China Auto Dealer Group Financing White Paper

China's automotive industry has entered a new era with a stable single digit growth rate, and we have seen Chinese auto dealers operate under an increasingly diverse model in order to address the new challenges and customer needs. New and innovative services are brought into the market to supplement the existing service offerings, and through opening new stores or acquiring new businesses, auto dealer groups are able to quickly expand their market presence. Given the market condition, auto dealers are in need of stratified and customized financial products and services to support their daily operational activities, creating an opportunity for financial institutions to further collaborate with auto dealers. 

Summarized below are key points from our analysis and our recommendations:

• The development of China's auto dealer industry is transitioning from a fast growing phase to a stable growth mode, and operation of auto dealers will fall between two extremes: for the well-managed dealers with high profitability and good credit, their growth momentum will persist; for those with low profitability and bad credit, they may end up with bankruptcy or being acquired by other dealer groups.

• The operational risk for auto dealers in China is increasing as a result of the squeezed profitability under the conditions of fierce competition and the intensifying liquidity pressures. Some auto dealer groups have started to invest in non-automobile business activities and transfer funds from their auto dealership business division, exposing themselves to higher operational risks. Furthermore, new legislations have been introduced to regulate the operations and marketing practices of auto dealers so that unfair competition in the marketplace can be eliminated. This has generated more compliance procedures and thus increased the legal and compliance risks facing auto dealers, hindering their future development if these issues are not addressed properly.
• Auto dealers prefer to choose a financing channel that has simple application and easy approval processes, with finance products that offer bigger financing amount at a lower cost. Credit finance products offered by banks remain to be their first choice; however, findings from our study suggest that more than half of the dealer groups think that finance products from banks are relatively more expensive and nearly one-fourth believe that borrowing from banks is time-consuming and the procedure is cumbersome.
• Consumer credit business in the automotive industry involves the banks, auto dealers, auto financing companies, and other non-financial institutions. Based on the experience in developed countries, China's auto consumer credit business has more than 50% white space to grow, and banks and the auto financing companies are expected to seek opportunities to collaborate in competition.
• Banks, as the key player in the auto finance industry, are advised to provide customized financing products to match the needs of each auto dealer. Through customized services, banks will be able to build a closer relationship with auto dealers and increase their customer loyalty and stickiness.
• Banks are also recommended to strengthen its role as a "platform" to nurture a mutually beneficial relationship with automakers, auto dealers, and the consumers.  Building upon the ecosystem formed by these three parties, banks could communicate more effectively with them; and by utilizing advance technology, banks would be able to facilitate information monitoring and asset management in order to enhance efficiency and minimize potential risks.