Survey Finds Emerging Markets’ Growth in Auto Financial Services

A survey from London-based Finaccord found that in ten emerging economies, surging car sales have doubled the value of their automotive finance and leasing markets in five years, to reach $182 billion

Finaccord said: “The future of the global automotive industry lies firmly in the world’s emerging markets, where car sales have risen faster than in the developed world for several years. Even the global financial crisis did not stop both new and used car registrations from rising in countries such as Indonesia, as well as China and India.

“This surge in the automotive industry has boosted the financial services related to it, especially finance and leasing. The value of credit to buy cars has risen even faster than car registrations themselves, thanks to rising average values of loans and leases.”

The survey covered automotive financial services for consumers in ten of the most important emerging markets: Argentina, Brazil, China, India, Indonesia, Mexico, South Africa, South Korea, Taiwan and Thailand. It calculated that “the value of gross advances and assets leased by private customers in these countries nearly doubled between 2007 and 2011, from $96.0 billion to $182.1 billion – at a time when western car makers had to be rescued by government scrappage schemes and financial support, or by Asian companies such as Geely and Tata.

The rather depressed finance and leasing market in Europe resulted in an increase in these ten emerging markets for automotive financial products of gross advances and assets leased “from 35 percent of the equivalent figure for the European Union in 2007 to 70 percent in 2011.”

This rate of growth was even faster for new car registrations. Finaccord estimated that gross advances and assets leased for new car purchases by private customers rose from $58.6 billion in 2007 to $123.4 billion in 2011, which is a compound annual growth rate of 20.5 percent.

It also concluded that “used cars are less often traded through dealers in many emerging markets, and are much more likely to be bought with cash.” As a result, Finaccord estimated that the “value of gross advances and assets leased for used car purchases rose from $37.4 billion to $58.7 billion between 2007 and 2011, at a compound annual growth rate of 11.9 percent.

David Parry, Managing Consultant at Finaccord commented: “The rapid growth of car sales in emerging markets is well known, but this has profound implications for the financial services that support these sales. Although new car registrations in the US and in most European countries picked up in 2011, there won’t be a return to the rapid level of growth seen in the run-up to the financial crisis, and levels of personal debt remain high. Emerging markets present significant opportunities for lending institutions as well as automotive manufacturers.”

Key findings on a country by country basis included the following:
• the fastest growth rates for finance and leasing between 2007 and 2011 came in China and India, where gross advances and assets leased for both new and used cars combined rose at compound annual rates of 37.5 percent and 33.0 percent respectively;
• Argentina, Indonesia and Thailand also had compound annual growth rates above 20 percent during this period;
• Brazil remained the largest market out of these ten countries, because it has a far bigger used car market: gross advances and assets leased for both new and used cars rose from USD 35.5 billion to USD 56.7 billion from 2007 to 2011, which made 31 percent of the total for these ten countries;
• although growth in Mexico, South Africa and Taiwan was slower when comparing the period from 2007 and 2011, these countries were much more affected by the global financial crisis, and both car sales and lending rose sharply in 2010 and 2011 in all of these countries.

Parry concluded: “The challenges for international companies seeking to enter these markets are first how to gain access and secondly how to ensure that they don’t feed another credit bubble.

“Direct lending is often weak in these countries and the point of sale accounts for 70 percent of these finance contracts on average; that means that lenders need to form partnerships with one or more of dealers, manufacturers and importers. Where there is little history of lending, it’s virtually inevitable that some consumers will over-borrow and that some finance companies with over-lend – but the potential for growth in these markets is so great that there is no need to lend aggressively.”

Source: Finaccord