Car rentals seen as a growth industry in China
Firms have their eyes on China’s 327.37 million drivers that were licenced as of the end of 2015.
Investors are closely eyeing mainland China’s car rental market after seeing its soaring development amid rising incomes that allow people to travel more for work and leisure.
Car-rental firms have their eyes on the mainland’s 327.37 million drivers that were licensed as of the end of 2015. That compares with about 124 million cars in private hands, according to data from the Ministry of Public Security. The bigger the gap, the greater could be the demand for rentals.
The country’s biggest car-rental company, CAR Inc., has a fleet of 88,853 vehicles. Its first-quarter net profit soared 55 per cent, compared with the year earlier, to 274 million yuan (HK$ 325 million). Sales rose 56 per cent to 1.63 billion yuan while car-rental revenue climbed 36 per cent, according to a report by Leon Chik, a J.P. Morgan analyst.
Its fleet utilisation increased two percentage points to a record 64.2 per cent in the first quarter.
“This was a surprising reversal of the drop in utilisation in the fourth quarter of 2015, ” Chik said. The strong growth in sales and earnings should offer some upside to sentiment, he said.
Some of the reasons behind the surge in demand for rental cars also include measures to control the chronic air pollution in major cities as well as congestion, which are making it less appealing for people to own cars.
At the same time, those living in cities but who lack a hukou, or household registration that grants them full rights to healthcare and other benefits, cannot buy cars, even though they may have driving licences.
So the gap between the number of qualified drivers in the mainland and actual car owners will continue to expand.
But while this could spell continued demand for car rentals, there are a number of bumps in the road that could point to a less than smooth ride.
Among the biggest threat is the rise of online car hailing services like Didi and Uber, whose aggressive pricing has lowered demand for rental cars.
Lo Ka-leung, an analyst at Kim Eng Securities, said the practice of discounted fares to attract customers by car-hailing services has driven down daily rates at CAR Inc. and its competitors.
Didi, which recently got a huge cash injection from Apple, is operating in 400 Chinese cities, while US-based Uber has a presence in 50 cities.
Sandy Wang, an engineer who works in the southern city of Shenzhen, said that for her daily commutes, Uber and Didi are convenient and even cheaper than the underground or bus.
“Sometimes, I even can take Didi or Uber for free because I can get a coupon for the fares,” Wang said.
Some auto makers are also combining to take a share of the car-rental market. Dongfeng Nissan Passenger Vehicle and Volkswagen AG both have subsidiaries operating in the sector.
Alongside fierce competition, China’s car rental companies can also be burdened by their heavy vehicle fleets, compared with lighter-asset model companies such as Didi and Uber.
Companies with bigger asset burdens face more business difficulties when economies slow, said Linus Yip, First Shanghai Securities’ chief strategist.
Another concern is a lack of industry regulation as the market is still in its infancy.
Yip said asset-heavy companies may find it difficult to adjust their businesses to follow changing regulations.
The Ministry of Transport laid down some rules in May to govern the way online car-rental businesses run.
Local governments can now make adjustments according to their specific conditions. However few details have so far been released.
Lo at Kim Eng Securities said the car-hailing service providers Didi and Uber are likely to bear the brunt of any new regulations because they cut into traditional taxi businesses and customers’ safety cannot be fully guaranteed when a company does not own its own cars or directly employ chauffeurs.
One report published by the Shenzhen Transportation Commission estimated that 1,425 drivers working for online car-hailing services had a history of drug abuse, and 1,662 had criminal records when they took on their driving jobs.
Both Did and Uber have had run-ins with mainland authorities and have faced protests by taxi drivers worried about the possible loss of their livelihoods. Some high profile crimes have also been committed by drivers working with Uber.
Car rental companies like Car Inc. who have their own fleets and hire their own drivers, can guarantee customers’ safety, Lo said.
“So new regulations will have less negative impact on car rental companies rather than online car hailing services companies.” he added.