Geely-BNP Financing Venture Part Of Growing Trend

BMI View : Geely and BNP Paribas's new auto financing JV is part of a growing trend among automakers to provide attractive financing packages through their subsidiaries to maintain sales and defend their market share. We believe the percentage of vehicle sales, which utilise some form of credit, is poised to grow in the coming years as consumers become more willing to embrace loans to purchase durable goods such as cars.

Zhejiang Geely Holding Group Co and French bank BNP Paribas have formed a joint venture (JV) to provide consumer auto financing in China. The JV will have a registered capital of CNY900mn (US$148mn), which will be used to provide floorplan financing to Geely's dealers as well as loans to car buyers. Geely will hold a 80% stake in the JV and BNP will hold the remaining 20%.

Geely will join other automakers such as General Motors Company, Hyundai Motor and Volkswagen, which already provide auto financing services in China. Besides boosting car sales, these captive financing services of these global automakers provide additional revenue for the firms once they sell a vehicle to the customer. Going forward, we expect more automakers to start providing consumer loans and become an alternative financing entity to commercial banks.

Geely-BNP Financing Venture Part Of Growing Trend

BMI View : Geely and BNP Paribas's new auto financing JV is part of a growing trend among automakers to provide attractive financing packages through their subsidiaries to maintain sales and defend their market share. We believe the percentage of vehicle sales, which utilise some form of credit, is poised to grow in the coming years as consumers become more willing to embrace loans to purchase durable goods such as cars.

Zhejiang Geely Holding Group Co and French bank BNP Paribas have formed a joint venture (JV) to provide consumer auto financing in China. The JV will have a registered capital of CNY900mn (US$148mn), which will be used to provide floorplan financing to Geely's dealers as well as loans to car buyers. Geely will hold a 80% stake in the JV and BNP will hold the remaining 20%.

Geely will join other automakers such as General Motors Company, Hyundai Motor and Volkswagen, which already provide auto financing services in China. Besides boosting car sales, these captive financing services of these global automakers provide additional revenue for the firms once they sell a vehicle to the customer. Going forward, we expect more automakers to start providing consumer loans and become an alternative financing entity to commercial banks.

While auto financing still forms a small segment of total industry sales (roughly 15%), we expect its share to rise in the coming years as credit becomes an important driver of new car sales. Although the Chinese have traditionally only used loans to purchase property, there has been a recent shift among the younger generation who are more willing to take on credit to purchase durables such as cars. As competition in the Chinese auto market intensifies, more carmakers will find it a good business proposition to provide attractive financing packages through their subsidiaries in order to maintain their sales and defend their market share.

Furthermore, according to Zhongsheng Group Holdings Ltd., one of the largest Chinese auto dealership groups, consumer financing is fast gaining acceptance in China. One fifth of car buyers use financing at Zhongsheng's 160 auto dealerships, with the rest opting to pay cash.

Besides boosting sales, the availability of greater modes of auto financing encourages younger buyers to buy more expensive cars. Carmakers are increasingly trying to woo the young driver segment by coming up with newer and trendier models, so as to find new areas of growth.

Lastly, we see dealerships also benefiting from additional financing provided by original equipment manufacturers. The recent bouts of credit crunches in the economy would have disproportionately affected smaller dealerships, which suffer from tighter cash flows, and financing facilities from car manufactures will prove invaluable for these dealerships during such periods of distress.

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