Auto Industry

Looking for keys to success

After early stalls, China’s car rental industry may be set to accelerate

Hertz and souls: US firm makes second drive at Chinese market

When it came to renting cars, Peter Hessler was one of China’s earliest and keenest customers. In his book Country Driving (see WiC54) he recalls his regular visits to Capital Motors. The Beijing firm had a fleet of around 50 Volkswagen Jettas, and Hessler recalls the “elaborate ritual” of hiring one.

“First I paid my $25 dollars per day and filled out a mountain of paperwork. Next, the head mechanic opened the trunk to prove there was a spare tyre and a jack. After we documented the prenuptial damage, the mechanic turned on the ignition and showed me the gas gauge. Sometimes it was half full; occasionally he studied it and announced ‘three eighths’. It was my responsibility to return the car with exactly the same amount of fuel. One day I decided to make my own contribution to the fledgling industry. ‘You know,’ I said, ‘you should rent out all the cars with a full tank, and then require customers to bring it back full. That’s how rental companies in America do it. It’s much simpler.’ ”

Mr Wang of Capital Motors quickly dismissed Hessler’s attempt at knowledge transfer. “‘That might work in America, but it wouldn’t work here. People in China would return the car empty.’”

The author sums up the episode thus: “The Chinese people had invented the compass, paper, the printing press, gunpowder, the seismograph, the crossbow, and the umbrella; they had sailed to Africa in the fifteenth century; they had constructed the Great Wall. They could return a rental car with exactly three-eighths of a tank of gas, but filling it was apparently beyond the realm of cultural possibility.”

Hessler’s somewhat frustrating experiences took place almost a decade ago, and perhaps explains why the industry struggled to attract customers. But there are signs the car rental business may finally be about to take off.

Legend Holdings – the parent company of PC maker Lenovo – has just invested Rmb1 billion ($149 million) to become a strategic shareholder in China Auto Rental, the nation’s largest car hire firm. Shanghai Ba-Shi Car Rental Service has also received an infusion of equity. Shanghai Johnson & Johnson Holdings – a state-backed firm with no connection to the US multinational – has paid Rmb1.7 billion for a 70% stake. The company, which was founded in 1919, is already a major player in the transportation business and wants to grow in car rentals.

Global Entrepreneur says that news of the two deals, plus the fact that “car rental ads can be seen everywhere”, indicates that the car hire industry “is finally on the rise”.

Roland Berger, a consultancy, predicts that by 2014 the auto rental business could be worth Rmb38 billion, with a fleet of 400,000 vehicles available for hire. BMW has also announced that it will start its own car hire business in China in 2012. Friedrich Eichiner, a senior executive at the German carmaker, said in Beijing last month that he thought the business has “tremendous potential”.

If such growth targets are to be reached, it’s likely the industry will need to see a lot more consolidation. At the moment, no single company has a market share that exceeds 1%. Market leader China Auto Rental currently only has 4,000 vehicles, and even after Legend’s investment that will grow to just 10,000.

That looks paltry compared to the international heavyweights. Hertz alone offers more than 600,000 rental vehicles.

In fact, Hertz provides a good example of some of the challenges facing the local market. The US giant entered China in 2002, believing there would be a big market for businesses to hire its cars on long leases. But in 2006 it exited its joint venture with China National Automobile Anhua Car Rental Company and appeared to depart the country altogether. Last year Hertz reopened in China, but currently runs its (now wholly-owned) rental business from a mere five locations in Beijing and Shanghai. Its marketing people say, however, that the new plan is to open in 20 Chinese cities.

Hertz is not the only international player that appears to have struggled to replicate its overseas dominance in China. In 2007 the German car rental firm Sixt opened its Chinese operation but according to Global Entrepreneur its development has been “limited”. Wang Jiye of Sixt candidly told the magazine the local market was merely “acceptable”.

Analysts offer a number of reasons for why the car rental business has struggled. On the demand side, the early wave of motorists tended to be rich – they bought their cars and hired drivers not vehicles. The industry itself struggled to gain economies of scale, and lacked a leader with a meaningful market share and pricing power. On the cost side, the country’s preponderance of toll roads were also an issue – if a driver dropped a car in another city where the rental firm didn’t operate, it had to absorb the tolls to drive it back.

But those who are optimistic about the industry now seem to be in the ascendant. And Hessler would be the first to notice some improvements. Should he turn up at Beijing’s airport the people from Hertz will rent him a car which, unlike Capital Motors, he can return with a full tank of gas.

Keeping track: Back in WiC83 we reported that German carmaker Volkswagen had sold its millionth Audi in China. But Audi chief executive Rupert Stadler was confident of much more to come. “It took us 23 years to sell our first million vehicles in China,” Stadler said. “We aim to deliver our second million to customers in just three years.” It still looks like an ambitious goal, although the company has just posted a record quarter, with 51,951 cars sold. Sales rose 18.2%.
According to research firm Dunne & Co, the A6 continues to lead the way, still the transport option of choice for the
discerning government official or company boss. Half of the A6s sold globally are now sold in China. (29 April 2011)


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