For the Future of Car Rental, See China

Google the words “global economy” and China will be interwoven through the great majority of the results. And for good reason — pick an industry, identify its year-over-year growth in China over the last 15 years, and analyze the ripple effect of that industry’s growth across the globe.

Chinese travel (and, by extension, car rental) fits the pattern. At an astounding 15% to 30% annual growth rate, infrastructure is unfolding into the Chinese countryside like America’s Route 66 in the ’50s. Externally, China now leads the world in global travel spending and is essential revenue for many countries, particularly in the Asia-Pacific region, where Chinese travelers are the first or second source of inbound tourism.

Car rental has only scratched the surface of its potential when it comes to China — with limiting factors. Regarding outbound tourism, Chinese travelers still have a preference for package bus tours, which takes car rental out of the equation. Yet this mode seems to be evolving quicker than Japanese travelers’ migration away from package tours over the last 30 years.

Looking at the inbound market, foreign tourists cannot drive rental cars in China without a Chinese driver’s license. This guarantees the inbound market for car rental will remain mostly “chauffeur drive” until the rule changes. As drivers’ wages rise, self-drive may start to make more economic sense, too.

However, the domestic rental market is still a large, green field waiting for the harvest.

First, China’s middle class now tops the entire population of the U.S., and wealth per adult has quadrupled since 2000, according to the World Bank.

“Instead of owning a car, more and more (Chinese) people are becoming more rational and practical toward renting a car for vacations, families going out, (insurance) replacement, and business trips,” says Julia Yu, a Chinese rental industry insider.  

Second, the Chinese government’s anti-corruption crackdown has led state governments and large businesses to rent cars instead of buying them for employees for the sake of cost savings and transparency, according to Yu. Moreover, as auto insurance matures, the replacement rental market, in its infancy today, will grow exponentially.

Third, China’s environmental crisis, manifested by its traffic congestion and air pollution, has led some 14 cities to implement a vehicle quota system, another factor instigating car rentals for those who can’t own one. The number of licensed drivers in China will soon surpass the entire U.S. population, yet in 2014 the number of passenger cars per 1,000 people was only 111, compared to 825 in the U.S., according to the World Bank.

While these factors have played favorably for car rental, they’ve also accelerated China’s assimilation of global trends transforming transportation and mobility. This is a society that has only begun to embrace an American-like car culture — and yet this culture may flame out quicker than cassette tapes or the Pony Express. Increased urbanization, environmental concerns, and the staggering acceleration of car sales over the last 15 years have many Chinese consumers realizing that the cost and hassle of owning a car is starting to outweigh its appeal as a status symbol.

China’s outsized problems, combined with its ability to harness new technologies without the legacy infrastructure of more developed nations, make it an incubator for new technologies and systems. The two largest Chinese car rental companies — eHi Car Services and China Auto Rental (two companies that didn’t exist 11 years ago) — are combining app-based, decentralized, on-demand rentals and Uber-like services with its fleet.

But China’s double-digit economic growth is not sustainable, a consequence of maturing industries, a normal pattern. China’s badge as the world’s growth engine is being turned over to the only vowel in the “BRIC” markets — India.

India has the world’s second-largest population behind China, but its GDP is five times smaller. If China is a green field, India is the Great Plains.

A country of close to 1.3 billion sold fewer than 3 million passenger vehicles in 2015. India’s entire car rental fleet size is fewer than 35,000 vehicles — its Western-style “self-drive” car rental market only began in 2010. With this clean slate, and with today’s technology, startup Indian car rental companies are positioning themselves as mobility service providers, too.

When looking to a world without rental counters, we might look to China and India first.

Originally posted on Business Fleet