CEO of Xinyuan Warranty (China) Co., Ltd. may be the shortest job position that Guo Jiyuan had ever had. From the beginning of 2007 when he took office to March of this year when he quietly resigned, his stint was so short that many can still recall the ambitious smile on his face when he first took this position.
Guo Jiyuan is a real old-timer in the auto credit sector. In 1997, he led the Yafei Automobile Chain Store on a trial basis in auto credit. In almost eight years, he amassed 200,000 customer information files as well as a wealth of experience in effective credit risk control. In 2004, market uncertainties forced insurance companies and banks to get out of individual auto financing. Tighter government policies soon followed. As a result, the auto market quickly contracted and Guo had to gradually pull out of the market.
Then in January of 2007, Guo returned to the individual auto credit market with two big weapons: Xinyuan Warranty (China) Co., Ltd. and Xinyuan Auto Credit Service Plaza. The former used advanced individual credit management, and used the customer data acquired by Yaxin. The latter used funds from red chip investor Liang Botao to build a network of self-operated stores across China.
This time, however, Guo wasn’t interested in selling cars. Instead, he would only sell credit management. At the Beijing Xinyuan Auto Credit Service Plaza, car vendors, 4S (sales, spare parts, service and survey) shops and second-hand car sellers could display their products in the plaza free of charge and sell new cars with financing. Banks and insurance companies competed to provide loans and insurance services for customers with various interest rates and services. For its part, Xinyuan provided guaranteed service for the bank loans with its cutting-edge individual risk management expertise, and assumed all the compensation risks. Consumers benefited through preferential interest rates, a stable purchasing environment, and a good selection of vehicles.
The plaza opened in May of last year. Rapid expansion soon followed. In July, the Chengdu Xinyuan Auto Credit Service Plaza started operations. In August, Xinyuan opened its Guangdong operations. Soon Xinyuan had 32 branches across China, covering most provincial capitals and municipalities. Guo Jiyuan envisioned the establishment of a similar auto plaza, each of which would cost RMB20-30 million (US$2.9-4.4 million), in 72 cities across China. The dream would cost RMB1 billion (US$146 million).
The dream didn’t last long. Before last year’s Spring Festival, dealers at the Beijing Wuhuan Xinyuan Auto Credit Service Plaza were notified that they must pull out. The plaza has been closed ever since. The Chengdu plaza closed its doors at the beginning of this year.
All branches of Xinyuan China are reportedly now all closed, with only the head office in Beijing remaining open. Guo Jiyuan, the spirit and founder of Xinyuan, has resigned.
According to Wang Zaixiang, the director of the Automotive Financial Engineering Research Institute of China Automotive Technology & Research Center (CATARC), and a friend of Guo, the ultimate goal of the Xinyuan model was to establish an auto-financing bank. Based on the auto financing company, it would have been able to attract currency and direct savings just like other banks. The auto-financing bank could have raised cash through its banking functions. As well, it would stay connected enough with the auto industry to influence price adjustments in order to maintain market vitality.
But government policies combined with existing difficulties conspired against Guo. One of those policies is the Measures for the Administration of Automobile Brand Sales. This regulation consolidates the control of automakers over the products and the channels. Having control over the products effectively means control over vehicle financing. But this obviously hinders the free operation of auto finance businesses.
The auto credit business can generate vast sums of money. This has led ten mainstream automakers, like Toyota and Shanghai GM, to start their own auto financing operations. To protect their interests, these automakers would do whatever they could to obstruct cooperation between dealers and Xinyuan.
In addition, the Administrative Rules Governing Auto Financing Companies raises the capital threshold for non-financial institution contributors from the original RMB4 billion (US$600 million) to RMB8 billion (RMB1.2 billion), and the revenue requirement from the former RMB2 billion (US$290 million) to RMB5 billion (US$733 million). Guo Jiyuan’s company simply didn’t have that kind of money.
Guo always knew that the fundamental aim of auto credit is to enlarge the scale. The larger the scale, the lower the default rate, and the less risk there will be in the market. This is why he tried to go so big so early in China. But Guo also fantasized about building high-profile car stores that would feature cafes, children’s parks and even cinema. It turned out that he overestimated the demand for car loans and the lethargic market couldn’t support Xinyuan’s massive overhead. For example, the Beijing plaza needed to sell 200 cars a day just to break even. In reality, the plaza didn’t even get 200 shoppers a day. In the first few months, losses climbed to a staggering RMB200 million (US$29 million).
It was a clear case of vision not agreeing with reality. In the end, Guo’s big dreams ran into some bad market timing and unforgiving government regulation.
