With car sales finally returning to pre-recession levels in 2014 and with car finance penetration reaching new heights, a number of companies reported excellent reports. One such company was BMW’s Alphera. Director Andy Gruber spoke to Jonathan Minter about why the industry is doing so well, and how the industry is shaping up for 2015.
How was 2014 for Alphera?
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2014 was actually another record year for us actually. Volume and cases both experienced good double-digit growth. In general we went from strength to strength as an industry.
Growth was across the board. From our mass market, three-to-four-year-old used car business, right up to our Aston Martin and Rolls-Royce captive relationships, are all doing extremely healthy levels of volume.
Why do you think motor finance and the car market in general is doing so well at the moment?
From the new car side of things, a lot of it has to do with the very attractive new car offers being pushed by manufacturers to help generate the volumes required to keep the factories busy and occupied. That is clearly one of the key drivers.
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By GlobalDataOn the used car side of things, I think there was a bit of pent-up demand in the market from the crisis. I also think dealers are actually getting better at selling cars. They are increasingly active in embracing PCP as a potential finance tool in the used car sector, which we’ve always said had been a lost opportunity for the dealers.
There is more growth to come but the question is just how much.
Did anything trigger the rise in PCP in used cars?
On the one side there is the realisation based on the new car experience that PCP is a better retention tool than your basic HP finance agreement, because obviously the customer has to get back in touch with the dealer at the end of the agreement.
On the other side, the FCA is helping because it stipulates that you have to explain all the suitable products to customers and walk them through a product selection process. And that means that PCP is mentioned more and more. Actually it should now be mentioned in every sales process. That will naturally lead to a higher pick-up rate for that product.
So you’ve found the FCA has brought about more finance because it’s forcing them to explore more finance options?
Hugely so. We’ve been very outspoken in being positive about the introduction of the new regulation and the FCA, because at the end of the day a more transparent and fairer sales process will be beneficial for the entire industry with regards to shaping perceptions of the marketplace and with regards to working with what the customer really desires as well.
Are dealers accepting the regulation?
I think it’s fair to say that the recognition of how big the change the FCA was going to bring was a slow process. A lot of dealers were initially caught off guard, especially with regards to how all consuming the application was from a really senior management level down to the shop floor because it pushes a cultural change – focusing on the customer.
That was one of the reasons why Alphera went on a series of roadshows for our dealers. We invited them and explained what the application process was about, and raised awareness that this is an engaged process. These were heavily subscribed.
I think Alphera’s dealer partners are in good shape overall, but there are segments of the market which will still not understand that this is not a one-day, sitting at your desk, filling in your application process. So some will still experience a couple of nervous nights.
One of the areas where the FCA will need to support lenders more is with regards to people whose application has not been approved because, by FCA requirement, we’re not allowed to trade with dealers or brokers who are not authorised. As soon as an application is rejected they are no longer authorised. So as soon as that happens we should stop trading with them straight away, but at the moment that information flow between the FCA and the lenders is not optimised yet. The FCA is aware of this and is working on it, though.
If a dealer gets rejected by the FCA, is there a grace period where it is allowed to reapply?
They would have to start their application completely anew, and as you would have to slot into what is happening generally, this could take them out for months.
And this is where we have some concerns for some dealers. It wouldn’t affect our partners at this stage, but the concern is the way that the new car sales process works currently – which relies so heavily on finance products. So if a dealer is not able to offer car finance products, and there is no alternative process, that could really put a dealer at fundamental risk of keeping its business overall.
You said you’re a bit worried about the communication over rejection, are there any other areas where you’re a bit unsure?
The FCA has been very positive for the industry. At the end of the day, with such a fundamental shift in regulation, there will always be question marks. But as an industry we need to do what we think is the right thing based on the regulation that’s out there.
I’m sure over the next year or two a middle ground will be found where everybody will be comfortable.
What dealers are finding quite challenging is the vast difference in approaches from the lenders and interpretations from the lenders with regards to what needs to be done under the FCA. In general there is a lot of grey around, and obviously grey means, almost by definition, there will be varying models that will be implemented. And that is what I think dealers are finding quite challenging.
This ranges from lenders which are not changing anything and saying its OK, down to people like us, who are making big changes. That is the whole issue – everybody is convinced that their model is the right thing to do. And I think dealers are finding that quite challenging.
BMW announced a new business plan for dealers towards the end of 2014. How does yours compare?
We’re actually going to go with a system that’s even simpler – it will literally just be a table. We pay one flat commission rate and then we allow our dealers a bit more flexibility around what can be offered to the customers, if required. We’re moving away from different commissions for different products; we’re planning on generally having no fees, and we don’t want to pay differently for different terms. So from that point of view it’s very straightforward, and the feedback we’ve got has been extremely positive.
Last time you spoke to Motor Finance you spoke about the potential of PCP bringing back a lot of two-to-three-year cars that could cause a bit of a future problem. Have you seen any development in this?
At the moment not yet. We’re looking at 2016 and beyond to impact the market. It’s just a logical equation. You’re creating so many new cars at the moment that in two or three years won’t be new cars, but will be coming back into the market. The question then is how will that impact market values – could it lead to loss positions for lenders at that stage?
If you can judge from past experience, there’s evidence that premium brands in situations like that perform better because people will aspire to get that kind of car and brand, but the volume sector could come under increasing pressure. I’d say another year-and-a-half or so until then.
In 2014 used car sales more than kept pace with new cars. Could this alleviate some of that pressure?
I think we’ll be seeing more and more professionalisation of the used car sales process across all manufacturers. There will be a need to extend some of the new car sales thinking into the world of used cars, and actually just make sure dealers are supported in churning the right number of used cars, while still maintaining the right level of market value. And that will mean working with subsidised used car programmes, with warranty programmes, around used cars. This is already happening, but I think there will be required more and more.
So could you see a few more companies creating finance companies similar to Alphera?
We can already see that happening through the captive finance brand. The way they’re sold, there will be more and more used car centres throughout the UK, where central remarketing departments of car companies will have central pools where they sell used cars, from central dealerships.
Are you working on anything big at the moment?
We’re working on a couple of exciting new programmes and systems around retention which we will be talking about in 2015.
Also, the way we work with our partners will change. Based on the positive feedback we received from the FCA roadshow, we’re working on a concept to establish a more continuous form of dialogue around all topics of interest. Hopefully we’ll launch these in Q2.
Aside from the FCA what are your partners telling you?
You would be surprised how all-consuming and encompassing the topic of FCA regulation is. There’s literally no space for anything else at the moment.
On an industry level, what direction do you see things going in 2015?
We expect growth to continue. However we don’t think we’ll see growth rates like in 2013 and 2014. I think it’ll be more moderate growth.
I think we’re looking at single-digit growth, but still some growth, especially compared to some European markets. So we should still be counting ourselves very lucky.
And from that point of view, specifically in our industry, the competition among the lenders will increase. The expectation from the dealers will be increasing as well towards the lenders as well, and I think the lenders will be forced to listen to what their partners need.
If things are going to get more competitive as growth slows down, where do think companies will compete?
From our discussions it’s becoming clearer and clearer – the discussions won’t be as much about rates anymore. According to FCA rules, differentiating based purely on commission levels alone won’t fly any more.
As a result it will be much more about service levels and qualitative aspects that will decide the degree of cooperation between us in the future.
Anything else?
We’re interested to see how the topic of electric vehicles evolves. That is going to be an interesting one, obviously BMW has been doing very strongly in this area recently.
From a used car point of view, how does the finance of these work?
We see it as our responsibility to support that new segment of the industry. So it was never a question that we shouldn’t be supporting it. Not just with BMW, but also with Tesla. We were the first independent to come up with an electric vehicle finance campaign. Numbers are still not huge, so now it’s about reaching the economies of scale that will allow the infrastructure to be built and then allow electric vehicles to take off. So we see it as our obligation to support our electric vehicles as much as possible.
Are there any unique aspects for electric vehicles?
No – if you’re talking about specifics of PCP, it’s exactly the same – it’s about getting the expected residual value at the right level. Naturally at this stage it will not be as strong as it will be with some traditional combustion engines, but again I think acceptable to the customers as well. So I don’t think it’s that different.
