Two of the top three best-selling cars in the first quarter of 2012 were the Toyota Prius and Corolla/Auris, with either one in top spot, depending on which stats you’re reading. Each model sold more than a quarter of a million units in Q1 and accounted for 1.3% of the global car market. Richard Brown asked Doug Gillies, managing director, Toyota Financial Services, just how business has been.
Toyota Finance was established in 1981, following previous joint ownership by Inchcape and Lloyds Bowmaker, and incorporated in 1998 under the name Toyota Financial Services UK PLC.
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Although working very closely with Toyota Great Britain, the company is a subsidiary of Toyota Financial Services Corporation, ultimately owned by Toyota Motor Corporation. As such, the focus for managing director Doug Gillies is both to support Toyota and Lexus sales in the UK with dealer finance and to provide an acceptable return to the shareholders of the Japanese parent.
So far, 2012 has been a year of recovering sales for both Toyota and Lexus, from the 2010/11 dip, with a range of model-specific campaigns. In particular, the Yaris Hybrid T4 has been marketed as the company car of choice, between 10% and 44% cheaper than rival hybrids from Ford, Volkswagen, Honda and Vauxhall.
Toyota Financial Services comprises 14 major European operations – in Germany, the UK, Finland, Italy, Norway, France, Sweden, Poland, Czech Republic, Denmark, Hungary, Spain, Slovakia and Russia – plus South Africa, spreading Gillies’ work across the globe and some of its best-selling cars, the burgeoning hybrid market, two marques, and a healthy pick-up truck business.
Richard Brown: How does the global aspect of Toyota Financial Services work?
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By GlobalDataDoug Gillies: There are two parts in Europe. There are the banking financial services, run from Germany by TKG, and the non-banking operation run by the UK. In the UK we have a number of subsidiaries, dependent on whether a banking licence is required or not in Europe, determining whether it fits under the German or UK umbrella.
Globally, we have 35 countries with a financial services operation, the latest one being India, which commenced new business in June.
In the last fiscal year, ending 31 March 2012, Toyota Financial Services globally wrote 2.48 million new finance contracts. Earning assets total €122bn.
The US operation is enormous. Toyota has around a 16% market share in the States; it was higher two years ago. It was number one in the States. Obviously, they have a heavy reliance on finance, last year writing 1.13 million contracts.
RB: Which offers and campaigns are working in the UK?
DG: Our strategy is all about accessibility and affordability, for both Toyota and Lexus customers.
We embarked on a change cycle management strategy in late 2008. That was heavily weighted toward PCP, giving the customer accessibility by way of low deposit and affordability, with low monthly rentals and a guaranteed future value at the end of the contract, reflecting the strong second-hand value of a Toyota/Lexus.
In addition, with this strategy, customers change their car more frequently and customer retention is over twice that of conventional finance. Irrespective of whether it’s in the fleet or retail arena, we funded, year-to-date, including demonstrators, 55% of all Toyota and Lexus new car registrations. We’re very proud of that.
PCP offerings are called AccessToyota, on Lexus it’s called Lexus Connect. When a new vehicle comes to market, along with existing models, we look at how we’re going to take them to market, how we’re going to conquer new customers and retain existing customers with a strong, consumer proposition based around affordability and accessibility.
Financing success comes through some very strong consumer propositions on what we would call core products. In the Toyota range, that’s Aygo, iQ, Yaris and Rav4. We’ve got the only PCP on the market that’s nil deposit and 0% APR on a PCP.
You’ll see a lot of 0% HP, but you have 20% or 30% deposit requirement. You have low rates on PCPs, but we’ve combined 0% with zero deposits.
RB: How has PCP worked with used cars?
DG: We embarked on the same strategy with used PCP in early 2011; we’ve seen a similar success rate.
The rationale behind this strategy was not just to conquer but also to retain customers. The retention on a PCP is around 45%. We’re seeing 45% of customers renew on a PCP within one month of the old agreement either coming to a natural end or settling early.
Particularly on used and, to a certain extent on new, we’ve seen, following the banking crisis, the banks’ appetite diminish for personal loans.
What we’re seeing, more so on the used side are greater opportunities to maximise our business volumes because the banks haven’t got so much appetite for personal loans .
RB: What’s the difference between working finance on Toyota and Lexus?
DG: They are different brands, appealing to different customers. The average balance on a Toyota is around £11,000. On a Lexus it’s about £22,000, £23,000. There is a higher propensity of business users.
The strength of the Lexus brand means the residual values on Lexus vehicles are very, very strong. That lends itself to contract hire and PCP business.
They’re strong on Toyota but the sector that Lexus trades in is very aggressive, with BMW, Mercedes and Audi.
We have a different marketing approach. Toyota is ‘Always a better way’ with Lexus focusing on ‘Creating Amazing’ with technology, design, driving dynamics, luxury, etc. There are different brand values. We have totally different, dedicated marketing strategies, sales teams and consumer offers.
RB: The Prius right now is synonymous with hybrid cars. Is that a boost to your work?
DG:The Prius is an interesting one. Globally, Toyota leads the industry in hybrid technology and has done for many years. We’re now on the third generation of Prius. Somewhere in the region of 90% of Lexus new vehicles are hybrid. The only car that isn’t hybrid in the Lexus range is the IS, but that’s soon to be replaced with a hybrid version.
In Toyota, last month, 16% of sales in June were hybrid. It was 93% last month for Lexus.
The challenge for us has been setting residual values on hybrid vehicles, but the actual, whole-life cost associated with running a hybrid, against a conventional power train, enhances the value of the car. We have a lot of experience in second-hand values on hybrid and we have no issues in disposing of hybrids.
RB: Is Toyota Financial Services leasing the battery as Renault is doing?
DG: No. That’s a fully electric vehicle. With hybrids, you’ve got a conventional, petrol power train and an electric motor. With the Plug-in, the figures are about 19 miles’ range on electricity. When that comes to the end, the petrol power train kicks in, you drive home and plug in to recharge the battery.
From a Toyota Motor Corporation point of view, the hybrid has got the best of both worlds. It’s got the electric range for short journeys but hasn’t got the anxiety that if the batteries run out you come to a complete standstill because the petrol engine starts. It’s got all the benefits of an electric, in addition to all the benefits of a normal power train.
RB: How is PCP doing on hybrids?
DG: We have a stronger residual value on the hybrid vehicles. That’s because we know they retain their value better, but we treat them exactly the same as far as offerings with consumer propositions. We find that, certainly with the Prius, the writing-down allowances and benefit-in-kind taxation advantages are very compelling to the fleet market, along with vehicle life costs. We finance many Prius vehicles on operational lease.
RB: Are hybrids responding well to finance?
DG: In the business arena, yes, in the sense that business users are taking advantage of an operating lease, with or without maintenance. From a private, retail customer perspective, they attract the older clientele and early adopters who prefer a PCP.
RB: Similar to the Prius domination of hybrids, the Hilux is the obligatory pick-up truck, worldwide. Does that bring in a lot of finance business?
DG:It’s an interesting one. The challenge of Hilux is: we just can’t get enough of them. The global demand is phenomenal.
Toyota, globally, has gone through quite an interesting period over the last three years. We became number one motor manufacturer in 2009. Then we had some issues with the recall, which affected some countries. It impacted in the UK, but in other countries, such as Australia, it didn’t have any implications. Then, obviously, last year we had the tsunami which impacted on production and also, last year, we had the floods in Thailand which, again, impacted because Hilux, for example, is built in Thailand, and in South Africa. There’s a higher demand for the Hilux and the supply was challenging last year. This year the factories are working flat out.
From a financial point of view, customers would probably fall into two categories for Hilux: You have what I’d call ‘the Workhorse’, which are the business users, where we do a lot of financing; that tends to be on an operational lease and we have offers in the marketplace of £249 plus VAT per month.
There’s the other market segment which I would call ‘the Lifestyle’, which is small businessmen, younger individuals that have the Hilux fully accessorised. With that type of customer we do PCP through AccessToyota.
Hilux, we do very well, predominantly in those two different segments. The Workhorse, which tends to be the single cab or double cab, and the Lifestyle which tends to be the invincible double cab.
RB: Are pick-up truck retail sales growing in the UK or do we not have big enough roads?
DG:That segment is growing because of the Lifestyle. The Workhorse activity is fairly static but the Lifestyle people are using it for the height ride. The comfort inside has improved significantly compared to 10 years ago, and it has the flexibility of being a double cab with the space at the back.
The market is growing; the 4×4 market is growing as well. People’s driving requirements are changing. There’s a lot of downsizing in to small cars but some segments are still growing, i.e. the pick-up. Some of our competitors: Ford, Mitsubishi and VW have launched new models but the Hilux is the industry leader, in the UK and globally.
RB: How has Toyota Financial Services responded to the credit crisis of 2008?
DG: What we’re seeing is an opportunity for financial services. The banks’ appetite for personal loans has diminished significantly. The banks are tidying up their balance sheets, reducing risk, etc, and their appetite to fund the motor industry has also declined.
At Toyota Financial Services we provide more wholesale lending to the dealer network to fund their business, including used vehicles and their properties. We have got quite a significant property portfolio now, which has grown over the past two to three years to around £70m, lending to Toyota and Lexus dealers for real estate purposes.
RB: What differentiated revenue streams and forms of wholesale are you seeing?
DG: Lending direct to the dealer network, funding for new cars, used car stock, demonstrators, property, plant and equipment. It’s grown quite significantly in two years.
Overall, banks’ appetite to lend and for risk has reduced. If you overlay that with their appetite for certain marketplace segments there are certain segments, certain markets, where they’re looking to reduce their exposure.
That’s good because we’ve got a very strong, profitable dealer network. As they come to expand, as they update their premises, as they move to bigger premises, they have a funding requirement.
People, historically, went to their bank as their first port of call. Now they are coming to us as first choice financer. They’re taking up that option more often now than they ever have been. That’s because the banks’ lending criteria, and various ratios they have to adhere to, capital adequacy, etcetera, lend themselves to saying: ‘No, we don’t want to quote on that business’, or, if they do, they’re uncompetitive.
RB: Do people better understand car finance, to the detriment of banks?
DG: If you think of cars, there’s a strong consumer proposition. It’s not just about the features, benefits and price of the car; it’s how you can access that through an affordable finance agreement.
On the other side, people’s awareness is much greater than it was 10 years ago with the internet. People will research the car and the finance. On the Toyota website you’ll see all the offers available and they are an integral part of the purchase decision. Whereas maybe before the first action was buying the vehicle and the second action was finance. Hence, the proliferation of new and used finance offers.
All customers will do a lot more research on the car and the pricing, but now they’ll also research the costs of ownership and finance. The cars are now marketed aggressively with some very competitive finance packages.
The banks’ lack of appetite is a great opportunity. We’re maximising that through funding Toyota and Lexus dealers, providing compelling consumer finance propositions and selling more vehicles, growing our portfolio 30% in less than two years.
richard.brown@vrlfinancialnews.com
