Motor Finance Europe conference concentrated on
strategies
to get through the downturn, says Jo
Tacon.
moment – but do not despair, was the message which came over loud
and clear at the Motor Finance Europe 2009 conference.
Yes, the current downturn is severe; but companies and customers
still require cars. That is not to say that urgent action is not
required from much of the industry if it is to survive, however,
and the day’s presentations offered many useful tips and talking
points for fleets and motor finance houses.
Setting the scene
Professor Peter Cooke, KPMG professor of
automotive management at the University of Buckingham, kicked off
proceedings with a thought-provoking look at the state of play for
the European motor industry. New car registrations fell steadily
from the middle of last year (see chart 1); the risk now,
Cooke said, is that “we are moving into a situation of economic
depression, with a period of deflation, where companies cut prices
but the market does not come back, which will almost inevitably be
followed by inflation.”
Go deeper with GlobalData
He made the first mention of a theme which would
return throughout the day – the recent collapse in residual values
(RVs) and the huge pain this has caused finance companies of all
stripes. Predicting the future movement of RVs is a fraught
business, but will the current collapse in new car sales aid
lessors?
“Three years down the line we may have a genuine
shortage of used cars – which will almost certainly push up RVs.
Are any leasing companies looking to drop their rates in
anticipation of higher RVs several years down the line?” Cooke
asked.
The topical issue of scrappage policies was also
raised: “We have to rebuild the market in terms of liquidity and
demand. Just offering the voucher for the scrappage of an older
vehicle – I don’t think it’s enough. It has to be linked to
provision of vehicle finance. People have to be able to borrow to
buy new, nearly new or used vehicles. We have to look at the total
picture, even if the government focuses on new vehicles. Until
people can sell their used vehicles, they won’t buy new ones.”
Cooke added: “If the government just stimulates new
car sales, questions will be asked about why they are supporting
the sale of cars built in Slovakia or Germany.”
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By GlobalDataUltimately, consumer confidence must come back
before vehicle sales can recover: “OK, there might be 3 million
people unemployed in the UK – but this means there are still 20
million in jobs,” Cooke pointed out.
But rebuilding that confidence could well be an
uphill struggle, given how sharply it has plunged across Europe
(see chart 2).
The independents’ view
Andrew Brameld, national sales director
at Barclays Partner Finance, and Chris Sutton, managing director of
Black Horse, gave complementary speeches on the role of the
independent finance house in helping dealers, and providing
exemplary service to end-user customers.
Brameld echoed Cooke’s point about the “fear
factor”, commenting that “property prices have historically been a
comfort blanket giving customers the security to take on more debt
– a comfort blanket which has been pulled away, with property
prices in some places down 30 percent.”
But while utility bills, petrol prices and grocery
costs were rising at the outset of this situation, leading to
uncertainty and confusion, “for the vast majority of us our
personal circumstances have probably not changed, and our
disposable income may even have risen” – which could create an
opportunity for point-of-sale (PoS) finance.
The traditional landscape in PoS is rapidly
changing, he believes: “We are also seeing a blurring of the
captive and independent sectors. As captives come under intense
capital pressure, and limit their lending, this leads to an
opportunity for independent players to step into parts of the
business which were previously off-limits.”
Certain sectors present huge difficulties for
dealers and financiers alike. Sub-prime and non-prime finance
providers “were hit earliest and hardest” by the credit crunch, and
provision of PoS finance to non-prime customers has reduced greatly
as an inevitable consequence, Brameld said.
Liquidity, too, is a problem, he says: “However a
finance company is funded, whether through securitisation or if it
is part of a bank, they have to compete for capital.”
The traditional thin returns from motor finance
business were a worry when credit was abundant; now that funding
sources have greatly reduced, they are a pressing concern. But a
rebalancing of the dealer-finance company-customer relationship
could improve the picture.
“The finance market is definitely seeing a review
of loan-to-value appetite. Minimum deposits are making a move back
to ratios last seen in the late 1980s,” Brameld observed, adding
that “risk analysts probably have the safest jobs in any financial
institution at the moment.”
Effective communication of “often difficult
messages”, along with strong leadership, will help see motor
financiers through the storm.
“There are customers out there, but you have to go
and get them. You have to be in tune with how they want to buy.
You’ve got to be active online. Many dealers are using finance more
proactively than they ever have before. Dealers are linking on to
the fact that they can’t take whopping commissions out of every
transaction, but they need to use finance more to sell the product
that they want to sell,” Brameld said.
“You’ve got to follow up everything – you are no
longer order-takers. We are seeing a lot more prime customers in
the showroom who have traditionally been taken away by the direct
lenders. We need to make sure that when we come out of this, these
prime customers are not attracted away by the bright lights of the
direct lenders once more. So we have to be quick and efficient, and
provide excellent service.”
Sutton, a self-confessed motor finance “virgin”
having only joined Black Horse in June of last year, agreed that a
rebalancing of the relationship between dealers and funders is long
overdue.
Currently, he said, there is “an unprecedented
focus on the capital and the returns, something that is certainly
true within HBOS and Black Horse. The risk-reward ratio has been
forgotten about in the past. All the principles of lending went out
of the window – you could get credit from anyone for anything over
any term you wanted. We need to earn a proper return for the
capital invested – and the benchmark rate itself is turning into a
little bit of an irrelevance.”
Sutton calls this the “interest rate conundrum”:
“benchmark rates are on their way down, but consumer rates have
gone up, as there is a redressing of the balance in people’s
books.”
Coming from a banking background, Sutton described
his surprise at the difference in performance between dealers
selling finance and insurance products, with some managing 70
percent penetration rates and others only 10 percent.
“Even setting aside such differences as franchise
and location, there should not be such a spread. If you’re good at
selling cars you should be good at selling finance. It is so
essential for some dealers to keep going. Why is the range of
performance so wide? My feeling is that some basic processes are
not carried out,” he noted.
What is needed, in his view, is nothing less than a
rethinking of the relationship between dealers and funders, moving
it from a “commodity-based, transactional” one to a “genuine
partnership”.
“We need to get away from the obsession with volume
and market share, with much more focus on return and the bottom
line – otherwise the capital needed to pump into the system will go
elsewhere,” he warned.
If this is not done, the consequences could be
grave, Sutton added: “When approached to head up Black Horse, my
boss told me that PoS finance is in terminal decline. To a degree
that has started to turn around and this will continue in the short
term – but for how long will this continue?”
Cause for concern
Tarun Mistry, head of leasing and asset
finance sector advisory services at Grant Thornton, gave an
accomplished overview of the outlook for retail and fleet funders,
flagging up many current causes for concern – not least the level
of motor dealer failures (see chart 3).
He put forward the intriguing view that it is
smaller groups that will survive and thrive, against the generally
accepted view that consolidation among dealers is inevitable: “Our
view is that over the next couple of years there will be a
structural change away from large national dealers towards the
proven regional model where you have smaller groups covering a
certain area.”
RV predictions remain uncertain, Mistry observed:
“Retail finance reduced by 4 percent in 2008 compared with 2007, or
by £500 million in all, although used car finance has been less
hit. Business car finance saw a 7 percent drop, about £400 million
in volume terms. Many motor finance players are having difficulties
and if even one were to have to defleet, that would have an
immediate severe impact on RVs, so while the market for used cars
is stabilising, I wouldn’t go so far as to say there are green
shoots.”
The impact of recent mergers is yet to be seen in
full, he suggested: “Lloyds and HBOS both had a significant
exposure to all aspects of the UK motor market – in this case, one
plus one equals less than two.”
Any reduction of liquidity is bad news, he said,
because “generally, banks want to reduce lending; want to move out
of non-prime; and will consider new clients only if they are
investment grade. Short-term lends are more attractive than
long-term, and they are increasing margins where they can.”
While some mezzanine or junior debt providers have
shown an interest in this market, potentially easing the liquidity
logjam, he believes for motor financiers this will have a direct
impact on the cost of funds.
“As far as liquidity is concerned, there are
certain banks willing to take the long-term view, and who are
willing to restructure existing debt to support the business
through the medium and long term,” he said. “Stay close to your
funders. Some Islamic banks are looking at this market – floor
stock funding is an ideal structure for that as it is fee-based and
leasing is a product that is well-known within the Islamic banking
market.”
It seems motor financiers and fleets are beset by
problems on all sides.
“We did a quick survey of our clients’ experience
of voluntary terminations [VTs], and they are experiencing between
£2,000-£6,000 losses per vehicle per VT,” Mistry said.
The threat to payment protection insurance will
cause yet more problems, although perhaps the industry can come up
with a different model for PPI.
“Some players are looking at income protection
policies – not linked to a specific loan agreement, but more
associated with the customer’s ability to generate income, so if
they are made redundant it kicks in,” Mistry explained. “Others are
looking at waivers, where the cost of cover is included in the APR
rate – but this is only really applicable to the non/subprime
market where price sensitivity is at a minimum.”
As for strategies to get through the recession,
Mistry believes “management information is going to be critical,
with access to high-quality information vital – so investment in
systems is a good idea.
“Look at options available to risk share and profit
share, as we have seen with commission structures in the non-prime
arena. Can you grow market share – maybe through acquiring some of
your competitors?”
Collections innovation is
vital
For Nick Cherry, director and general
manager of Red2Black Collections, innovation in collections
procedures is not just a “nice-to-have” – it’s absolutely
vital.
“Training and personal skills in collections is
fundamental, but will only take you so far. Strategic innovation is
called for – it’s time to find different ways of doing what you’ve
always done,” he said.
There is a diminishing response to typical contact,
Cherry said, as “the telephone and letter approach gets less
response than it used to. Traditional enforcement methods such as
charging orders and returns are being impacted heavily by the
reduced equity in repossessed vehicles, while attachment of
earnings will be impacted by the reduced employment situation.”
Repossession levels have fallen off sharply over
the past 18 months, a situation which he did not predict would turn
around until RVs improve.
“But in any case, we should be looking to keep
customers in their vehicles, and thinking about curing strategies
rather than simply recovering the car,” he added.
Adding to the regulatory burden on collections
functions is news that Ofcom has fined several companies for misuse
of automatic diallers.
“The fines are between £5,000 and £50,000 but they
can keep on coming back if you don’t fix your processes, so do be
aware of this,” Cherry warned.
The OFT is also due to review its debt collection
guidance, he added, as the current guidance has been in place since
2003 – another worrying development for the industry.
Lenders also risk losing access to the edited
electoral roll as a consequence of the data sharing review, which
will hamper efforts in trace cases and “gone-aways”, said
Cherry.
As ever in hard times, cash is king – but
cost-cutting should not be taken too far said Cherry: “We all have
a healthy imperative to reduce overheads, but that can sit in
adversity for need for collections team to push harder. Outsourcing
can complement existing collections functions through benchmarking
and ‘champion challenging’ your processes.”
Companies must take an integrated approach to
collections, and not “be afraid of allowing collections feedback.
All too often risk sits at one end and collections at the other –
now more than ever there should be joined up thinking.”
Lenders should revert to “the three-stage strategy:
Work it yourself, place it with agencies, then sell it. This will
get you the best returns.”
Crisis of skills among fleet
managers
Stewart Whyte, director and membership
secretary of ACFO, and a fleet consultant, emphasised the changes
which have occurred in business car management.
“This used to be called the fleet industry – now
smart people call it ‘managing business travel by motor vehicle’.
The old silos have gone away; there is now a continuum, and fleets
can mix and match to get their business travel right, with more and
more fleets using a mix-and-match of different funding methods,” he
said. “Now, employees can own their own cars but still sit within a
scheme that looks and feels like a company car scheme.”
But the huge increase in sophistication in fleet
management options has not been matched by an up-skilling of fleet
managers (FM), Whyte opined.
“The level of management in the UK is appalling,”
he said. “The average FM is unqualified, inexperienced, and has no
authority. They make day-to-day decisions without understanding
anything beyond solving the immediate problem, with no insight into
why finance directors and procurement managers make the decisions
they do.”
There is a mismatch between what is decided in the
boardroom and what happens on the ground, which is bad for
businesses.
Fleet operators should not react to the downturn by
treating their customers badly, Whyte warned.
“Everyone assumes that contract hire is a
rock-solid transfer of RV risk,” he said. “But what we have seen
from some leasing companies over the past six months is that
vehicles which come off fleet are looked over with a fine-tooth
comb, and customers are charged for a respray, for example, in an
attempt to get some cash back into the business – and that’s not
good. Customers often have long memories.”
Pan-European approach to fleet
leasing
Sergey Dianin, managing
director of Arval Russia, described the unique market aspects which
lessors must take into account when setting up a fleet leasing
business in Russia.
“Leasing is quite a new product for Russia – it
started in 1998, and demonstrated dramatic growth, doubling its
volume every year. But now the forecast is for decline thanks to
lack of liquidity and growth of credit risk.”
Financial leasing is more popular than operational
leasing, with operational leasing making up only about 1 percent of
Russian fleets – compared to a European average of 28 percent. With
more than 3 million fleet units in Russia, there is huge potential
for growth.
“Still, 75 percent of fleet units in Russia are
bought outright,” he said.
The multi-currency environment in Russia makes life
difficult for fleet operators, so the market became very sensitive
to foreign exchange rates.
“Customer transparency is a big issue. Credit
information is difficult to come by – this is changing, but
slowly,” Dianin said. “An absence of liquidity has reduced the
number of players, especially small independents, while recent
changes in the leasing law have also removed some of the benefits
to leasing in Russia.”
Despite this, the opportunity for lessors willing
to brave it out remains huge.
Olivier Fossion, head of international sales at ALD
Automotive, meanwhile, emphasised the importance of a pan-European
approach to fleet leasing – as exemplified by the fact that over
two-thirds of the market in Europe is controlled by the ‘big four’
pan-European players (ALD Automotive, Arval, GE, LeasePlan) along
with the seven largest captives.
“Therefore there must be an added value in being
part of an international leasing company,” he said.
Even a decline in the sales of company cars was not
too much of a worry, he said, given the potential that exists to
move companies which purchase vehicles outright to leasing. About
one quarter of the business car market in Europe is in full-service
leasing agreements, with about 50 percent purchased outright.
“In Western Europe, overall fleet registrations are
growing by 0.7 percent, with operational leasing growing by 2.4
percent. In Central and Eastern Europe, we still see a market with
huge opportunities, with fleet registrations growing by 4.2 percent
and operational leasing growing by 12.8 percent,” he said.
But a pan-European approach must still recognise
differences between countries, he warned: “All customers are
looking for economies of price and economies of scale. But it’s
impossible to offer one price and one lease rental across Europe
for multinational clients. And the level of service offered to
clients will differ across Europe – in the case of one-hour
servicing, for example, which would be expected in the UK, but
impossible to provide in Russia.”
Acknowledging Dianin’s point about the lack of
customer transparency, Fossion said this could be sidestepped if
lessors enter new markets alongside established multinational
customers, then expanding the product offering to local
companies.
RVs continue to be a worry in almost every market,
he pointed out: “We will never recover the level of residuals we
had one or two years ago, mainly because of taxation changes – as
in Finland two years ago, when the whole taxation system changed,
and in France, when emissions suddenly became hugely important
thanks to the government’s CO2 bonus, with Mégane customers
downsizing to a Clio.
“In the current environment, people are looking to
smaller cars – they’re not looking for a car which makes coffee,
but simply four wheels and an engine. With the imminent arrival of
the Tata Nano, for example, small cars are on the rise – but how
will this affect residuals? Nobody knows. The only thing to do is
to have a good mix of brands and countries, avoiding putting all
your eggs in one basket.”
Moreover, environmental legislation is still only
just getting started, Fossion believes: “In Scandinavia, for
example, nitrogen oxide and particulate levels are looked at too,
and this is something that will spread, and must be considered when
setting residuals.”
Captives: How to stay
ahead
The problem with coming up with a unique
offering, noted David Betteley, managing director of Toyota
Financial Services (TFS) UK and vice-president of TFS Europe and
Africa, is that it won’t stay unique for long – competitors will
copy any good idea that works.
“The key to long-term success is retention, and
keeping customers for life – and this is not unique to Toyota,” he
said.
TFS carried out a survey last year in Europe and
Africa, which found that over a third of its budget was spent on
incentives, with another 20 percent on PoS material, and supporting
tactical campaigns. Only 6 percent was spent on CRM – customer
retention or customer relationship management.
“There’s definitely a balance to redress,” Betteley
said.
Consumer choice is a huge trend, which captives
must keep abreast of, he believes: “Many direct competitors base
their strategy on visibility, while a captive has very little
visibility – it’s just a sub-brand of the main brand. But on the
internet, you can deliver a price very easily – what is difficult
is delivering value”
Betteley believes that is means there is an
opportunity to retain customers and grow organically, but first “we
need to develop an effective internet platform so customers can
access quotations and arrange finance, and we have to balance
relations with dealers and customers – a difficult balancing act,
but one we have to manage.”
The internet will play a large part in the new
strategy for TFS, but it will still be based on three pillars of
core business: CRM, product development and sales channel
development. Betteley then gave examples of each ‘pillar’ in
action, and the positive results which had been achieved as a
result.
Toyota has an offer called Key for Key, aimed
initially at Yaris owners in Italy, which gave them bespoke
individual quotations.
“Overall, 19 percent of customers targeted in this
way ended up re-buying, and average transacted vehicle price was up
to €500 more than for the same cars sold without the offer, as we
were successful in selling add-ons, and selling higher levels than
the entry levels, because we talked about how much it would cost
per month,” Betteley explained.
“All markets where Key to Key has been tried have
shown significant improvements in retention rates. From 2007 to
2008, in Germany, retention rose from 14 percent in 2007 to 23
percent to 24 percent in 2008, thanks to the dedicated letter sent
to each customer.”
TFS has also shown innovative thinking around its
product offering. For example, TFS developed the “3flex” offer for
the new iQ model.
“We thought about mobile phone contracts and used
those as a basis for 3flex – after a year, people can either hold
onto their current model for another year, exchange it for another
iQ, or return it. It’s in between ownership and rental – so if you
want to change it or walk away, you can do,” Betteley said.
Possibly the most important pillar, in his view, is
sales channel development. Unsurprisingly, the internet has to be
central to captives’ future plans. Betteley said: “With TFS’s ‘10 x
10’ programme, we aim to transact 10 percent of new finance
business online by 2010.
“When we did research, we found 80 percent of
customers research new car purchases online, and 20 percent said
they would be ‘likely or very likely’ to purchase a car entirely
online – up from just 2 percent in 2001. Southern European markets
are less likely to do this than Northern Europeans as the further
south you go, the more emotion is wrapped up in a car sale,” he
said.
In order to capture browsers’ attention, high
visibility is vital and captives must grow their profile, with a
presence on the front page of the manufacturer’s website – “you
can’t expect the customer to click through three or four pages.”
Offers should be clear and transparent, and simplicity and
usability are key.
“If you don’t have a simple offer, there is a very
high drop-off rate,” Betteley warned. “Captives are the only
finance company in any market with the brand loyalty to generate
‘customers for life’ and who are able to provide long-term
consistent support.”
Taking stock
The message which emerged loud and clear
from the day’s discussions was that, while battening down the
hatches, lessors and financiers must not forget to take care of the
basics – and that those who do not innovate will be left behind.
Systems and process updates, not least the formation of a coherent
online strategy, must be undertaken, to ride out tough economic
conditions.
