Baidu Invests in Auto Lending Site as Potential Platform for Autonomous Cars

Baidu Inc. — together with Tencent Holdings and — announced yesterday an investment of $1 billion in Bitauto Holdings

Baidu Inc. — together with Tencent Holdings and — announced yesterday an investment of $1 billion in Bitauto Holdings, an e-commerce site for automobile users, manufacturers, and dealers, providing a potential platform for the Chinese search engine’s autonomous vehicle technology.

The investment will go towards Bitauto’s financing subsidiary Yixin Capital. The funding is aimed at growing Bitauto’s business in online auto finance and related transactions, a spokesman said in a published report.

This investment is the latest in a series of funding Bitauto has raised as the company seeks to be China’s largest online car financing platform. And Baidu’s investment is strategic as it positions itself to be a provider of autonomous vehicle operating systems, according to a company statement. Baidu recently announced it will make its operating system for self-driving cars free in hopes of speeding up development of autonomous driving and draw carmakers to its services. The company previously formed a self-driving car team in Silicon Valley back in April 2016, focused on research, development, and testing.

It’s a “tremendous” investment, Grayson Brulte, president of Brulte & Co, told Mobility Buzz. “It is a clear indication that Baidu is working on some kind of autonomous vehicle service.”

Traditionally, Chinese avoid taking out loans to buy cars, instead opting to use cash, according to a 2015 study conducted by Deloitte Consulting. In comparison, more than 80% of cars are financed in the United States. However, Deloitte expects 50% of cars to be financed in China by 2020 as automakers aggressively push financing to increase sales. Chinese consumers finance about 27% of cars as of 2015, according to the study.

“China’s car market remains primarily a cash market, but it is starting to move to credit,” John Lawler, head of Ford Motors Co. operations in China, said in a published report. “It’s a demographic and generational phenomenon. Those people who finance cars are primarily younger buyers.”

Establishing credit is also a quick way to build growth, especially for an economy, Brulte said. In the case of China, where the government exhibits a strong sense of control over the growth of the economy, influencing citizens to move beyond cash stimulates the economy as people buy more items and can buy higher priced items since they will pay it off in installments.

For Bitauto, the economy’s move toward credit is significant since the company also offers financing and is looking to grow that part of its business. Baidu is likely to market its autonomous technology instead of developing its own cars, Brulte said, and use Bitauto as a means of assuming the liabilities of owning and maintaining autonomous vehicles. And, since self-driving cars are likely to be very expensive — too expensive for ownership — it is likely Bitauto and Baidu will set up a subscription model for ownership and that Bitauto may provide financing for those subscriptions, he added.

“They may provide financing for a subscription for an autonomous vehicle, but it depends on how much the government will let this happen,” he said. The communist Chinese government is often noted for stepping in to stop or prevent a free market — more often blocking foreign companies from operating in China as a means of bolstering Chinese businesses and the government itself. But, back in June 2013, China’s central bank cut the amount of money auto financing firms needed to set aside as reserves, in a bid to stimulate the economy.

The push by automakers to direct consumers to finance is part of their strategy to make up for sliding margins on new-car sales in China, where more companies are cutting prices to encourage buyers. Buying a vehicle in China has historically been more expensive than American or European markets, often leading to many Chinese people purchasing luxury cars such as BMW, Porsche, and Mercedes-Benz, from those markets and shipping them to China in a black market that has faced a crackdown from U.S. prosecutors.

Other key sources of revenue for OEMs in China include maintenance and repairs, vehicle leasing, and sales of accessories and parts.

Overall, global carmakers also have been funding their financial units’ expansion by selling off their loans in the form of asset-backed securities to firm up their operations in China, freeing up money they can then use to lend to Chinese consumers, according to a report.

As featured in Mobility on April 21, 2017