These challenging times of
dropping sales and liquidity issues also present opportunities for
the captive arms of vehicle manufacturers as penetration increases
and trends emerge, reports Antonio Fabrizio.
It is a challenging time for captive
arms of vehicle manufacturers, as sales drop and liquidity issues
become increasingly relevant.
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But there are also opportunities as
penetration increases and new trends emerge. Indeed, 2009 could be
‘the year of the captives’, but will it be so in a positive rather
than negative sense?
Car and commercial vehicle sales have
plummeted in the first months of 2009. In the first quarter,
commercial vehicle registrations decreased by 44.3 percent – with
vans declining by 45.5 percent and trucks by 36.6 percent – while
car registrations were almost 30 percent down.
Fewer opportunities?
According to Steve Gowler, MD of RCI Financial
Services – the UK captive finance company for Renault and Nissan –
fewer sales necessarily mean fewer opportunities for captives to
finance vehicles; they will therefore be looking hard at their cost
bases “in order to adapt them to lower volumes of business and
declining portfolios”.
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By GlobalDataHe is, however, convinced that the “lack of
availability of competitively priced funding” is even bigger a
challenge for captives at present because, as a “structural
problem” in the funding markets, it is more difficult to
address.
“As such, captives have been restraining their
lending levels while seeking support from national governments in
order to secure liquidity and access to more competitive funding,”
Gowler adds.
“Captives are doing more business now than
they have ever done, because there is less competition”
Elliot Lennick, CEO of MAN Financial Services
in the UK, concurs that liquidity for captives is a pressing
issue.
Lennick says “many captives are having
liquidity problems at present”, although that is not the case of
MAN Financial Services, which is supported by MAN head office, and
is free-standing in terms of funding into the market.
A recent piece of research by Credit Suisse’s
automotive team has suggested that, in order to overcome the higher
costs of borrowing, vehicle manufacturers should “reinvent” their
financing business model by teaming up with banks.
According to Credit Suisse analyst Arndt
Ellinghorst, one of the authors of the report, as funding costs
have rocketed, manufacturers should unbundle their captive
operations to banks, forming joint ventures with them.
Based on Credit Suisse estimates, if vehicle
manufacturers wanted to achieve a 15 percent return on equity, they
would need to charge their customers a rate of 10.1 percent, versus
7.3 percent if banks were involved.
Eliminating this 200-300bps spread would
structurally lift margins by 15-21 percent, Credit Suisse says.
Joint ventures beneficial
Therefore forming a joint venture with banks
would be beneficial for manufacturers, as they would keep access to
financial services products, while securing lower refinancing
costs.
Whether or not vehicle manufacturers will opt
for a joint venture, what is certain is that captives will continue
to be of key strategic value when selling vehicles.
Lennick is convinced 2009 could be the “year
of the captives”.
He explains: “Captives are doing more business
now than they have ever done, because there is less competition. As
banks aren’t as active as they once were, there are fewer players
out there to provide finance for the transport industry.”
In the first quarter of 2009, MAN Financial
Services funded 90 percent of all MAN truck sales and Lennick
predicts most captives will have a greater penetration rate than
ever this year.
He says: “Even if truck sales are down in
volumes, penetration is going to be a lot higher, so obviously the
whole company will benefit, as we will generate cash and,
hopefully, profitability for the business.”
Captives better placed
Overall, according to Lennick, captives are
better placed than banks to work with customers and to handle their
issues, because they “understand them better”.
He observes: “We have a closer relationship
with truck operators.
“We know their business, and are able to come
to some sort of arrangement with customers when they run into
difficulties.”
But this is not just true for trucks. For cars
and vans, Gowler believes the link with the manufacturer remains
the greatest strength of a captive – one which becomes even more
significant in a downturn.
“The competitive financing offers available
from captives attract good quality customers with whom the captive
can build a strong relationship through CRM programmes,” he
says.
Russell Hamblin-Boone, a spokesman for the
Finance & Leasing Association, agrees.
“Captives are part of a global corporation,
which means that they can offer more attractive deals on new
stock,” Hamblin-Boone says.
“Obviously, they benefit from strong branding
and they have a franchised dealer network serving only that captive
finance provider, so there are advantages in size.”
“Captives are part of a global
corporation, which means that
they can offer more attractive
deals on new stock”
Despite this advantage over banks, many in the
industry have asked for direct or indirect support from the
government, although not everyone thinks the issue has been
addressed properly so far.
Lennick, for instance, does not think the
government should do anything to support captives directly, but
should instead channel more help towards the SME sector.
In his opinion, the fuel price increase
announced in the 2009 Budget will end up damaging transport
operators, as it “increases the costs of delivery the products into
the shops, and hurts our customers’ margins”.
John Lewis, the head of the British Vehicle
Rental and Leasing Association (BVRLA), agrees that fuel increases
will hit businesses and, therefore, captives as well as non-captive
finance companies.
“Coming just weeks after a previous 1.84p per
litre rise in fuel duty, this announcement will increase the
financial burden on millions of businesses for whom road transport
is an essential tool, not a discretionary luxury,” Lewis warns.
Even the scrappage scheme, a specific measure
aimed at supporting the sale of vans and cars, has provoked mixed
reaction.
It has been hailed as “decisive” by the
Society of Motor Manufacturers and Traders because it could
kick-start demand in the new car and van vehicle market.
But it has been criticised by the BVRLA,
because it “ignores the close link between new and used
vehicles”.
Moreover, it will only apply to vehicles that
are more than 10 years old. Many experts highlight that it will not
benefit most businesses, whose car and van fleets are changed at a
much earlier stage.
However, Lennick says the captive industry is
strong enough to survive in these turbulent times.
One year from now, he predicts, all players –
at least those in the truck industry, which is his area of
expertise – will still be there. Whether his view will be borne out
by events remains to be seen.
