By Wang Zhiyong
China.org.cn reporter

China's rapidly expanding economy and the relatively low level of vehicle ownership per capita should logically mean rich pickings for car rental firms, but there are many obstacles in the way of the industry's growth.

Starting from zero in 1989, China's car rental market has reached the globally significant value of 10 billion yuan (US$1.46 billion) annually.

There are over 3,000 players with a combined hire fleet of nearly 100,000 cars.

Some experts forecast revenue might reach 180 billion yuan by 2015 generated by a fleet of 300,000 to 400,000 cars.

The frothy market means greater choice for customers, but there are many headaches for the rental companies.

Eighty percent are small players with less than 50 cars and 5 or less employees. The largest domestic firm, Beijing-based Shouqi Auto Lease Corporation, has only 2,800 cars nationwide.

International rental giant Avis set up its first outlet in China in 2002 and now has more than 2000 cars in its fleet.

But China is not a happy land for car rental multinationals.

Global leader Hertz has a fleet of 525,000 cars in dozens of countries but quit the Chinese market in 2005 as a result of licensing problems.

Avis is the biggest overseas player so far, but with a much smaller fleet than the 5000 it had planned. Avis intended to open an outlet in Hangzhou some years ago as a route into the Yangtze delta, but fell foul of local regulations that treated rental cars as taxis with tight restrictions on licensing.

Low taxi fees

Another hurdle for rental firms is China's low-cost taxi service. Like most developing countries, taxi fares in China are low, just 10 yuan (US$1.4) for the first 3 kilometers in Beijing, while renting a car costs at least 300 yuan a day.

Local traffic rules

The number of rental cars allowed is usually strictly controlled by local governments. In Shanghai only 10,000 sets of plates have been issued to rental companies in total and only 500 were issued in 2008.

In a bid to cut traffic, Shanghai auctions new car license plates and many roads in the city center only admit cars with local plates. The restrictions apply to rental cars hired outside Shanghai.

In Beijing, traffic control rules based on license plate numbers mean every car in a rental firm's fleet must stay off the road one day per week.

Difficult access to credit information

It is also difficult for car rental companies to check customer credit as information sharing is in its infancy. Consequently, rental companies have difficulty with risk control and there have been many cases of firms being swindled.

Competition from private cars

Rental companies also face competition from unlicensed taxis. There may be as many as 60,000 illegal taxis in Beijing, roughly the same as the number of licensed cabs.

Private cars are also preempting a slice of the potential rental market. Car owners are able to arrange private rentals via the Internet using sites like Taobao, a kind of Chinese Ebay. Prices are much lower than those charged by mainstream companies with huge overheads.

Competition from domestic players

Set up in Shenzhen in late 2006 by He Wejun, Top One Car Rental Company was the first domestic player to set up a national branch network and simplify the rental process, requiring only the driver's ID card, driving license and a credit card.

The company secured a US$5 million investment from SIG Asia Investment and Hong Kong Maida Fund in 2006, and US$50 million more from the same companies at the end of 2007.

Top One says it has cut the time needed to complete rental formalities from two hours to five minutes. The company has opened 48 branches in airports and business centers across China.

Positive notes

From the end of 2007 onwards many barriers in the way of the rental business have started to disappear. For example, it is no longer necessary to obtain taxi licenses for rental cars.

Another important factor is the growing number of credit cards issued in China. As of June 2008, Chinese banks had issued over 130 million credit cards. The banks have also extended the pre-authorization deposit guarantee to non hotel-operators.

Car prices have stabilized after a period in which they plummeted from initially highs, which means the value of rental fleets is subject to normal depreciation rates.

At the end of 2008, nearly 170 million Chinese citizens held driving licenses and with only 18 million private cars on the road there should be plenty of scope for rental companies to grow their business.

(China.org.cn February 6, 2009)