Finance Leasing Paves Way for New Energy Vehicles in China

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  Fiacing obstacles in its early stageof development, new energyvehicle operators are in needof innovative business models,such as finance leasing, to help them-selves, according to a report released byRoland Berger Strategy Consultants andCredit First Finanaal Leasing Co., Ltd.
  Promising future
  The report shows that worsen-ing environmental pollution and theworldwide energy crisis have concen-trated intense pressure on the automo-tive industry to reduce vehicle emis-sions and energy consumption, whichis driving a massive push to developnew energy vehicles. The Chinesegovernment has introduced a series ofpolicies to promote the use of new en-ergy vehicles in recent years, setting uppilot cities where new energy vehiclesare subsidized and operators receivedirect governmental support.
  In 2011, only 8,159 new energyvehicles were sold in China, but sales areexpected to reach 50,884 units in 2014,which will represent a CAGR of 84%over the four-year period. Despite therapid growth in sales, however, adoptionof new energy vehicles in pilot cities stilllags far behind government targets.
  The future development ofChina's new energy vehicle industryfaces several challenges. The market isgeographically fragmented and small,with less than 80,000 new energy ve-hicles sold since 2011, which preventsthe infrastructure of charging stationsfrom reaching the scale necessary toprovide full coverage.
  Awareness also lags, as the in-dustry is currently lacks the supplyto provide model cars to dealers andshowrooms; this makes it difficult todemonstrate the advantages of newenergy vehicles and assuage consumerdoubts and misgivings about the newtechnology.The industry's small scalealso impairs the development of down-stream industries and a full industrychain. These challenges demonstratethat government subsidies alone arenot enough to build up the industry.
  Despite their currently limitedconsumer awareness and adoption rate,new energy vehicles show great prom-ise in China New energy vehicles con-stitute under l% of China's automotivemarket, but market share is expectedto grow t0 6% by 2020 and 15% by2025, when sales of new energy ve-hicles are predicted to reach 5 million.
  In order to realize this growthhowever, new energy vehicle operatorsmust adopt business models, such asfinance leasing, to overcome the chal-lenges facing the still-nascent industry,the report said.
  Finance lessing opens up afast lane
  The report finds that financeleasing provides important benefitsfor consumers of new energy vehicles,as well as clear advantages for opera-tors. Finance leasing is an innovativefinancialinstrument that separates legalownership from economic ownership-until the last payment is made.   Not only does this model allevi-ate consumer concerns about owninga new energy vehicle, it also facilitatesprocurement of new energy vehicles forpublic transportation or for innovativeservices such as car sharing. Conse-quently, the government strongly sup-ports finance leasing as a means of pro-moting the use of new energy vehicles.
  The current penetration rate offinance leasing among China's newenergy vehicle sales has reached ap-proximately 14%, and is predicted torise t0 22% by 2025.
  According to the report, one fac-tor driving the adoption of financeleasing is the relief of financial pres-sure it can bring to vehicle manufac-turers and other market operators byreducing the debt burden, improvingbalance sheet structures and facilitat-ing bank financing, especially since thelease period is typically much longerthan conventionalleases.
  Additionally, a VAT tax is appliedto finance leasing instead of a businesstax, allowing operators to enjoy a lowertax rate, which is further optimizedby long lease periods and flexibility insetting rates. Financialleasing also of-fers a convenient solution for resolvingconsumer concerns about the futurevalue of their new energy vehicles withresale value guarantee programs. Fi-nance leasing will continue to play animportant role in the promotion of newenergyvehicles.
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