Want to buy an excavator? Check out this zero down payment deal5 July, 2012, 15:59. Posted by Zarathustra
Signs of slowdown in the Chinese economy are becoming more obvious, and it is obviously being felt by more and more industries and companies in China that we are finding it increasingly hard to keep track of everything.
Yesterday, there was a rumour that Sany Group plans to lay off some 30% of its workforce (although the rumour was subsequently denied), highlighting the impact of slowing growth and, in particular, slowing fixed-asset investment, on sales of heavy equipment.
Facing this difficult economic environment, it is not surprising that these producers of heaving equipment are in some sort of trouble. According to Caixin, Sany is planning to raise cash from initial public offering (IPO) in Hong Kong as it is very much cash strapped, not only because of the slowing economy, but also that it has acquired a German company Putzmesiter.
|Source: U.S. Navy Photo by Lieutenant Cris NeishWikicommons|
But perhaps more interesting bit of this story is the common practice among these producers to arrange leasing deals for buyers. According to Caixin, many of these producers run leasing companies, where buyers obtain financing from these producers through their leasing arm to buy equipment.
This kind of financing arrangement, also known as vendor financing, is not surprising at all. The surprising thing about such financing deals are just how aggressive they can be. For example, Li Guuanghao from Beijing bought one excavator last year with no down-payment and no payments for the first six months. If it feels a bit sub-prime, well, it is:
"Since the second half of last year, there has been less work" for construction contractors and other heavy equipment operators, said the owner, Li Guanghao. "Then there was less and less. Today, there’s none."
Li bought his first excavator with a standard loan tied to a 25 percent down payment in July 2010. He picked up the second machine last fall through a leasing plan that required no down payment and no payments for six months.
Manufacturers and leasing companies started offering clients zero-down-payment leasing plans last year in a push for sales that some called risky. Indeed, the company that Li leased from last year might get stuck with his used machine.
"I’ll pay off the bank loan for the first one next month," he said. "But I’ve deferred payment on the second one," and unless business picks up "I’ll take it back to the leasing company."
As the economy slows, these buyers will not be able to afford to make the purchase because their businesses are not good. Thus account receivables for the equipment makers are rising faster than sales, which “"directly reflects the increasing difficulty of repayment for downstream customers” according to one analyst cited by Caixin. Some buyers would simply default. Not only is Sany facing such problem, another maker of heavy equipment, Zoomlion, is seeing default rate rising:
The executive said Zoomlion last year assumed customer loan guarantees worth 9.1 billion yuan and paid banks 190 million yuan on behalf of customers, which means the default rate was a relatively low 2.1 percent.
But defaults in the industry quadrupled in the second half last year compared to the first six months 2011, pointing to accelerating risk.
Sany’s earnings report said the company bore cumulative repurchase obligations of 21 billion yuan at the end of last year, when it covered 1.2 billion yuan in customer defaults, for a rate of 5.5 percent.
Sany is also embroiled in several lawsuits tied to defaults and its lease financing.
Perhaps the problem described here is only a problem for a few companies in one particular industry, but we will not be surprised to see more and more debts surface as the economy slows. After all, debts are everywhere in China, and often in places where you least expect, and they do not appear to be a big problem until they become one.