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Q. Will China continue to dominate the global auto market?
A. Since overtaking the US in 2009, China has established itself as the world's largest car market. And although slowing economy in China is weighing on auto sales, there are no signs that China’s pole position is under threat. Sales of passenger and commercial vehicles in China totaled 23.5 million in 2014, up 7% from a year earlier, according to the China Association of Automobile Manufacturers.
We expect passenger vehicle sales will increase about 7% in 2015 and around 5% in 2016, as high earners continue to seek greater mobility and better living standards. However, we also estimate that commercial vehicle sales will decline by 15%-20% in 2015 and another 3%-5% in 2016 because of slowing industrial and economic activity.
Q. How have rising auto sales spurred growth in financing and securitization?
A. The increase in auto sales has brought with it demand for financing. Auto finance companies in China recorded aggregate auto-loan receivables totaling RMB320.4 billion at the end of 2014, according to the China Banking Regulatory Commission. Banks meanwhile have been rapidly accumulating auto-related loans as well. As household income grows and affordability increases, we expect auto-finance penetration to increase from a low base rate.
Growing Chinese demand for motor vehicles and the financing of their purchases have also increased financiers' need for funding diversification and capital management. As an alternative funding tool for auto financiers, auto-loan securitization has established a foothold in China, with 10 transactions rolled out since 2008 and total issuance of more than RMB22 billion.
Q. Is China’s auto-loan securitization market compatible with global practices?
A. The auto-loan securitisation structures in China are similar to those in other markets, particularly in terms of the issuing platform, credit enhancement formation, liquidity arrangement, and servicing process. The performance of auto loans securitised also has been close to that of prime loans in other markets. Moreover, the introduction of global experience from originators also selling the products in other markets has allowed more comparability among transactions and enhanced investors' familiarity with such products in China.
Among the distinct features of auto-loan securitization in China are the typically more conservative asset profiles, such as lower loan-to-value ratios, shorter tenors, and the introduction of non-collateralised loan underwriting practices. We believe China's regulatory structure and the vehicles makers' lower reliance on financing for auto sales contribute to these differences. Such features could have positive implications for the industry, which constantly faces questions about its shorter development history and macro uncertainty.
With regulation and a more conservative securitisation approach, we believe the sector should be able to address the potential risk posed by a shorter development history and a minor slowdown in economic growth.
Q. When do you expect Chinese automakers could emerge on the global stage with international appeal? Who could be the potential winners?
A. We would not be surprised to see a Chinese brand emerge on the global stage within the next decade, and the first to do so will most likely come from the current leading group of state-owned enterprises and private companies. The question is whether the potential winners can go global without drastically sacrificing their financial risk profiles.
We have identified a group of six companies from which one or more global players are highly likely to emerge within the next five-to-10 years: SAIC Motor Corp., Dongfeng Motor Group Co., Chongqing Changan Automobile Co., Beijing Automotive Group Co. (BAIC), Great Wall Motor Co. , and Zhejiang Geely Holding Group Co. We believe these companies will excel in new product development, branding, quality, distribution, and marketing.
Q. How would you compare the credit profiles of Chinese automakers with global peers?
A. We believe the financial risks of China's domestic automakers are broadly in line with their foreign peers', but with slightly higher leverage. As a whole, the industry doesn't seem to be under any imminent financial pressure, but some private and smaller manufacturers are slipping to the edge of financial distress.
The business strength of Chinese automakers still lags that of global peers, mostly due to weaker product development capability, less brand recognition, geographic concentration, and lower product diversity and quality.
Q. Looking ahead, what are the biggest challenges facing Chinese automakers?
A. China's automakers have come a long way over the past five years. They are making strides with new products after heavily investing in research and development (R&D), and are building on their large domestic market volume. However, domestic automakers still lack sufficient proprietary technology reserves and experience to meet increasingly tightening environmental regulations and to consistently introduce quality and desirable products to the market. What’s more, local players are still heavily dependent on foreign partners for technology advancement and product designs.
Consumer confidence and brand awareness will also take time to build. Electric cars could offer great catch-up opportunities for Chinese automakers, but we believe the challenges in this segment will be even bigger than those for traditional combustion-engine vehicles.
For China's domestic automakers to become true global players, they will need to match their R&D efforts to international standards. Although Chinese automakers have been investing as much as their global peers on R&D in terms of percentage of revenue, they haven't invested enough in technology and product development to be able to close the know-how gap . We believe it will take at least another three to five years for Chinese automakers to introduce proprietary cars under their own brands that are competitive and attractive by global standards.
The authors of this article are Vera Chaplin, Managing Director of Structured Finance Ratings and Tony Tang, Director of Corporate Ratings at Standard & Poor’s Ratings Services.
