The CEO of Fiat Chrysler Automobiles, Sergio Marchionne, announced recently that the company struggled to grow in the US because it didn’t have a captive finance house, sparking a debate about the role of in-house finance in the automotive sector.
Reports suggest that FCA’s current US partner, Santander Consumer USA, wasn’t reaching market share targets, as it financed 26% of loans last year. Rivals’ manufacturer captive finance houses are achieving 50-75% market penetration, FCA Group said.
However, in addition to delivering greater penetration of the car finance market, Marchionne said that a captive would be essential for delivering FCA Group’s vision of transforming into a Transportation as a Service company (TaaS).
This would see it expand to offering vehicles to mobility companies, a process already started with its major Waymo order announced recently, in addition to offering broader mobility services and the funding that supports them. This could include financing transport services that are unrelated to cars.
According to reports, FCA is also set to launch a subscription program called Jeep Wave, offering members the ability to switch between vehicles for a single monthly fee, in response to launches by a number of other manufacturer rivals. Volvo has announced that half of all cars provided to its customers will be through subscription services in the next decade.
Marchionne is preparing to retire, and his strategic vision will be delivered by an as-yet unnamed senior executive, so what future financial landscape will the new automotive leadership be facing, alongside rival manufacturers and their captives?
Global consultancy Deloitte, in a report called The Future of Captives in 2030, argues the business model of the captive industry is on the verge of fundamental change over the coming decade.
According to the report: “Automotive captives have long been a success story thanks to their stable business model. Captives have on average contributed up to one-third of their group's profits, but this is being challenged by several disruptive forces at the same time.”
It says the traditional core role of being an asset-based financing business will have to be increasingly complemented by a service-based focus that generates recurring revenue over the full customer and vehicle lifetime.
While this may require a fundamental remapping of business processes and roles, Deloitte argues that captives are well-positioned to become a key enabler of this transition from “asset-focus to customer-centricity and service-orientation”.
Arguably the biggest change is the shift from vehicle ownership to usage-based models. While finance companies have funded the first stage of this change by offering leasing and personal contracts, the next stage will be most disruptive.
New vehicle provision services, such as subscription products, change the nature of vehicle finance, as customers only need a small deposit and the money for a single monthly commitment at a time. Vehicles can be handed back with no commitment and drivers aren’t tied to a single vehicle, as most subscriptions allow them to switch as the need arises.
Already this market is being served by several new fintech disruptors, who are stepping neatly into the gap between the customer and the manufacturer (and its finance house).
Disruption is likely to mainly affect mature markets. Globally, annual vehicle sales are set to grow by more than 30% until 2030, with most of this growth coming from emerging markets where current credit and leasing penetration rates have substantial growth potential.
In developed economies, where sales growth is less dynamic, new opportunities are emerging, such as autonomous driving, ride-sharing and fractional ownership.
How will captive finance houses respond, as their asset-based business is affected by these changes, along with the increasing cost of financial regulation and emergence of strong competition?
The need for a different approach has already been signalled by BMW and Mercedes-Benz, perhaps the greatest of automotive rivals, which recently merged their mobility services businesses in a bid to deliver the economies of scale required to create a profitable business model.
While the two will have competing brands, there will be back office efficiencies and compatibility for consumers when using their services, in a similar way to consumers choosing different brands of personal computer that both have the same Microsoft operating system.
Deloitte says captives will need to concentrate on deciding where they want to focus their limited resources and suggests strategic cooperation could become paramount.
It has built a financial model to look at the market and provide business simulations based on different scenarios.
Deloitte asks: “Will captives still fund these assets and their respective risks in the future or will they by choice, or by necessity, shift these assets to third parties?”
Deloitte has developed four potential scenarios for captives in 2030, based around two key drivers - whether vehicles are owned by OEMs and captives or by third-parties; and whether the market becomes more concentrated or fragmented.
In a concentrated market where the OEM’s and captives retain ownership, there is little change, but if ownership increasingly shifts to third-parties, then captives become ‘mobility platform orchestrators’, which introduces potential for major new revenue streams.
In a more fragmented market, captives hold a less critical role, as they shift more to aggregating and managing third-party providers.
In one scenario, vehicles would still remain under the ownership of captives and OEMS because the fragmented market prevents specialist mobility providers from achieving the scale required to self-fund their fleets. Therefore, they would most likely outsource most of their vehicle financing and management processes to captives.
In turn, captives would focus on optimising their asset-based business model and its respective infrastructure.
Captives would excel in forecasting residual values and this, combined with mild regulation, would allow them to extend their balance sheets, asset ownership and access to valuable customer and vehicle data.
Deloitte said: “Ownership of vehicles would become a strategic advantage and captives [would] still contribute substantial profits to the group.”
However, the most disruptive scenario would be the ‘empty shell’, where captives and OEMs have lost control of the ownership chain and the market is fragmented.
In this scenario, the role of the captive in the OEM structure would become less important.
Under the ‘empty shell’ scenario, Deloitte said: “In this scenario global financial regulators have focused on captives and capital requirements have tightened noticeably.
“As a result, OEMs decided to reduce captives’ assets substantially. Furthermore, the freed-up capital reserves were used by the OEMs to transform their global manufacturing facilities. New fintechs and digitally-enabled companies have attacked the captives’ core business model and excelled in individual parts of the value chain.
“Captives [would] identify and aggregate best-in-class service providers; they [would] manage them on behalf of their OEMs as well as other mobility providers who operate in this highly-fragmented mobility landscape.
“To remain competitive, captives have had to reduce their cost base drastically; their operating models have had to become lean and agile; the relevance of the captive in the group has been reduced and the captives now have only very limited contact with the end customer.”
Although the reality of the industry’s evolving future will only become clear with time, it is certain that CEOs and C-suite leaders will be monitoring developments closely as they consider how their captive finance operations need to adapt to any future changes.