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Keeping Your Eye on China ... Why It’s Worth Watching

September 03, 2013, 07:00 AM

I have been fascinated by the growth of the Chinese equipment financing market for a number of years…since 1997, to be exact, when I began work to help IBM Global Financing obtain its leasing license in China.

In those days, only a handful of international lessors felt the need to have Chinese leasing operations. I think a lot of firms were scared off by the experience of Korean and Japanese lessors, which lost hundreds of millions of dollars leasing construction equipment in China in the 1980s. By the late 1990s, only Caterpillar, Hewlett Packard, IBM and a handful of other international lessors had ventured into China, and collectively they underwrote a few billion dollars a year in new business.

Boy, has that changed. In recent weeks, the equipment leasing media quoted statistics from a current market research report:

  • China leasing turnover in 2012 exceeded $250 billion, an increase of more than 66% over 2011;
  • The number of licensed international lessors in China grew from 210 in 2011 to 460 last year, a whopping 219% increase;
  • The number of domestic licensed Chinese lessors exploded in 2012 by almost 300, to 560, an increase of over 210% from the prior year. 

What’s going on? Has China suddenly become the new mecca of equipment financing? Will Woody Sutton and Ralph Petta need to move ELFA headquarters to Shanghai?

Not just yet. The Chinese equipment financing market is expanding rapidly, and will continue to do so in 2013 despite the current business slowdown in China. In fact, the research report I referenced above projects the Chinese leasing market to grow to $1.63 trillion by 2020…that’s 647% growth for the rest of this decade. But…

China is a very different market from the U.S. and Western Europe. In future posts, I’ll discuss some of the key differences (such as asset mix, credit information availability, funding challenges, and cultural issues) that will cause challenges for most western lessors that choose to enter China. For now, I’d like to focus on a few reasons why you should keep your eye on China as you develop your growth plans for the next several years.

China is a large, rapidly growing market for equipment financing. Many of the largest captives and international bank lessors already are in China and providing equipment financing services today. For those bigger firms that are not -– and there are several –- some have studied the market and made a conscious decision not to enter at this time. But I am surprised by how many larger lessors have not even performed due diligence on China yet. With a moribund European economy and a sluggish one in the U.S., expansion into Latin America, Central/Eastern Europe or China represents a potentially excellent way to kick-start growth for lessors.

To be sure, China isn’t for everyone. It’s expensive to set up and maintain operations there, and the language and business culture are tough to transcend. This makes it hard for smaller lessors to consider China at all. Still, I tell my clients it doesn’t hurt to try to develop some relationships in China for the time being. There are several leasing conferences each year in China, and translation services are almost always provided. It’s an excellent, low-cost way to begin to understand the market, and make some contacts there. Why wouldn’t you want to have industry contacts in one of the world’s most dynamic growth markets?

Follow your customers. Lessors in the vendor program business, and those whose end user clients are large enterprises, can differentiate themselves by offering financing in the countries where their customers are. Our most forward-thinking clients have already met with their largest customers and know what international financing requirements they’ll need for the next several years. China is on the horizon for many of them.

Consider also that the Chinese yuan has appreciated 26% against the dollar since 2005 (from 8.25 to 6.12 per dollar), and is projected to continue to do so. Foreign goods and services will be more cost-competitive as a result, and more equipment financing in China for non-Chinese products will be needed.

Chinese manufacturers. Have you read about the battles Huawei, a $35.4 billion Chinese telecommunications firm (the world’s largest, by the way), has had with the U.S. government lately? Huawei is trying to establish a beachhead in the U.S. market, and is being blocked by the federal government because of security concerns (Huawei has purported ties to China’s military).

Whether or not Huawei is successful, Chinese manufacturers are poised to enter western markets in waves over the next decade. Automobile manufacturers (Dongfeng, Great Wall, BYD, SAIC), machine tool companies (Shenyang, DMTG), construction equipment manufacturers (Zoomlion, LiuGong, Sany), and many others will become exporters as their product quality improves and their costs stabilize.

Few of these Chinese companies have domestic equipment financing capabilities today, and fewer still understand the need for equipment financing in western countries. Lessors that develop relationships now with Chinese manufacturers will have an edge at providing financing.

Niche opportunities. China’s government often provides incentives for companies to enter “focus markets.” The Ministry of Finance in recent years has urged banks to provide more financing to small and medium businesses in China, and played a role in creating the first asset registry in China as a result. More recently, the government has created a series of province-specific tax incentives for companies to establish used equipment operations there. Used equipment is not yet widely accepted in China, and this effort is aimed at creating a market for used assets, particularly (at this point) for automotive parts.

In my future posts, I’ll describe the Chinese leasing market in more detail, and outline some of the challenges western lessors face there. I’m also interested in hearing from others in our industry who are exploring this market.

Jonathan L. Fales
Senior Managing Director | The Alta Group
Jonathan L. Fales, an international management consultant with The Alta Group has worked in the information technology and equipment leasing fields for several decades. Prior to joining the global consultancy, Fales held numerous leadership positions with IBM Global Financing, including general manager of Asia Pacific South Global Financing. His years of experience in international business development have helped Alta clients launch and manage vendor finance programs in Latin America, Europe, the U.S. and Asia, with a special emphasis on China. Fales is a former member of the Equipment Leasing and Finance Association (ELFA) board of directors and executive committee, and he frequently presents at global leasing conferences. He is the chairman of China Leasing Summit held annually in Beijing.
Comments From Our Members

Bob Rinaldi • View APN Profile
Excellent points making the case for why lessors should seriously consider a China entrance! I look forward to the forthcoming posts on this topic. Hopefully you will discuss the state of securing assets under lease as well as billing and collecting models that are acceptable and workable in China. Thanks Jon for sharing your vast practical knowledge of leasing in China.
9.4.2013 @ 8:05 AM

Jonathan Fales
Thanks, Bob. So you want to secure assets in China, eh? I'll talk about that in a future's pretty difficult to do today for sure, as there's nothing resembling the UCC we have here in the US (which you know). I can share what other lessors do to protect their security interests, though...I hope that will be useful for some readers.
9.6.2013 @ 1:34 PM

Bob Rinaldi • View APN Profile
I eagerly await that post. Not that I am an expert on China, far from it, but the Chinese Government's notion of "property" seems diametrically opposed to "property" as construed in an Equipment Lease. As a humorous aside, there are more than a few in Washington that see China's version as "Nirvana".
9.7.2013 @ 7:51 AM

Jonathan Fales
That view might change if they visit Beijing in July...air quality is a real problem there.
9.9.2013 @ 1:16 PM
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