Conference agrees
traditional model must adapt. Fred Crawley
reports.
Go deeper with GlobalData
“The days of
the wholly manufacturer-owned captive finance model may be
numbered.”
These were the words of Chris
Sullivan, chief executive of corporate banking for RBS in the UK,
spoken at a recent conference organised by systems provider Sword
Apak.
The comment was made in a
discussion on the future of manufacturer finance programmes.
Sullivan expressed his expectation that most manufacturers would
soon need to partner with banks to achieve access to capital at a
sustainable price.
He argued that the cost of
funding would only increase in the years to come, putting margins
under greater pressure. This would force manufacturers either to
think like banks in terms of the management of their treasury
functions, or enter into risk-sharing partnerships with banking
partners in order to provide finance.
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By GlobalData
Banks advisers and
funders
Speaking exclusively to
Motor Finance, Sullivan explained: “Of course, every set
of circumstances is unique and a generalisation can’t be
made.
“However, banks are
increasingly acting as both advisers and funders to manufacturers
and, even when manufacturers are providing finance themselves, it
is likely they are borrowing from a bank to fund that
lending.”
Colin Maddocks, director of
network development for Mazda Europe, agreed manufacturers had to
begin thinking about more than just “moving metal” in their
provision of finance programmes.
“In working with bank
partners across Europe, we have had to think about cost and profit
implications for them – so we have learned to think like a bank,”
Maddocks said.
Across the industry, business
leaders have responded to the issue with unanimous agreement that
captive strategy will have to change to reflect shifts in the
capital markets, but have stopped short of sounding the death knell
for the traditional captive model.
Black Horse managing director
Chris Sutton said: “Money costs are undoubtedly going to rise in
the short term to counteract inflation, as economies continue to
recover and money supply stimuli reduces.
“Manufacturers have been
particularly active in supporting sales of new vehicles by
providing subsidised finance, but as interest rates rise, this
becomes increasingly expensive, especially around provision of
zero/low rate APRs.”
Sutton contended, however,
that manufacturers need not necessarily be at a disadvantage to
banks in terms of access to capital. Traditionally, Sutton argued,
banks have had the ability to raise funds to lend out at lower
rates than major corporates, but this had changed as the risk
premiums attached to financial institutions had increased in recent
years.
“Some corporates can now
raise funds in their own right more cheaply than via their bank –
depending on the strength of the balance sheet,” Sutton
said.
“Since the credit crunch, the
importance of liquidity and availability of capital is much more
apparent for both banks and manufacturers. With any joint
arrangement the profit element is usually required to be shared,
which can place pressure on the margins needed.
“Personally, I believe we
will still see both models in operation in the future – some
manufacturers will want, or need to, rely on banks to provide
funding and some will be able to raise their own funding by other
means.”
Meanwhile, consultant and
former head of Mazda Bank Ian Dewsnap agreed there would be ways
for the current captive model to survive.
“I would not for one minute
argue with Darwin. Evolution is constantly going on, and the only
constant is change – or whatever expression you care to use,”
Dewsnap said.
“However, I would not buy the
argument that captives are dead for a while yet. To answer the
question of how they will change, however, one needs to look beyond
the UK.”
Struggle for ‘true’
captives
A dry securitisation market,
poor access to funding and consequent higher operational costs,
Dewsnap said, had made some smaller markets no longer viable for
single brand “true” captives.
He explained: “Creative
solutions have emerged, with some manufacturers taking back
ownership of wholesale and moving their point of revenue from
wholesale to retail.
“Certainly the landscape has
changed, and the days of the captives in every market their parent
brand operates in are gone.”
The survival of wholly-owned
captives, Dewsnap said, will depend on both the motives and the
financial positions of their parents. The German captives, he
argued, had particularly strong treasury operations, and might
prosper “for a long while yet”.
At the same time as these
comments were being made, one German-owned captive – BMW Financial
Services – made a muscular demonstration of its confidence by
completing the acquisition of ING Car Lease by fleet subsidiary
Alphabet.
It was enough for Roddy
Graham, commercial director of fleet provider Leasedrive, to
re-evaluate his view of the viability of the captive
model.
“Until last week, I would
have agreed with the view that partnership with banks will become
the only realistic way for manufacturers to offer finance
programmes,” Graham said.
“However, the news BMW has
acquired ING Car Lease for a not insignificant consideration, and
the fact it will need to feed the business ongoing with a huge
level of asset finance, suggests this captive is alive and
well.”
If, then, the captive model
still has life in it, what will the next phase of its
evolution?
Dewsnap thinks the situation
may change dramatically once Chinese brands start to develop
momentum in Europe.
“As and when the Chinese
brands have a market share foothold, it will be interesting to see
what their decision might be for the use of what seems to be
plentiful capital access,” he said.
“Will they partner with
existing players, bring Chinese banks with them – or set up their
version of the traditional captive model in larger
markets?”
While few would disagree manufacturers who have chosen to
ally themselves with banks will have an advantage in preserving
margins in a pricier funding climate, it remains to be seen whether
truly in-house funders will fall foul of their traditional methods,
or find new ways to compete.
