Chinese Cars in Saudi: The Test of the Second Buyer

✍️Islam Zween

A company may succeed in persuading you to buy its car new, then find it harder to persuade someone else to buy it from you second-hand. Price, specifications and warranty help close the first sale. The second needs something that takes years to build: confidence in what the car will still be worth once it has been used.

It brought to mind a remark by Fawaz Danish, chief executive of Budget Saudi Arabia, to Argaam last May, linking the rise in supply — particularly of Chinese cars — to pressure on used prices and lower expected residual values, and the higher depreciation that follows. Competition to sell new cars was showing up in the accounts of a company that had bought them earlier.

While preparing this week's Argaam Intelligence study on used-car finance in Saudi Arabia, I found that this relationship deserves to be looked at from another angle: is it enough for a car to find a second buyer, or does it also need a financier who trusts its value and is willing to fund the purchase?

We usually think about competition between cars in terms of purchase price, equipment and fuel consumption. But a car passes through more than one owner, and its value as it moves between them enters the cost of ownership from the outset. We may pay more for a model we know how to repair, what that repair costs, and how easily it can be sold on later.

That accumulated knowledge is part of a brand's value. It is what makes the comparison between certain well-established Japanese and Korean models and newer arrivals a matter of more than specifications. A market needs experience of use and maintenance, and actual completed sales, before it can price with any confidence.

Here the work of the Nobel laureate George Akerlof comes in. More than fifty years ago he published a paper with the striking title "The Market for Lemons," in which he used the used-car market to explain the problem of asymmetric information.

The seller may know more about a car's condition than the buyer, and when good and bad are hard to tell apart, the buyer becomes cautious on price. A good car may take a discount because its quality has not become information that can be trusted.

A model new to the market, meanwhile, may face a shortage of experience on both sides. This does not prove its quality is poor, but it does make estimating its cost and future value harder.

Chinese electric and hybrid cars are probably already in your mind, with the differences between the two. The purchase price may look attractive, but how will the car be valued in a few years? What condition will the battery be in? Does the warranty transfer to the next owner? Will the dealer keep providing service and parts? And what happens to its value if a newer generation is launched at a lower price?

The International Energy Agency has recorded the pressure that cheaper new electric models place on used values in China — an example of a car losing value because competition has changed, even as it continues to run just as efficiently.

The Intelligence study shows why this matters to the financier. In one of its hypothetical tests, a rapid fall in the car's value coincides with a large final payment, and the outstanding debt comes to exceed the value of the collateral. The test is not specific to Chinese cars, but it explains why resale value affects financing terms and the risks attached to them.

So in my view competition will extend to building a used market as well: reliable inspection, a transferable warranty, continuing service, and data that helps establish price. These elements may come to matter as much in selling new cars as in selling used ones.

The question to watch, then: when these cars reach their second owner, will they find the trust and the financing that help close the deal? The answer will tell us more about the strength of a brand than its initial sales figures do.
 

Click here to read the full study

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