GM's Incentive Mania Spreads to China

by Frank Williams

Published: August 21st, 2007

General Motors is offering interest-free financing on new Buicks. But don't bundle up grandma and grandpa and trundle down to your local Enclave emporium. You'll have to go to China to take advantage of this deal. Bloomberg reports GM has the dubious honor of being the first automaker in China to cave to competition and offer interest-free loans to try to bolster sales. The only stipulation is that the buyer has to make a 40 percent down payment. While that seems excessive on this side of the Pacific, banks there usually require 60 percent down for financing so it's a pretty good deal. Whether this will lead GM into an [all-too-familiar] incentive spiral is yet to be seen. But they may have taken the first step on that slippery slope.

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Frank Williams on Aug 21, 2007
tentacles: The problem with financing in China is that like most poor countries, there really doesn’t exist any effective system of tracking personal credit. Rich countries can extend huge amounts of unsecured personal credit because the banks can easily determine your creditworthiness. How do they plan on doing that in China? That's probably why they require such large down payments. They figure if the buyers can save that much of the purchase price, they should be good for the remainder. Besides, can you imagine what would happen to someone who gets behind in their payments in China? Losing their credit rating or getting a car repossessed would probably be the least of their worries!

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Tentacles on Aug 21, 2007
That’s probably why they require such large down payments. They figure if the buyers can save that much of the purchase price, they should be good for the remainder. Besides, can you imagine what would happen to someone who gets behind in their payments in China? Losing their credit rating or getting a car repossessed would probably be the least of their worries! That idea works for real estate and other forms of secured debt, because you can’t pick up your house and run away with it. For cars, not so much. Car loan are essentially unsecured. One’s credit record matters in the US because everyone is so use to easy consumer credit, they literally wouldn’t know what to do without it. I’m Chinese, and this never ceases to amaze me. As for your implication that GM will somehow be able to bring about dire consequences to anyone who defaults, well, let’s just say GM won’t be the first Western company to get screwed in China because they overestimated how much clout they really have with the local administration, when the rubber really hits the road (literally and figuratively).

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Redbarchetta on Aug 21, 2007

Isn't China one of the few places GM was actually making a profit.

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AGR on Aug 21, 2007

Years ago GM established GMAC when no one wanted to loan money on a “new fangled invention” called the car. They are doing the same thing in China, where most cars are paid cash, they are establishing “time sales” with a strong down payment. Its not different than GMAC in North America 50 years ago. It might all be "recourse paper" where the selling dealer is on the "hook" for the loan, or deficiency.

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