Banking & Finance

Buy now, pay later

BMW gears up for auto finance; Toyota gets fined

Buy now, pay later

Now available on credit

For the up-and-coming Chinese businessman, being able to park a BMW 7-Series in the driveway counts for serious bragging points. But with a starting price of Rmb918,000 ($137,000), the 7-Series remains out of reach for most.

Perhaps a little less so in future: for those willing to borrow, they could be behind the wheel sooner than they might have dared hope.

The reason? BMW has been given government approval to establish an automobile finance company in China, with operations expected to start in November.

The new company, a joint venture between BMW and Brilliance Auto, will provide wholesale and retail financing to dealers and customers.

The German carmaker is not completely new to the auto financing market: it started offering similar services in China three years ago via Shenzhen Development Bank. But the take-up was low, with only between 5% and 10% of BMW buyers choosing the offer of a financing package.

Expectations are that more car customers will borrow to buy in future. “We expect to increase retail penetration (in China) considerably after 2011,” a BMW board member told the China Daily. He added that younger consumers are becoming more comfortable using credit to purchase a car.

The Chinese aversion to borrowing money stretches to car purchases too. Only 10% of Chinese consumers buy vehicles on credit, compared to 80% in the US. But as attitudes become more relaxed, the China Association of Automobile Manufacturers is predicting an auto financing market worth Rmb525 billion by 2025.

BMW would be wise to keep in mind the recent experience of rival Toyota‘s local auto finance business in Zhejiang province. Last month the Japanese automaker was fined for corporate bribery; authorities claimed that the firm used rebates to gain an unfair advantage over competitors, reports Xinhua.

The annual interest charged by Toyota on an auto loan was said to be between 10% and 13%, significantly higher than the 7% deal offered by the state banks for similar loans. The accusation was that Toyota would then pay 4.5% of the interest to the dealers.

This led to more than a little murkiness down at the dealerships, explains Xinhua. Sales assistants would say that bank loans were unavailable, or not mention other financing options, pushing customers towards the Toyota plan.

One dealership employee told Xinhua that, outside the luxury market, selling just the cars themselves earns little profit. It is through selling the extras – financing, insurance and accessories – that dealerships make much of their money. And the proceeds from car loans can be a key revenue.

The fines are the latest in a line of recent setbacks for Toyota, which is still trying to recover from a product recall earlier in the year, and was also punished for selling faulty auto parts, again in Zhejiang, reports 21CN Century Business Herald.

Toyota was also hit by industrial unrest in its supply-and-assembly chain in the summer, provoking government officials to tell the Nagoyoa firm to raise wages. Nor will a general atmosphere of poor Sino-Japanese relations in recent weeks have helped the company’s marketing folks much.

Before the bribery case became public, Toyota’s China manager said that he thought the company would meet its target of selling 800,000 units in China this year – having sold 420,000 by July. But with so many setbacks, his task may no longer prove as straightforward.

Not that there are many reasons for Toyota’s rivals to gloat. The secretary of Zhejiang’s Industry and Commerce Bureau told 21CN that it wasn’t just the Japanese firm that it was investigating for breaching car finance rules. Clearly, other companies in the auto financing business are being given a message to clean up their act too.

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