As China gets used to buying on credit, it remains important for GM financing arm even as new car sales soften
- Chinese buyers make larger down payments and pay off loans quicker than US counterparts
As concerns are increasing about rising delinquency rates among car buyers in the United States, GM Financial, the car loans arm of US carmaker General Motors, is increasingly looking to mainland China for potential growth.
Not only is China the world’s biggest market for car purchases, but Chinese buyers make larger down payments and pay off their loans quicker than their US counterparts when they borrow money for new or used cars.
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SAIC-GMAC Automotive Financial, GM Financial’s joint venture in China, originated US$12.3 billion in new retail loans last year and had a much better performance in terms of net charge-offs than GM Financial itself, the company said this month.
“Credit quality continues to be extremely strong in China,” Dan Bearce, GM Financial’s president and chief executive, said on a conference call on February 9.
As a result, China has plenty of room to grow, particularly when it comes to vehicle financing, according to GM Financial.
Most vehicles in China are bought with cash, with only about 40 per cent being financed, according to GM Financial. In comparison, 80 per cent of vehicles in the US are bought using car loans.
“That’s largely a generational thing, where the older generations in China hadn’t been using credit, and weren’t used to using credit. As the younger demographic buys cars, they have much more comfort level with using credit,” Berce said at the JPMorgan Auto Conference in New York.
“Generationally, as more and more young buyers enter the market, we believe that cash number will converge with the US number,” he said.
Credit will be used more and more in China
Another attractive feature of the Chinese car financing market is that loans average about 27 months to pay off and include a 40 per cent down payment. In the US, loans can run as long as 70 months and consumers are only required to put down about 10 per cent of the purchase price as a down payment, according to GM Financial.
“That structure of the loan drives a lot of the good credit performances, because it’s very short, pays off quickly and the customer has a huge stake in the vehicle,” Berce said of Chinese car lending. “Credit will be used more and more in China.”
Yu Yarui, the general manager of SAIC-GMAC, said in January the company generated 1 million new retail contracts for the second consecutive year in 2018 despite softening car sales in China and posted “positive growth on a year-on-year basis” for a 14th straight year.
For GM Financial, the growth potential in China juxtaposes with increasing concern about rising delinquency rates among US borrowers, even as new car loans and leases in the US surged to US$584 billion last year.
More than 7 million Americans are three months or more behind on their car loans, a million more than at the end of 2010, the New York Federal Reserve Bank said in its blog on Tuesday. Overall delinquency rates for car loans peaked in 2010, according to the New York Fed.
“The substantial and growing number of distressed borrowers suggests not all Americans have benefited from the strong labour market and warrants continued monitoring and analysis of this sector,” it said.
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GM first entered China in 1997, when it formed a joint venture with SAIC Motors, China’s biggest carmaker. Car financing began in 2004 with another joint venture, the SAIC-GMAC Automotive Finance Company. SAIC-GMAC had relationships with about 7,400 dealers in 351 cities in mainland China at the end of last year.
In addition to financing for retail and fleet sales, SAIC-GMAC provides loans to authorised dealers for showroom construction and spare parts.
GM Financial, based in Fort Worth, Texas, took a 35 per cent stake in SAIC-GMAC in 2015, buying it from Ally Financial, formerly GMAC. Last year, it made a US$51 million investment for a 35 per cent stake in SAIC-GMF Leasing, a separate car leasing joint venture in China.
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“The margins we're making in China are a bit larger than they are in the US,” said Berce. “They're converging as the market matures and as consumers get more used to credit. The margins will converge with what we see elsewhere. For now, they're a bit outsized.”
