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Foreign car companies are highly excited about the potential impact of motor vehicle financing, but analysts say credit risk and a cultural aversion to credit buying mean it will take time for the sector to take off.

A report by Standard & Poor's in March said  the growing availability of  loans would spur car sales in emerging markets such as China. But despite the optimism, credit car sales have been relatively modest since  approval for the establishment of finance institutions  in 2004.

So far, GM, Volkswagen, Ford, Toyota and DaimlerChrysler are approved to provide  financing.  The Bank of China has formed a joint venture with Banque PSA Finance, an arm of PSA Peugeot Citreon, and Dongfeng Automobile Co. Ford said retail financing was being offered to customers in Beijing, Shanghai, Guangzhou, Shenzhen and several other cities.

Car financing has had a short, but troubled history in China.

Domestic banks aggressively jumped into the market in 2003 in co-operation with car dealers, but after bad loans started to pile up in mid-2004, the government told them to step back.

According to a report in the Shanghai Daily newspaper in December, the non-performing ratio of car loans at commercial banks averaged 10 per cent at the end of last year.

A western analyst said many  buyers stopped paying back their  loans after they realised the cars they purchased were worth less than what they owed on them.

'People defaulted because they thought they were being ripped off,' he said. 'They had no experience with financing before.'

Christian Weidemann, general manager of GMAC-SAIC, said car financing was one of the most important marketing tools for  manufacturers, adding that  GMAC was confident about the future of  financing  'although it will take a while to really develop'.

Analysts say that on average only about 10 per cent of buyers use financing, compared with up to 85 per cent in the United States and the EU. GM said just 6.3 per cent of its nationwide sales in China were financed.

Mr Weidemann said part of the small numbers was because  the company offered retail financing at just 236  GM dealerships in 58 cities. Shanghai GM has 400 dealerships around China.

'Of course, compared with other countries like the US or EU, the overall rate for China's auto finance penetration is still low, mainly due to consumer behaviour,' says Mr Weidemann.

'We believe it will take time for the consumers to change.'

The biggest obstacle to the expansion of  financing is the lack of a reliable credit-rating mechanism.

'We build into our policy an expectation of some defaults,' said Kenneth Hsu, vice-president for public affairs at Ford Motor (China).  'This is the reality of the China market, it's the same in other developing markets.'

Mr Weidemann said that in the future, the company hoped to access the new nationwide credit bureau that was introduced earlier this year.

'This would, on a macroeconomic level, improve efficiencies in the lending process,' he said. He declined to give figures for the firm's default rate in China, only saying that it was 'marginal'.

DailmlerChrysler has said it would employ an in-house team to do background checks for loans, a process that would include home visits.

The company will also require buyers to pay at least 20 per cent of the purchase cost in cash.

So far, the bulk of lending by foreign finance companies has gone to  dealerships. Mr Weidemann said his company's primary focus at present was serving Shanghai GM's dealer networks.

Ford Automotive Finance (China), a unit  of Ford Credit, began operations  in July 2005, and so far has provided financing to 60 Ford dealers with a credit line of US$100 million, primarily vehicle inventory wholesale loans for dealers.

The company has plans to expand financing to dealers of other Ford brands, including Lincoln, Volvo, Land Rover and Jaguar.

Mainland banks are now heading back into the market, but with stricter requirements set by the government, such as a 20 per cent down payment on car purchases.

China Construction Bank has doubled the salary requirement of buyers and its demanding more background information, while other banks are planning to reduce the lending period to three years from five years, or reduce the maximum loan to 40 per cent from 70 per cent of vehicle value.

Timothy Dunne, of Automotive Resources Asia, said that Chinese were becoming accustomed  to buying on credit and that if  car financing took off it could have an impact on the market.

'As their wealth develops and the system develops, Chinese will understand the value of financing,' he said. 'If consumers begin to accept this, it could be a huge boost for the industry.'



Vehicle finance idea faces cultural hurdle with mainland buyers