Interview Transcript

How does financial services fit in with the dealership network and the OEMs?

As I say, on new cars, 82-83% of all retail cars are acquired via financial services products. But the captive finance company or the associated finance company that's working with the OEM has schemes in the marketplace to drive that volume to hit that target. Therefore, they have an advantage versus a neutral white label financial services organisation. Consumer offers in the marketplace are put together with the OEM, hand-in-hand with a captive to do that, and the retailer will recognise and accept that on new cars. On pre-owned cars they have more flexibility themselves because the OEM involvement in that is somewhat less, and they'll strike a deal with the financial services company to make sure that their unit profitability and the overall target rated bonus in the financial services area is as advantageous as is possible. So they've got more leeway there. In reality, they are probably still going to strike an individual deal with a captive - say VW financial services - but without the OEM being in the midst of that because the OEM hasn't got any legal right to be interfering in that area.

So the consumer goes to the dealer, looking to purchase a car, the OEM would have set up the financial services offering the leasing plan with the dealer beforehand, that financing is offered to the consumer at the dealership, at the dealer level, and then once the car is returned it’s then still on the OEM’s balance sheet, then the dealer strikes a deal with the OEM so that they can dispose of the car and take another margin for the dealer?

Yes, the communicated offer in the marketplace for the new vehicle, starting with the web and broadcast media, will be put together by the OEM and the financial services company. Let's say a car at £199 a month. The consumer will go in there and acquire that car. If you've got a part exchange, let’s say it's a VW Golf, the retailer will take that VW Golf in as a part exchange. If it's a retailable car, i.e. it's less than 3 or 4 years old, that car will go into used car stock and the financial services offers on that car will be more retailer specific. But VW will have still put the retailer in a good position to finance that car through them, rather than through anybody else, because they still want that relationship with the consumer. They want to be able to churn that relationship when they can really.

What is the advantage of a captive financing division?

I think that the core difference is that if you are a captive, because your master is the OEM at the end of the day, you recognise the fact that you are touching the customer many times and not maximising the unit profit on each of those occasions. You are actually taking a margin out of them and you're taking responsibility to make sure that the chain cycle is shortened and that you’re working hand in glove with the OEM in terms of the overall corporate strategy. If you’re a non-captive, you're a bank let's say, you're really driven by the generic, by maximizing the unit margin on that transaction at point of sale. You are not as geared up to actually do lifecycle management thereafter or effectively the resolicitation process as actively as a captive would be. So that is the core difference. It's always very difficult to explain that to, for example, engineers, because they assume too much logic in this. But the fact that the paymaster, the OEM, decides what the strategy is, dictates the pace for everybody really.

Does the lack of captive mean that there is less flexibility at point of sale and that the price is higher for comparable products?

The price might not be higher because the marketplace will dictate the price. If you were to sell a like-for-like car with another brand and you’re uncompetitive in the marketplace, you've got a problem. What it will probably do is dictate the margin you’re taking out of the car and the chain cycle might be a bit longer. Any OEM who has not got a captive is at a severe disadvantage.

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