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Over the past week, September 5th – 6th I had the privilege of representing Autofutura as one of the guest speakers at the Auto Finance Asia Conference in Shanghai as hosted by Auto Finance News (Royal Media USA), in conjunction with the Shanghai Leasing Trade Association (SLTA).

This international event was attended by a large audience of senior auto finance professionals from China, (CN) along with a number of executives from other markets across the Asia Pacific region as well as representatives from the USA and EU and was extremely well received. With keynote speakers from Dong Feng Nissan Auto Finance, US Bank, Deloitte, NETSOL Technologies, Moodys Analytics Asia Pacific, KPMG together with Cox Automotive to name but a handful, Autofutura was in extremely good company.

By way of a high level introduction to readers who may be less familiar with the Tier structure of the of cities in CN, the largest city is Shanghai, with a population of in excess of 22 m people followed by Beijing with circa 12 m. There are thirteen additional cities with populations in excess of 10m. A further 65 cities with more than 1m people and 360 cities less than 1 million. By way of comparison many of the last category mirror the population densities as typically found in many European cities. Theses cities are then ranked on a number of economic indicators and categorised as holding Tier 1,2,3, & 4 status.

With more than 28m* new vehicle registrations in 2017, CN is the worlds largest car market by a considerable margin. Whilst growth in vehicle sales has slowed by comparison to 2016, primarily as a result of broader economic reasons she continues to grow steadily helped greatly by a national finance penetration rate of circa 43%** and growing. These factors alone will ensure that this vast market many of its provinces of which are untapped remains extremely dynamic in every respect. Consequently, opportunities abound for growth in vehicle sales as manufacturers, their National Sales Companies (NSC’s) and captive financiers place considerably greater focus on the smaller Tier 3 – 4 cities.

Tier 1 and 2 cities are very well developed and demonstrate many of the business charachteristics and challenges that NSC’s and their captive financiers encounter in many other mature global markets. As a result, this maturity has created a very competitive landscape which in turn is rapidly driving new product innovation from the captive community and their brand partners so as to protect and sustainably grow their market share.

Amongst a number of topics tabled and discussed at conference was the scope for growth that Residual value (RV) funding solutions, similar to Personal Contract Purchase (PCP) in the UK and Closed End Personal Lease in the US can bring to the market. In many instances these products are at the forefront of the captives strategy and will in the first instance allow customers greater accessibility by demonstrating affordability, as well as making it easier to payment walk customers up the the brands model range. In the short term RV funding will undoubtedly result in boosting sales volumes and over time time will, as is the case in many other major global markets serve to shift the customer customer mindset from ownership to usage.

In our world of ‘new mobility’ consumers, especially the younger generations are far more open minded in respect of usage vis a vis ownership. It’s just not that big of a deal to them! This bodes very well for vehicle sales. RV funding solutions have much greater reach than simply accelerating unit sales because it has the ability to (in most cases) generate a lower monthly payment. The fact of the matter is that RV funding is the essential component in establishing a robust customer Trade Cycle Management eco-system. This eco-system will allow NSC’s and captives to forge ever closer relationships directly with the end user and drive retention and repurchase in equal measure. Autofutura’s “Portfolio 3Sixty” customer retention / sales acceleration technology platform is the ideal catalyst for this purpose.

Organising the used car market...

Remarketing of used vehicles especially in Tier 1 & 2 cities remains fraught with complexity. For example, and in the majority of cases used car dealers can present a vehicle to a prospective customer on their own premises, but not transact. Rather the buyer and seller must meet at an approved centralised location in order to transact at which time a fee is levied by way of a tax on the total purchase price of the transaction. Moreover, there is no Dealer / Trade Plate system in operation either. This means that each vehicle held in stock must be registered. As vehicle licence plate ownership resides with the individual and not the vehicle, this causes further complication. What’s more, plates are not issued on demand by the vehicle registration agency, this causes acute problems in the major cities. For example, in Beijing customers have to enter a lottery to win a licence plate, in Shanghai customers have to bid at auction, currently running at circa £11k or US $20k with no guarantees of a plate being allocated. Additionally, access to data services such as vehicle history checks, HPI or Experian in the UK, or Carfax in the US are not available. And finally, used vehicle pricing for consumers is not transparent as access to used vehicle valuation services and data in general is limited. That being said, quality data is available from several reputable suppliers in CN. However, it is not widely adopted as the de facto reference point for buyer and seller. That being said, this is now changing rapidly, awareness of data availability coupled with technology makes accessing information far easier. All in all, this complexity makes it extremley difficult for franchised dealers to sell used vehicles. Therefore, the market is controlled by independent traders. However, even when taking these complexities into account there are two major captives that I am aware of who successfully promote RV funding solutions via their franchised networks primarily in the Tier 1 & 2 cities. This illustrates clearly the old adage of, “where there is a will there is a way”…

Change is in the air...

The focus of many NSC’s and captives is now squarely on Tier 3 – 4 cities as they represent a tremendous opportunity for sales. In the vast majority of instances these cities have excellent under-utilised infrastructure by way of roads, airports etc; coupled with burgeoning consumption demands by residents of these cities who have higher levels of disposable income fuelled by lower housing and public service costs. As a consequence there is considerable pent-up demand for vehicle ownership/usage. This is especially relevant for all manufacturers of mainstream family focused brands be they European, domestic or American. Crucially there are no plans to institute vehicle licensing restrictions in the lower tiered cities which makes these sizeable markets all the more interesting and valuable to develop.

In conclusion, and to illustrate the optimism and tremendous room for growth that CN represents I have an anecdote to share. Whilst in conversation with a senior executive from one of the major captives operating in CN, he shared that dealer profit as generated by F&I income has in the past five years for the brands he supports doubled, and now accounts for 30% of the GP on the sale. Moreover, he is bullish about expansion into the Tier 3 & 4 cities and fully expects that finance penetration aided by the introduction of RV funding solutions will allow his company to reach 70% penetration in the coming years. Whilst this is a bold forecast indeed, it is one that I am in violent agreement with…

To continue the conversation please contact the author below

Paul Bennett – Director International Business Development @ Autofutura E:

* source – China Association of Automobile Manufacturers (CAAM)

** source – Congo Inc