By Edwin Chan
SHANGHAI, July 23 (Reuters) - Hong Jiankang can't understand why car rental powerhouses Hertz and Avis want to muscle into China -- the profits of his own rental operation have been sliding since the heyday of the mid-1990s.
The general manager of Shanghai Zhenlang Transportation Equipment Leasing Co Ltd lent a car a few years ago to a customer who breezed into his cramped, spartan outlet on the outskirts of Shanghai armed with all the proper documents.
Hong didn't see him again until four years later, when the errant customer was arrested in the northern city of Xi'an over an unrelated incident.
"By the time the car was returned to us, it was so banged up it was practically useless," Hong told Reuters wearily in his cluttered office, from which he commands a fleet of several hundred rental cars. "This happens all the time."
China's auto rental business is a nascent service, with hundreds of companies waging a losing battle against bewildering regulations and shrinking margins.
But Hertz and Avis, the world's largest car rental firms, think rentals could be big business in China, particularly as World Trade Organisation membership sparks an influx of corporate clients and businessmen with deep pockets.
It's with the crucial personal rental market, however, that the trouble starts.
Con artists, ham-fisted drivers and dismal road conditions mean rental cars often give out in about a year, versus two to three years overseas, Hong estimates.
Lofty capital costs are exacerbated by price wars. China has 3,000 rental agencies operating about 40,000 cars, state media said. By comparison, Hertz has 7,000 global branches controlling more than 400,000 cars.
"They're coming in with grand ambitions, but they're in for a dose of reality," said Hong, whose firm has about 300 cars.
Hong guesses more than half Shanghai's 22 registered rental firms are on the brink of collapse. The smallest has only eight cars.
GENTLEMEN, START YOUR ENGINES
Undeterred, Hertz and Avis are gunning their engines to race into what Avis thinks will be the world's third largest market by 2020, powered by galloping growth and a ballooning middle class.
Initially relying on international corporate customers, they plan to build up a nationwide network through their partners.
Hertz, owned by U.S. auto giant Ford Motor, awarded a licence to China National Automotive Anhua in January and now operates eight outlets in Beijing, Shanghai and Guangzhou.
"The business is growing well, we're seeing in-town business in China now," said Chew Kheng Fui, licensing manager for Hertz Asia-Pacific. "What we're trying to do over time is start with the major cities, then we'll expand through a sizeable network."
If approved, Avis Europe will soon set up a 50-50, $22 million joint venture with Shanghai Angel, a unit of China's third largest auto group, the Shanghai Automotive Industry Corp.
Hertz and Avis say they have no illusions about the effort it will take for the market to take off. Rental cars at 200 to 400 yuan ($24-$48) a day are now expensive compared to train tickets.
Complicated application procedures and hefty deposits ranging from personal valuables to property deeds also deter customers.
Avis says it will take 5-10 years for mainland China to become a significant market.
"It's a very new market," said Dale Morley, Avis Europe's Asia general manager. "We're not in there expecting necessarily a short-term win," he told Reuters from Avis headquarters in Bracknell, England.
To grab market share from established operators like Beijing Tonglida, which commands a fleet of several hundred, Hertz and Avis are counting on better service, such as toll-free hotlines and links to global networks.
BUMPY RIDE
Analysts say both are in for a bumpy ride in a country that doesn't even recognise foreign driving licences.
"Rentals can only pick up after auto consumption matures," said Sun Hung Kai analyst Chen Rong.
"Private consumption is now small, but will be key. If every household buys a car, the market will skyrocket," she said, estimating that about 4.5 million Chinese now own cars.
Car rental agencies won't see significant profits for up to five years and will have to sidestep protectionist local regulations and a non-existent credit risk rating system.
"It's a systemic problem. The market will grow piecemeal but policies must improve. Only then will there be a viable market," said China Southern Securities analyst Xu Xiang.
Hong estimates annual government fees can double or triple capital costs.
"There are so many fees even I can't begin to tell you about them. Every month the government devises new ones," he said.
It remains to be seen how Hertz and Avis fare, but analysts say they would have just as hard a time as local operators.
"They better be prepared for deep pain," Hong said.