Amanda Hall-Davis looks at how captive
finance houses are weathering the economic storm
Amid the global economic slowdown, and
with major UK financial institutions curtailing their exposure to
consumer motor finance as a result of escalating portfolio losses,
what is the story for the lending arms of the car manufacturers?
What strategies are they employing to deal with these turbulent
economic conditions?
Go deeper with GlobalData
“Recovery remains fragile and uncertain, especially
in manufacturing and one of its cornerstones, the car industry,”
said business secretary Lord Mandelson at the recent Labour Party
conference. The latest survey results from the New Car Finance
House Survey 2009 by Sewells reported a positive upturn for the car
manufacturers’ captive finance arms, showing market penetration in
new car sales of 84 per cent, up from 80 per cent recorded over the
past decade.
Captive finance companies continue to be challenged
as the waves of the economic climate ebb and flow. In this climate,
maintaining customer brand loyalty is one of the key ways captives
can help to protect their parents’ brands.
Ford Credit
The largest car finance captive globally
is Ford Credit, which provides finance to over 10 million consumers
and 12,000 car dealerships in 40 countries. Ford Motor Company’s
Europe captive finance arm is FCE Bank, which directly operates in
15 European countries.
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By GlobalDataWithin Europe, FCE employs 2,200 staff to
serve 3,500 dealers and provides financial services for both the
Ford and Volvo brands. The largest share of FCE’s finance is within
the UK and Germany operations. FCE sells primarily to the prime
market while providing finance for both used and new cars.
FCE highlights that as a captive it continues to
reduce its operating costs by offsetting its cost of funding. Ford
Company introduced over the past year a variety of cost-cutting
strategies to counteract the company’s losses, including the sale
of Jaguar and Land Rover to Tata Motors, not selling its retail
book but transferring its wholesale book. In the US, Ford’s credit
arm cut 1,200 jobs in the first half of 2009.
With regard to securitisations, the FCE 2009
interim report states its funding “continues to be predominately
sourced through securitisation transactions and unsecured debt… the
company continues to meet a significant portion of its funding
requirements through public and private asset-backed securitisation
transactions and European Central Bank funding programmes”.
FCE states its appetite to risk is “generally low”,
and it “actively” manages the credit risk on commercial and retail
portfolios to balance the levels of risk and return. FCE UK has
stepped up with the introduction of strong, new incentives
including financial promotions on the range of the new Ka Style,
Fusion and Zetec. FCE UK promotional offers include 4.9 per cent
APR on two year Ford options with free Bluetooth on the Fusion
model until 31 December 2009.
“The scrappage scheme has had more benefit
than many expected. I didn’t think it would
have a huge impact on the vehicle finance market but it has helped
manufacturers sell cars, dealers stay solvent and helped used car
prices”
Offers on other models include 4.9 per cent APR and
customer discounts ranging from £500 up to £2,500. Ford UK has also
actively jumped on the advertising wagon by using the Spandau
Ballet reformation tour to promote sales of the Ford S-MAX Titanium
models.
Scrappage boost
With the introduction of the UK
government’s vehicle scrappage scheme and the recent announcement
of £100 million extension, what effect has this had for motor
financing captives?
Chief executive SMMT Paul Everitt says: “Lord
Mandelson’s announcement of an extension to the car scrappage
scheme… will help to stimulate demand, giving more consumers access
to it, and create a bridge to a period when economic growth is
strengthened and more sustainable.”
However, Geraldine Kilkelly, head of research and
chief economist at the Finance & Leasing Association has
reservations.
She says: “Motor finance companies still need a
long-term and sustainable market for affordable wholesale funds.
Otherwise, with or without the scrappage scheme incentive, it will
be difficult for the industry to continue to offer good motor
finance deals in response to rising demand.”
Scrappage incentives have lured wary buyers back
and the implementation has had a positive effect for vehicle
finance arms, through improved new car sales volumes. FCE announced
the introduction of the UK vehicle scrappage programmes has
increased 2009 vehicle sales and had a positive impact on UK dealer
performance.
Peter de Rousset-Hall, the former CEO of Ford Motor
Credit, and chairman of Woburn Consulting, agrees that the vehicle
scrappage scheme has had a positive impact on the motor finance
industry.
De Rousset-Hall says: “The scrappage scheme has had
more benefit than many expected. I didn’t think it would have a
huge impact on the vehicle finance market but it has helped
manufacturers sell cars, dealers stay solvent and helped used car
prices.”
The issue of liquidity is a major hurdle captives
face in the downturn, and de Rousset-Hall observes that in the
current economic cycle, “the manufacturers are being squeezed and
liquidity is much tighter – they can’t borrow the money to lend to
the degree they would like”.
It appears captives have factored this into the
strategies they have employed in this challenging period and
through different processes and products are standing strong in the
face of economic adversity.
Toyota Financial Services
Following the dramatic decline in global
vehicle sales in 2008, Toyota Motor Corporation reported its
largest and first operating loss since 1938.
At the time, president Katsuaki Watanabe said: “The
environment we are in is extremely tough – we are facing an
unprecedented emergency situation. Unfortunately, we can’t see the
bottom.”
Its captive, Toyota Finance Services UK, employs
180 staff in the UK and 8,000 worldwide. The credit arm provides
finance for Toyota and Lexus brands, sold through independent
franchised dealers – none of which are owned by the manufacturer.
In the UK, there are 183 Toyota centres and 50 Lexus centres which
offer the company’s products.
The latest published accounts for TFS UK, year
ending March 2009, showed the new business volume at over £480
million. TFS caters for prime customers but supplies finance for
both used and new cars. Although TFS UK’s arrears have increased
marginally, to date, it has not withdrawn from any dealerships as a
consequence of the current climate.
TFS UK maintains customer loyalty to their brand
through the availability of online finance for Toyota vehicles,
making quotes for finance online available for both the Toyota and
Lexus brands. It has recently added customer access to a new online
facility for questions and answers clients may have.
TFS also offers branded insurance products
including Toyota motor insurance, payment protection and guaranteed
asset protection (GAP) insurance. All TFS UK’s insurance products
are underwritten by the sister company AIOI Motor and General
Insurance Company of Europe Ltd.
This strategy of diversification shows one way in
which captives can retain customer market share in the financial
services industry. TFS UK has also introduced AccessToyota, a new
PCP finance product for customers aimed at giving added payment
flexibility.
The scrappage scheme has pushed manufacturers to
extend their vehicle product range alongside new finance options
for payment on the new models. The relationship between the
manufacturer, dealer and captive seems to becoming cohesive as
competition in the industry continues to be fierce.
TFS UK general marketing and customer relations
manager Brian Munday says: “As a captive sales finance company, our
primary aim is to help support car sales through finance
campaigns.”
Toyota UK has pushed the drive to include two new
launches planned in 2010. The new vehicles are the full hybrid
Auris and a rechargeable ‘plug-in’ Prius. A new launch is also
prepared for December 2009 for the new hybrid, Sai.
Munday adds: “The credit crunch has had a
significant impact on car sales and as our route to market is
reliant on car sales we have been affected; however, the fact
access to credit is harder to obtain elsewhere is also an
opportunity for point of sale finance.”
Of the scrappage scheme, Munday says: “It has had a
very positive impact for Toyota and TFS. Toyota in September was
one of the top-five manufactures registering scrappage vehicles
according to the SMMT.”
BMW Financial Services
According to BMW Group’s latest quarterly
figures report, there are signs car sales volumes are stabilising
in the UK, while the manufacturer’s financial services segment is
performing well. Strategies to manage during the downturn have
included implementation of a global staff reduction programme and
further additions to the model range.
The BMW X1 and BMW 5 Series were launched, to be
followed by the new BMW ActiveHybrid at the end of 2009, and the X6
model. BMW Group Financial Services (BMW GFS) employs 350 staff and
has a penetration rate of 50 per cent for new car sales, on a
portfolio size of 200,000, providing finance for all brands on new
and used cars to prime customers.
Alongside the usual finance products the captive
offers branded insurance products such as motor, home, travel, BMW
Select, GAP and payment protection insurance. Demand has remained
strong for insurance products, according to fourth-quarter figures
and, as a result, BMW GFS UK strategy was to introduce a revised
payment protection insurance offering in May.
Captives appear to be looking at the long term by
extending credit and offering financial products such as PCPs
providing customers with fixed monthly outgoings. Add-ons
available, like insurance offered by the credit arms, can generate
income for captives, and for dealers whose margins remain squeezed
due to reduced sales.
BMW GFS general manager of marketing and CRM Joe
Pattinson observes: “There has never been a better time for car
dealers to be promoting manufacturer’s finance. With access to
mainstream credit becoming harder, the availability of affordable
and competitive car finance is a key selling point for dealers and
a good way to get more customers through their doors.”
RCI Financial Services
Renault Credit International Financial
Services UK (RCIFS UK) provides finance for the Renault, Nissan and
newly-launched Infiniti brands; owned by Renault. It employs 201
staff in the UK, with 400 UK dealerships offering Renault products
to solely prime customers. RCIFS UK has a penetration rate of 24.5
per cent for Renault and 16 per cent for Nissan on new car
sales.
In the last business year, 46,151 units of new car
sales were financed and 17,143 of used car sales on a portfolio
size of £1.5bn. On RCIFS UK’s portfolio, 73 per cent is made up of
loans and leases. The UK finance arm provides finance products for
independent dealers; however, both Renault and Nissan have their
own retailers, Renault Retail Group and Westway.
The captive is keen to stress its support for
dealers has not wavered, and it has not withdrawn finance from any
of its retail partners.
As a non-bank owned motor finance company, RCIFS UK
has no access to government-supported initiatives to improve
liquidity. According to the captive, the demand for finance at
dealer point-of-sale has increased as a result of Renault- and
Nissan-supported finance offers.
A RCIFS UK spokesman says: “We are finding
customers are appreciating our proposition of the availability of
low-rate finance at the point of vehicle sale.”
Offers include 5.9 per cent APR on new cars, and 0
per cent on hire purchase. RCIFS UK also offers branded insurance
products alongside finance, including payment protection and GAP
insurance products.
Arrears levels in RCIFS UK have decreased as a
result of internal changes. However, RCIFS UK says there has been a
definite increase in the number of customers in arrears, citing the
effects of the recession and redundancy as a reason for
defaults.
The finance arm has implemented a damage limitation
strategy by reducing the proportion of customers it previously
accepted with a ‘borderline’ credit score.
Commercial challenges for
Vauxhall
UK captive arms face further challenges
within the commercial vehicle sector. According to the SMMT, new
van and truck registrations are 38.8 per cent lower in 2009
compared to 2008. Within the commercial vehicle sector, captives
are working with manufacturers and dealers to make new and used
vehicles more affordable without resorting to tactics that may
jeopardise residual values.
Vauxhall Finance UK’s new incentives on Vauxhall’s
commercial vehicle range include four years of 0 per cent APR on
selected commercial models. This deal has the additional offer of
four years of free servicing, four years of warranty and four years
of breakdown cover.
VW Financial Services
Volkswagen Finance UK, meanwhile, has
what it calls “competitive” contract and finance lease options on
new and used vehicles. VFS UK also has fixed-cost service plans and
PCP financial offers in place on the Caddy Maxi Life and Caravelle
commercial vehicle models until the end of 2009, in conjunction
with the government scrappage scheme to attract potential
customers.
Using the Volkswagen Solutions PCP product, the
offer reduces potential customer’s monthly payments when used
alongside the scrappage scheme discount. Volkswagen Finance also
offers complimentary van insurance for seven days when customers
take out annual insurance.
Other strategies being implemented in the
commercial sector include RCI Financial Services UK’s offer of 0
per cent APR on all hire purchase agreements on commercial vehicles
until the end of 2009. Ford Credit Europe UK has included
promotional offers until December 2009 on the new Fiesta and
Transit van range with fixed 7.9 per cent APR and discounts off the
retail prices.
With the decline in the commercial sector, brands
need the protection and dealers the support which captives can
provide, through developing strategies to meet the specific needs
of their customers. But manufacturers’ finance arms need to avoid
resorting to offering large discounts – and thereby destroying
residual values.
Marketing is a key strategy for captives to employ
in the current climate with responsive promotions, and pricing
tactics. Customer service and add-on products play an important
role for captives to build on the brand and maintain customer
loyalty. New models have been launched and both manufacturers and
captives have jumped on the green bandwagon with ‘green’ finance
offers (see below).
It appears that captives are taking into account
the need for diversification strategies to provide their related
dealers with additional selling points. With manufacturers
extending car ranges, availability of arranging finance online,
offering new insurance add-ons for customers – the interrelation
between captives, manufacturers and dealers is becoming even more
imperative to ride out the economic storm.
