Potential for Leasing in China, but a long way to go
Where leasing has become a mainstream methodology in the so-called mature markets to acquire company vehicles, we already know that this is not the case in Asia. Most of the Asian countries are somewhere between the stages of “awareness” and “acceptance”, but manage to book double digit growth on leasing products nevertheless, at least if regulations are not disturbing the industry (India).
China is still in the “awareness stage”, and for good reasons. Especially a unregulated second hand market, the high percentage of cash payers and a perceived indecisiveness from professional suppliers on how to market themselves seem to be major factors in the slow breakthrough of Operational Leasing as a product.
What are the real volumes?
When talking about leasing penetration in Chine, the figure that circulates most is 2.5%. In a market that sells about (roughly) 25 million vehicles on yearly basis, this would mean annually, 625,000 vehicles are leased. This is not exactly true.
Let’s take a 1000 cars. 620 cars will be purchased, 380 will be financed. To finance these cars, 353 Chinese will take a regular bank loan, which is, for the Chinese, the first option that comes to mind. If that doesn’t work, they will look for alternative solutions. So here we have 27 future car owners exploring the “leasing market” – this is where the 2.5% comes from.
In reality, 26 of them will chose a Lease-Loan and only 1 will opt for a regular leasing. This leaves us with a current penetration ratio of not 2.5%, but in reality 0.1%. The real leasing volume is 25,000 vehicles p.a.
The Lease-Loan (LL) is the result of the regulatory environment in China. The LL is more flexible than a regular bank loan, especially when it comes to the down-payment ratio. Also, the client’s credit ratio is evaluated in a slightly more forgiving way than a bank loan. In other words, is an alternative for the client who might not get a regular bank loan for his car.
In comparison with a regular (true) lease, there are 4 main differences:
- In a LL, the client will have to buy the vehicle at the end of the contract
- The residual value is significantly lower than market value
- The LL is focused on a low downpayment (compared to a bank loan) rather than on low monthly payments, as it is the case for a true leasing
- The target customers do not have a high credit rating, but has trouble to finance their cars
The LL is the perfect tool for OEMs, Dealers to boost volume but also for internet affiliated financial institutions brickwall their clients and use the proposal to include the client in mobility offerings and gather data.
Remarketing in China
The used car market in China can only be described as volatile. As the residual value (RV) setting is essential for any leasing company, not only to be competitive, but also to establish the risk exposure of the company itself, the challenge for the true leasing supplier is massive. Directly linked to the RV setting are the remarketing channels, which are fragmented and transparent in China.
For a company that expects end of lease units to come back, but is not sure how to sell them with profit and that needs to quote for a renewal, without knowing for sure what the value of this vehicle will be in 3 or 4 years’ time, there’s only one solution: lower the RV and accept being expensive. Suppliers who are trying to buy the market and offer true leasing at a low monthly payment, will get in trouble at some point in time.
Back at square one; in order for clients to accept a higher pricing for a sustainable service offer, they need to understand what leasing is. The volume, on paper at least, is huge. KPMG has calculated a potential of 6 million units per year (that’s 240 vehicles in our example). This leaves the traditional leasing supplier with 2 options: either align with status quo and start offering LL or invest money in the education of the client. The first option will work quicker, but will also expose the leasing supplier to harsh competition with cash-rich players who don’t even want to make money out of financial services. They either want to sell cars or own the client for other purposes.
The latter option will cost more time and effort, including a complete re-education of the leasing supplier’s sales teams, who are used to go head-to-head in pricing negotiations. But it would be a first step towards sustainable growth.
There’s a third option. 75% of all the electric vehicles in the US are sold through leasing solutions. The reasons are obvious: clients want to leverage the higher MSRP, they have doubts about the residual value (there’s the illusion that EV technology will change drastically in 4 years’ time) and the life span of batteries.
Leasing companies deal with the first 2 problems without any issue – it’s their core business. In addition, comparing the TCO of a leased EV with a leased ICE is usually in favour of the EV and draws the client away from other comparisons. Solutions, such as OEM buy-backs, can support the leasing company and act as a “RV guarantee”.
The growth potential of “true leasing” might be big in China, but 3 issues need to be solved. Client awareness, remarketing channels and residual value volatility. The solutions are available, but not in an organised manner. Suppliers need to invest in client education, second hand dealers need to be organised and the OEM, in collaboration with leasing companies, need to start owning the second hand market.