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