive to investors. Currently, the used Transactions to be completed in separated places vehicle industry is surprisingly divided with a great cause trouble in procedures like logistics and number of minor dealers operating in local areas. ownership transfer. For new vehicles, dealerships Conditions of used vehicles can hardly be traced. simply move them from manufacturers to their A 4S dealership is authorized access to any other own parking facilities, and then hand them dealership of the same brand for databases over to consumers. When it comes to used tracking any vehicle of the brand in question that ones, they have to bring together vehicles from has sought repairs service, while access to other different sellers based in various areas, which brands is impossible. When the warranty expires, discouragingly challenges logistical arrangements and transaction convenience. Ownership transfer, from purchase to license plate registration, has to deal with a dozen of different authorities to go through necessary formalities, not to mention differentiated regulations imposed where the used vehicle concerned is being registered. To meet the mounting needs for trans-regional transactions, a functional industrial chain of purchase, transfer, and resale has been established. In conclusion, contributors and limitation to the market development coexist, and commercial innovation will prosper as the regulation loosens in the future.
2014 China Auto Finance Report Emerging Auto Financial Services 19 Regulations governing the used vehicle On the other hand, economically developed first industry and second tier cities have been introducing new Car-purchase restrictions are about to policies against air pollution. As registration of stimulate the market, while tougher used vehicles that fail to satisfy national emission environmental policies will place limitations. standards is either limited or denied, the market Traffic problems resulting from proliferating suffers from some uncertainties. The legislation vehicles have urged big cities like Beijing and has negative impacts, pushing good bargains Guangzhou to impose car-purchase restrictions aside to neighboring markets. over the past few years, putting a ceiling on the Competition in used vehicle industry number of newly issued license plates. Beijing has New players are entering and changing the gone so far that it has put restrictions based on competition landscape the last digit of a license plate number. Therefore, Such markets used to be dominated by a big consumers only buy new vehicles after they have group of local agencies. An isolated agency is sold the old ones to the second-hand market. usually small-sized with limited sources. In recent Beijing, for example, traded 700,000 used years, the landscape is gradually changing with vehicles, nearly 1.2 times the new ones. the emergence of new participants. Listed below By the end of 2012, Beijing reported an are a few trends worthy of attention. automobile parc of 5 million, with Shanghai and 1. Leading auto manufacturers have entered Guangzhou both posting 2 million, all together used vehicle market engaging in: totaling 9 million. Imagine when the ratio of traded used vehicles to the aggregate parc meets ••Certified Pre-owned car (CPO) the qualification of a mature market at 20%, the ••CPO & Non-CPO three cities alone can trade nearly 2 million used vehicles. ••CPO & vehicles under different brands
Table 13 Business Models of Leading Manufacturers’ Used Vehicle Sales
Brand CPO Non-CPO Other
BMW √ - -
Mercedes-Benz √ - -
Audi √ √ √
Volkswagen √ √ -
Toyota √ √ √
GM √ √ √
Nissan √ √ √
Peugeot √ √ √
Infiniti - - -
Hyundai - - -
Source: Deloitte Research
20 1. Studies on leading manufacturers in Financing fuels consumption of used vehicle second-hand sales business found that: Auto finance accelerates market development Used vehicle financing offers products designed ••Most of foreign manufacturers or joint for different participants in various parts of the ventures have entered the business and industrial chain. It includes loan arrangements and offered certification services, while their warranty extensions. domestic competitors are basically staying out of the business. In the future, used vehicle financing will target consumers to provide loans and warranty • Among foreign manufacturers, a few of extensions. However, its availability to dealerships luxury brands offer certification exclusive to in light of wholesale loans like inventory financing their own brands. Mid-range manufacturers is hardly insured – they’re not yet considered as are engaged in a variety of brands, trading normal small and mid-sized companies. AKD, for not only their own CPOs and Non-CPOs, example, takes out loans from banks, and uses its but also used vehicles of other brands. fixed assets as collateral in exchange for a 10% 2. Online used vehicle trading is booming. discount on interest rates and RMB 50 million credit limits. Two of the main reasons why above- ••Used vehicles are collected from 4S said dealerships find it difficult to use vehicles in dealerships and then their information is store as collateral are: posed online, which makes the trading more transparent and streamlined. It’s worth noting ••Financial institutions are incompetent to that some dealers would hand a selection evaluate vehicle conditions for reasonable of more functional vehicles of the same prices. brand to their own dealerships for resale, • Short term loans for dealerships have which keeps order in the market’s supply deprived banks of more profits from credit and sales practices. With technical advances products. Offering of a loan for each vehicle and commercial innovation, tools have been requires a lot of evaluation efforts at high introduced for remote testing. expenses, which discourages banks to follow 3. A few specialized used vehicle dealership through such services. groups like AKD Luxury Cars Mall are growing. Figure 8 Used Vehicle Financing ••AKD was founded in Shenzhen in 1999, and Testing & Warranty has developed into the largest of its kind in Search Procurement Transport Storage Transaction Distribution certification Extension Southeast Asia. It’s designed to house 3,000 mid-range and luxury cars. In 2011, AKD sold over 5,000 cars, and is planning to reach out Dealerships Collateral Warehouse loans financing to cities like Shanghai. AKD is engaged in purchase, sale, evaluation, mortgage loan, Insurance and insurance brokerage, as well as housing Buyers Used car a vehicle administration office for ownership loans transfer, traffic ticket payment, and annual
testing. It also offers a wider range of services Banks & Micro loan like aftersales repairs, maintenance, and financial Insurance Service providers Banks lenders & leasing companies accessories. banks companies
Source: Deloitte Research
2014 China Auto Finance Report Emerging Auto Financial Services 21 Business models of used vehicle financing of market, a rather small loan at high costs and with different companies few profits, no used vehicle-specific evaluation Judging from the credit forms on which loans are agencies, vehicle instability, and high residual value based, companies that offer financial services for – which explains the market’s slow development. used vehicles fall into two categories: In the long run, however, as vehicles are more often replaced and the residual value of the used 1. Vehicle-based: companies like GMAC-SAIC and ones increases, used vehicle trading value and its China Grand Auto base their loan decisions on attraction to financial instructions will gradually their own industry expertise and understanding mount. When other problems are duly addressed, of the vehicle conditions. used vehicle sales and financing will surely get on 2. Borrower-based: lenders like Ping An Bank the fast track. base their loan decisions on borrowers’ credit Still, used vehicle financing, credit business in histories. particular, requires the advance of condition The two models are still in their infancy, and the evaluation, residual value management, and competition landscape remains to be seen. The credit line grading. Evaluation agencies, micro full realization of the business’ potential without loan providers, and small and medium-sized double closely correlates with active financial company-specific lenders need to work together innovation. for the improvement of such a business model, and innovate more targeted and risk-controllable products for dealerships and consumers. When Status quo & visions of used vehicle financing it comes to warranty extensions, manufacturers, Business changes and financial innovation dealerships, and insurance companies should join are essential to market development hands to regulate market practices and develop a Used vehicle financing is faced with several China-specific model. limitations – higher loan risks, a much smaller
Table 14 Features of Leading Used Vehicle Financing Providers
GMAC-SAIC China Grand Auto Ping An Bank
••Oldest and largest of its kind, ••Down payment as low as 30%; ••Provision of one-stop loan, operating in over 300 cities loans starting at RMB 30,000 insurance, and transaction services
••Efficient procedures taking only 2 ••Financing maturities as long as ••House properties not required for days or more 1-3 years (no more than 6 years application after the vehicle’s first use) ••Multiple loan plans, and flexible ••Efficient approval, ideally on the payment arrangements ••No brand-specific restrictions same day of application
••Loans transferred as soon as the first business day on receipt of required documents
••Credit limits as generous as RMB 5 million for a single loan application
22 Auto Insurance
Abstract: ••China’s auto insurance industry is highly centralized with China Life Insurance, Ping An Insurance, and China Pacific Insurance seizing two-thirds of the market. ••On a fast growing market, most companies are challenged by insufficient profitability. ••Auto insurance is categorized as compulsory traffic accident liability insurance (CTALI) and commercial insurance. ••The launch of Zhong An Online Property Insurance has announced that the Internet, unlike the traditional dealerships and the bank insurance model, will be a game-changing auto insurance provider. ••Auto insurance extensions and the big data are going to have far-reaching effects on the auto insurance industry.
2014 China Auto Finance Report Emerging Auto Financial Services 23 Industry overview China’s auto insurance industry is highly Strictly speaking, China’s auto insurance goes centralized with China Life Insurance, Ping An back to the 1980s. However, it was not until Insurance, and China Pacific Insurance (CPIC) July 2006 that the China Insurance Regulatory seizing two-thirds of the market. The top Commission (CIRC) promulgated the Regulations ten players have reported sales that account on Compulsory Insurance regarding the Liability in for nearly 90% of the market’s total. The Traffic Accident of Motor Vehicles, and imposed policy changes in 2012 have allowed foreign traffic accident liability insurance on vehicle companies to access to the CTALI. It is said owners, marking the birth of the country’s auto that, they occupied only 0.5% of the market in insurance industry. Before the promulgation, the 2011. market was small and divided, making up only a small proportion of the non-life insurance. After Figure 9 2011 Auto Insurance Market Analysis the CTALI’s introduction, 7.3 million vehicles were immediately covered and helped the auto insurance market to develop into its current Others landscape. 11% The CTALI is designed as the most fundamental liability insurance that helps avoid the industry- wide losses resulting from lack of insurance China Life contracts to reach the break-even point. Also, Top 4-10 37% 19% the CTALI also determines the country’s one and only insurance rate. Premiums are determined according to the floating rates as well as the vehicle size and usage, plus additional payments for traffic violations and accidents. CPIC The CTALI is a huge stimulator for the voluntary 14% insurance market. It changes consumers’ Ping An expectations, and also helps insurance companies 19% enter the market. In 2007, the CIRC announced regulations on commercial vehicle insurance, Source: 2012 Yearbook of China’s Insurance which covers multiple risks excluded by the CTALI, including driver/passenger liability insurance, Years of fast growth haven’t helped auto damage insurance, and theft/robbery insurance. insurance companies earn profits. It wasn’t until The regulations in question include four 2011 that the top three began to turn profits. categories of insurance and details like indemnity However, intensifying competition and changing rates and premiums. regulations have been preventing most companies Over the past 5 years, the explosive growth of from developing sustained profitability. the vehicle parc and the introduction of the CTALI Instead, earlier investments brought by rapid have ensured a yearly increase of 25% of auto growth and resulting business operations haven’t insurance sales. Although the vehicle parc and proved to be satisfyingly profitable. Therefore, sales have been growing at a smaller rate, the solvency has become a major concern for auto insurance market as a whole has maintained insurance companies. Over the past few years, its momentum thanks to increasing luxury some of them have resorted to subordinated automobile sales and insurance consumption. debts and premium splits, hoping to curb impending financial shortage. However, lack of mid and long-term funds remains persistent.
24 Figure 10 2011 Auto Insurance Market Analysis Average (WA), no-fault insurance, and Irrespective of Percentage. Broken windshield/window 160,000 insurance, spontaneous ignition insurance, and additional equipment damage insurance are
120,000 additional insurance terms affiliated to vehicle damage insurance that has to be bought first. Driver/passenger liability insurance, no-fault insurance, and cargo liability insurance are 80,000 Top 3 affiliated to third party liability insurance that has Top 4-10 to be bought first. Others 40,000 Compulsory traffic accident liability insurance for motor vehicles The Regulations on Compulsory Insurance 0 0% 20% 40% 60% 80% 100% regarding the Liability in Traffic Accident of Motor Vehicles, promulgated on 1 July 2006, stated that Indemnities/premiums owners or custodians of motor vehicles driving on Source: 2012 Yearbook of China’s Insurance roads within the territory of the People’s Republic of China are required to buy compulsory traffic In addition to sales agents as major platforms, accident liability insurance for their motor vehicles. insurance companies are also seeking other channels like direct selling, telemarketing, and Currently, indemnity limits for an insured motor cyber-marketing. New marketing choices are vehicle at fault are set at RMB 110,000 for injury expected to help gain market shares and cut and death, RMB 10,000 for medical care, and customers’ costs, which eventually further RMB 2,000 for property damage; otherwise the increases the overall incomes and splits the costs. limits are RMB 11,000, RMB 1,000, and RMB 100. The CTALI calculators: Product Analysis Final premiums = basic premiums × (1 + floating Analysis of major insurance categories rate applicable to traffic accidents) × (1 + floating Insurance for motor vehicles is comprised of rate A applicable to traffic violations) compulsory traffic accident liability insurance (CTALI) and commercial insurance. Floating rate calculators: The CTALI requires insurers, within the liability A1: -10%, not responsible for any traffic accident limits, to indemnify the victims of the insured over last calendar year vehicle’s accident (driver/passengers and insurants A2: -20%, not responsible for any traffic accident of the vehicle in question are excluded) for any over last two calendar years injury, death, and property loss. The CTALI is the first of its kind required by a Chinese national law. A3: -30%, not responsible for any traffic accident Promulgated on 1 July 2006, it was introduced over last three calendar years nationwide on 1 July 2007. The CTALI sets up 42 A4: 0%, responsible for one traffic accident basic rates, and a single national rate applies to an (causing no death) over last calendar year entire vehicle category. A5: 10%, responsible for two traffic accidents Commercial insurance includes primary insurance (causing no death) over last calendar year and additional insurance. The former is subdivided into vehicle damage insurance, third-party liability A6: 30%, responsible for any death-causing traffic insurance, theft/robbery insurance, and driver/ accident over last calendar year passenger liability insurance; the latter covers broken windshield/window insurance, scratch insurance, spontaneous ignition insurance, With
2014 China Auto Finance Report Emerging Auto Financial Services 25 Table 15 Commercial Insurance List
One of the most common insurance whereby the insurer, according to the insurance contract, indemnifies the insurant Vehicle damage for any damage to the insured vehicle incurred by natural calamities (not including earthquakes) or unforeseeable insurance accidents within insurance coverage.
The insurer indemnifies the insurant for any financial responsibility that shall be borne according to the law, which causes Third-party liability bodily injury or death, or direct property loss of a third party incurred by an unforeseeable accident caused by the insured insurance vehicle driven by a qualified driver.
The insurer, according to the insurance contract, indemnifies the insurant for the insured vehicle being registered missing Theft/robbery by a police authority above county level three months (or 60 days according to the life insurance) after theft, robbery, and insurance illegal seizure activities, or for any damage or repair to any part and accessory equipment during such criminal activities.
Driver/passenger The insurer indemnifies the insurant for any expense cause by bodily injury or death of the driver or passenger in the liability insurance insured vehicle in an accident, and for any expense for any necessary rescue or protection efforts to minimize the costs.
Broken windshield/ The insurer indemnifies the insurant for any broken windshield or window alone of the insured vehicle in use. Any other window insurance damage in the same said accident shall be covered by vehicle damage insurance.
The insurer indemnifies the insurant for any damage to the insured vehicle in motion and any reasonable rescue expenses Spontaneous incurred by spontaneous ignition caused by malfunctioning electrical equipment, wires, and fuel supply system, or by ignition insurance goods in carriage.
The insurer indemnifies the insurant for any expense for repairs to scratches on the insured vehicle in use without notable Scratch insurance signs of collision by a third party.
Irrespective The insurer gives the insurant a full refund for purchasing vehicle damage insurance, third-party liability insurance, and of percentage driver/passenger liability insurance during the period of irrespective of percentage. insurance
Additional equipment damage The insurer indemnifies the insured vehicle for any direct damage to its additional equipment caused by any accident. insurance
Vehicle lay-off loss The insurer, according to the insurance contract, indemnifies the insured vehicle for any loss incurred by its lay-off at a insurance repair facility after an unforeseeable accident.
Cargo liability The insurer, according to indemnity limits stated by the contract, indemnifies the insurant for any financial liability for a insurance third party’s bodily injury, death, or direct property loss incurred by falling cargo of the insured vehicle in carriage.
In case the insured vehicle in use causes any bodily injury, death, or direct proper loss in any traffic accident involving No-fault insurance pedestrians or non-motor vehicles, and should the insured vehicle not be held liable, the insurer indemnifies the insurant, after his/her request for refusal of the payment is denied, for the paid yet irretrievable expenses.
Source: Deloitte Research
26 Regulations governing auto insurance Analysis of auto insurance sales channels Over the last two years, the CIRC has announced Auto insurance is often sold through auto two sets of important policy adjustments. The dealerships, or bank insurance, a partnership first, put in force in May 2012, allows foreign between insurance companies and financial companies to enter compulsory traffic accident institutions like banks. liability insurance. The second, promulgated Consumers prefer convenience and thus usually in March 2013, requires more control over go for insurers recommended by auto dealerships commercial insurance rates and contract terms. where they’re purchasing new vehicles. Moreover, Apart from a few additional compulsory terms in clients who decide to take out loans are targeted favor of consumers, it gives away more autonomy by their own lenders (like banks) to market of commercial vehicle insurance pricing to well insurance products, a practice that streamlines operating big companies. application procedures and quickly sells the Since the CTALI is subject to compulsory price insurance. In case a bundled insurance contract controls, insurance companies have no choice expires, consumers will choose to go directly to but to sell it at a loss, and bundle it into more their insurers for renewal. profitable commercial vehicle insurance. Over the Bank insurance is an important model for life past few years, the CTALI has estimatedly inflicted insurance that makes up 50% the total sales. on insurers billions of losses in total. The insurance In contrast, auto insurers are more reliant companies, however, sees the CTALI as a stepping on dealerships instead of banks. One of the stone to reach clients and thus continues the reasons is that auto loans in China are not quite practice, which makes clients purchase the CTALI popular, and dealerships are able to make more and commercial vehicle insurance package. preferential offers in doing so. Studies have Over the past few years, foreign insurers were found that auto insurance companies prefer unable to sell the CTALI, which explains their little dealerships, and telephone/online marketing is participation in the auto insurance market. Now, even more acceptable than banks. By establishing with the introduction of the mentioned first policy partnerships with dealerships, insurance adjustment set, they have been able to compete companies are more confident of reaching out to more effectively. Although industry experts buying clients. find it impossible for them to take up more of It’s worth noting that the launch of Zhong An the market on their own, active acquisition and Online Property Insurance in February 2013 merger strategies will be helpful to that end. has announced that the Internet will become Another possibility is that they may want to another sales platform for auto insurance. On partner with auto companies of their own country 29th September 2013, the China Insurance as their choice insurance provider to noticeably Regulatory Commission announced its approval elevate their market position in China. to establish the insurance company. The long-awaited policy liberalization has created opportunities for leading players in commercial vehicle insurance, who in compliance are able to adjust pricing and venture into subdivided markets. Small players can more actively respond to competition by securing other differentiated markets, but they as a whole are at a disadvantage.
2014 China Auto Finance Report Emerging Auto Financial Services 27 Figure 11 Zhong An Ownership Development of auto insurance extensions Auto insurance extensions, including second-hand vehicle insurance, began around 2008 in China. The past few years’ fast development has drawn wide attention. It’s estimated that the market penetration rate of China’s insurance extension business is below 5%, in sharp contrast to 30% enjoyed by a mature Alibaba market. This category of service is provided through Others 20% tree partnerships between: 45% 1. Manufacturer-affiliated insurance companies Ping An Insurance and manufacturers 15% 2. Independent service providers with manufacturers 3. Independent service providers with dealerships Tencent Ctrip 15% Table 16 5% Manufacturer Model Plan Details
What’s special about Zhong An is that it doesn’t 1 yr/120,000 km open offices in any other place in China than All 2 2 yrs/140,000 km Shanghai where it was registered. Its sales and 3 yrs/160,000 km indemnity processes are conducted completely 1 yr/20,000 km Chevrolet & Buick online. The company is engaged in liability 3 2 yrs/40,000 km series insurance and guarantee insurance which, 3 yrs/60,000 km compared with traditional auto insurance, have Teana, Sylphia, 1 yr/20,000 km limited coverage but generate much more profits. 1 This business model has proved to be a major X-trial, Qashqai 2 yr/40,000 km breakthrough of Ping An Insurance and the 1 yr /30,000 km Internet-based financial innovation. Civic, Spiror, CRV 1 2 yrs/60,000 km Currently, Chinese insurance companies are struggling with bottlenecks of highly New Elysee, sega, 1 yr/20,000 km 1 homogenized products and channels as well as C5 2 yrs/50,000 km lack of competitiveness. The arrangement benefits all participants. Ping An Insurance is able to 1 yr/20,000 km 207, 307, 408 1 explore financial marketing reforms and diversify 2 yrs/50,000 km away from the stereotypes, while exploiting the potential of reaching out to hundreds of millions 1 yr/20,000 km All 2 of client resources of Alibaba and Tencent. On the 2 yrs/40,000 km other hand, giants outside the insurance industry, like Alibaba and Tencent, are thus able to exploit Source: Deloitte Research their large pools of clients and funds to engage in In the future, the increase of the vehicle parc a second round of exploitation of their financial will encourage manufacturers and dealerships operations. Ping An Insurance's affiliated bank to promote the insurance extension service. and subsidiaries covering securities, trust, funds, Offering consumers better experiences, the and life insurance (auto insurance included), can business is expected to prosper in China. all be turned into online clients.
28 Effects of big data on auto insurance The technology is likely to slash premium costs. A popular theory in the insurance industry The first companies to use this device will charge states that a driver with a good history deserves drivers with good habits fewer premiums, a discounts on premiums. In the past, incompetent move that secures competitiveness and attracts techniques and computational theories were more clients. At the same time, it’s believed limiting data analysis to a driver’s existing accident that the pros and cons brought by client-based records. With technological advances and the insurance policies have created a reverse selection establishment of big data theories, tracking of mechanism, where drivers with bad habits driving patterns has featured meticulousness prefer companies employing traditional actuarial and accuracy. Now, insurance companies build techniques – for them, client-based companies actuarial techniques on existent records, and charge more. This mechanism has urged apply them to put clients into different risk competitors to either impose higher average categories, which helps the determination of interest rates, or turn to client-based techniques. insurance premiums. The cellular technology, Whatever the choice is, the application of Internet features, and big data have enabled client-based insurance techniques will increase insurance companies to develop more accurate transparency, cut risks, and finally lower insurance evaluation of driver-based risks, and ask for more rates. reasonable premiums based on their real driving For consumers, they’re offered what they believe patterns. is more reasonable and controllable. For insurers, In recent years, there has been limited innovation first-hand evaluation of driver behaviors, instead of the market’s major products. In well- of the frequency of claim application, helps them established markets, the segmentation strategies cut down indemnity costs. The differences come have widely lowered prices of insurance products. from the system’s screening process (e.g. a good The emergence of big data may turn out to be the driver would prefer this system), and the driver’s most influential change: in the future, premium wish to behave knowing that he’s under watch. discounts are likely to be determined by multiple For regulators, the mechanism makes roads safer factors like locations, driver habits, and his/ and more environment-friendly, which is what her driving age. Insurance companies may add they like to see. a small device to a vehicle’s OBI part, which is designed to track the entire driving information and send it to insurers' data centers through cellular connections. According to the collected data, insurance companies are able to keep better track of risk-inducing habits, like acceleration and braking frequencies, average and peak velocities, and driving time length and frequency, which are combined with other factors to help them more accurately determine the risks of a driver's involvement with accidents.
2014 China Auto Finance Report Emerging Auto Financial Services 29 Conclusion & outlook
Abstract: ••After two years (2011 and 2012) of high growth, China’s auto industry noticeably slowed down in 2011 and 2012. The year 2013 has seen an improvement, but a lower growth rate is in sight in the long run. ••The market’s value chain has shifted its pre-sales focus to after-sales services. Auto finance have proved to the next profit source of interest to manufacturers and other market participants. ••In auto finance, participants are not going to be limited to traditional players, and outside companies will join to take their shares.
30 Booming auto sales decelerate, and value For auto manufacturers or dealerships, profits chain is noticeably shifting to the aftermarket. from traditional repairs services and new After two decades of development and recent vehicle sales are to be squeezed by increasing years (2009 and 2010) of high growth, China’s competition. Judging from the distribution of auto industry noticeably slowed down in 2011, value chains in foreign markets, similar trends are and market is expected to see an even lower expected to take place in China. It’s inevitable growth rate in the future. that manufacturers, dealerships, and banks put more focus on the aftermarket where participants 1. The market's inelastic demand is being can realize more of their potential. satisfied while alternative consumption, or elastic demand, has been absorbed into the The figure below shows that auto insurance, mainstream with increasing chances of market leasing and rental, and used vehicle sales generate fluctuations. considerable profits, and they’re all closely related to auto finance. 2. Dealerships have established almost saturated networks so that it’s impossible for manufacturers to increase their sales by More and more companies are participating opening up networks and building large in the auto aftermarket. inventories. Traditionally, auto manufacturers, component makers, and dealerships are the main three 3. Rising costs of labor and raw materials have players in the industry, while financial institutions encouraged automobile prices to increase like banks are engaged in providing funds, and rather than slip deeper. auto insurers and car rental companies playing 4. Worsening traffic has urged big cities to impose in their own industries. However, it’s going to all car-purchasing restrictions. change in the future. Manufacturers and dealerships are opening up more business instead of being limited to Figure 12 Distribution of profit contribution in well-established markets their own traditional operations. It has been noticed that a few leading manufacturers, (Profit contribution %) Auto financial leasing including Volkswagen and Nissan, as well as 25% large dealerships like Pang Da Automobile Trade Company are venturing into new business Aftersales service 20% and, in the process, they have forged external Fixed gas pricing 15% partnerships to gain funds and experience and Auto operating split risks. Car loans Auto insurance Repairs & 10% Maintenance leasing New vehicle sales Component 5% Used sales 0 0% 100%
Source: Harvard Business Review; Deloitte Analysis
2014 China Auto Finance Report Emerging Auto Financial Services 31 Companies formerly outside the auto industry are Amid dominance of the traditional auto finance, joining with the shift of the market’s value chain. the Internet finance still has huge potential to A foreseeable case is that, with the emergence explore. Despite their common goals of exploiting of automobiles fueled by new energies, battery the market, the Internet finance and auto finance, makers are becoming main providers of electric not sharply divided, are challenged by some automobiles, a category that made up only a inherent friction. In addition to taking over market fraction of the traditional gasoline-powered shares, the Internet finance is in many ways vehicles. In the future, Internet companies like disturbing the traditional auto finance market. Google or electronic device makers like Apple In discussions about wholesale auto finance, are going to work with auto manufacturers on a the Internet finance plays a crucial role for auto number of big projects, providing technologies manufacturers, authorized 4S dealerships, and and equipment that meet the market needs. used vehicle sellers. Some models are able to Unlike traditional component makers, these connect small-sized private lenders with big companies are in possession of considerable borrowers to explore new fund channels. Internet funds and resources, and they’re bound to take giants like Alibaba and Baidu are working to this these opportunities to expand into the auto end: putting together short-term small loans from industry – Apple has been planning the launch private non-institutional lenders, and turning them of iCar. Meanwhile, different market players will into long-term whole auto loans in support of the enhance their cooperation to make better use of working capital and daily operations like project the existing resources. In the future, the nature of finance. The platform is all about attracting a large cars is going to change: more of a lifestyle, rather number of lenders, and coordinating interest rates than a means of transport. Therefore, all those and principal with lenders according to contract products in people’s lives will be seen in their cars. terms. Considering the popularity of putting money at banks, the unwealthy population are short of more reasonable investment channels, which can The Internet finance will have be made up for by the Internet finance. far-reaching effects on auto finance. No longer a buzzword, the Internet finance was This financing mechanism is highly beneficial to insufficiently defined. For the convenience of this small companies or start-ups, which need relatively report, the term is limited to the preparation and small loans over a short period. Currently, these execution of the arrangements and agreements companies are financed by unofficial channels or between fund providers and borrowers – the licensed micro-credit lenders. However, they’re former are scattered, and the latter are either vulnerable to frail credit relationships as well as selling or buying on electric platforms which, inflated interest rates of such small lenders, who connecting both ends of the trading, increase are only recommendable to stat-up companies; transparency and promote cooperation. instead, short-term funds are accessible for these companies through the Internet finance.
32 Auto finance and the Internet finance are focusing of borrowers is an important determinant. To on consumer auto finance. There’s a mechanism that end, a qualified platform should ensure such already in place which involves a serious of diversity, allowing lenders to grant small loans to platforms to help consumers choose, apply for, multiple borrowers, or reach a loan agreement and obtain car loans. Over the past few years, a with other lenders. great deal of websites have emerged to gather Furthermore, such a platform has to verify the such lenders. Still, there’s no specific evidence borrower’s personal information. Like what the that a single website has dominated the market or traditional auto lenders have been doing, an engaged in massive trading. expert team can be organized to go through The mentioned mechanism is built on China-specific the paperwork, or gain more competence in consumer habits: the purchase of a vehicle often application evaluation by using big data or involves various debts. Although buyers prefer a databases from a third-party source. combination of different loans, they don’t like to Meanwhile, to attract more borrowers, such a repeatedly go through the application procedures. platform should be operated through streamlined That’s exactly where online loans generate profits. processes for better efficiency. Furthermore, these websites also succeed in increasing transparency and cutting interest rates. In general, the Internet finance is expected to play an important role in the future’s auto finance. The Another replacement mechanism is taking shape trend involves new financing channels that make – it manages relations between small private the Internet a principal part. For wholesale auto non-commercial lenders and vehicle buyers in finance, the Internet finance will become new need of loans. The mechanism manifests itself in sources for small private lenders. While increasing different ways. Since lenders are not willing to give transparency, auto consumer finance will increase all their money to the same borrower, the diversity the competitiveness of the auto finance, and cut down prices or interest rates.
2014 China Auto Finance Report Emerging Auto Financial Services 33 Contacts
John Hung Deloitte China Automotive Managing Partner Tel:+86 21 6141 1828 Email: [email protected]
Winhon Chow Deloitte China Auto Dealership Managing Partner Tel:+86 10 8520 7119 Email: [email protected]
Dr. Marco Hecker Deloitte China Automotive Consulting Managing Partner Tel: +86 21 6141 2298 Email: [email protected]
Congjian Wu Deloitte China Automotive Consulting Director Tel:+86 10 8520 7812 Email: [email protected]
Benjamin Chang Deloitte China Automotive Consulting Associate Director Tel:+86 21 2316 6322 Email: [email protected]
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