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Looking Closely at China’s Auto Leasing Industry

2019-06-26 14:29 Wednesday

In many developed markets, auto leasing is a normal approach to acquiring vehicles, and accounts for 15-30 percent of new vehicle retail sales. In China, things are somewhat different; while equipment finance is already quite normalized, auto finance in China is still a relatively new aspect of the industry. Auto leasing penetration rates in China were about 2.5 percent in 2016, but over the course of a decade ending in 2026, the China leasing industry is estimated to have grown closer to 20 percent.

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There are many benefits to auto leasing. First, it provides a boost to new car sales by offering competitive pricing and speeding up the rate at which consumers replace their vehicles. Secondly, off-lease vehicles become a source of premium quality used cars, allowing expansion into the secondhand auto industry – also a rising segment of auto sales in China. Finally, leasing companies have greater opportunities to maintain relationships with customers throughout the leasing process and ultimately strengthen retention rates.

Keys for growth in consumer finance and leasing are a strengthening second hand auto dealership market, educated consumers, and the development of a residual value forecasting model. Over the next 10 years, a large percentage of car buyers will be millennials who are generally considered to be open to westernized consumption behaviors and concepts. Concurrently, the used car market is evolving into a more transparent and regulated market under government decree. Therefore, increasingly advanced residual value forecasting becomes possible based upon the availability of more transparent data.

Despite the fact that China is the world’s largest market for auto sales, the auto finance industry is still in its early stages of development. With a finance penetration rate of 38%, China remains significantly behind other more developed nations whom boast penetration rates between 50 and 80 percent. In this underdeveloped environment, financial leasing has only started to emerge as an option for auto consumers in the past few years. In 2018, the China auto market is estimated to have generated some 800,000 leasing originations. However, of these originations, over 95 percent were auto loans signed in the form of a lease-loan contract, resulting in an actual lease penetration less than 0.1 percent.

Auto leasing depends largely on three important mainstays that reinforce the growth of this market: consumer awareness, remarketing channels, and residual value management. For new products the first priority on the market side is always to raise consumer awareness of the innovation and transfer its value to the consumers. Auto leasing, being a new concept to many Chinese consumers, requires considerable effort on consumer education. From the operational side, the growth of leasing business highly depends on the development of remarketing channels and residual value forecasting models. Since auto leasing asks customers to bring back the cars by the end of the term to speed up the vehicle replacement cycle and motivate for new purchasing, it always leads to a high volume of vehicles for leasing companies to get rid of. Therefore, a developed remarketing channel is needed to allow efficient disposals. The second-hand car market, which is the most commonly used remarketing channel, is now largely viewed as non-transparent in China since second hand vehicle sales are often managed by individual dealers and take place in offline markets with one-on-one negotiation. This is obviously not the best way for leasing companies to get out from under the weight of their large volume of used vehicles.

Despite the low market readiness today in China for leasing business, there is significant growth potential moving ahead. As a quickly changing market, China is rapidly developing these essential pillars which will enable the growth of auto leasing. Millennials, soon to be the largest segment of auto consumers are not only interested in new energy vehicles but are developing a “you only live once” attitude that corresponds well with the concept of leasing, or at the very least exploring alternative financing channels.

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