Captive Finance is growth area for automotive players

15 February 2016 6 min. read

The European car market, after more than five years of stagnation, is projected to pick up in the years to 2020. The pickup provides opportunities for OEMs to leverage their captive financing companies to capture more of the automotive value chain, a Roland Berger report highlights. The benefits of captive finance are numerous, including among others, higher profit margins and customer loyalty, as well as the elongation of a customer’s life cycle.

The global passenger car market has been growing consistently across much of the world over the past five years, a new white paper from Roland Berger finds*. In the Americas for instance, the number of new units sold increased 29% from 15.9 million to 20.5 million. The growth in the Chinese market was even more considerable, up from 11.6 million to 17.9 million between 2010 and 2014. Growth in Europe in the same period remained relatively stagnant however. Sales of new units were at 16.4 million in 2010, decreasing 1% to hit 16.2 million in 2014.

Passenger car sales per region

Demand to increase
A closer look at the European market finds a more complex landscape between 2010 and 2014, with particularly Italy, France and Spain seeing considerable declines at -8.7%, -5.1% and -3.5% CAGR respectively. The number of new units sold in Italy for instance, dropped from 2 million to 1.4 million between in the period, while France saw a decline of 0.5 million new units sold between the respective years. On the other side, the UK saw a 5.1% increase, while Germany saw a 1.1% increase. In absolute terms, the UK market saw 0.5 million more units sold in 2014 compared to 2010, while Germany saw an increase of 0.3 million units.

The market is projected to pick up in the coming years, growing from the total of 16.2 million new units sold to 19.1 million in 2020. Almost every market is projected to see an increase, bar the UK. Particularly the Spanish, and Italian markets will pick up, as well as the rest of Europe.

Passenger car sales in Europe

Financing the drive
Buying new cars require considerable expenditure from customers, and, in the majority of the European regions considered, market financing is a means to provide customers with a way of driving the car away, without having the capital immediately available. Different countries have different levels of financing, as well as type, however. Germany in particular has captive financing (where the financing entity is owned by the vehicle OEM) as the major source of finance for a new vehicle acquisition at 45%, while 27% prefer to pay in cash and 28% use non-captive finance. In the UK the picture is somewhat different, there 11% pay in cash, 52% use non-captive finance while 37% use captive finance. The profile for Italy, Spain and France are similar to the UK, with for the most part non-captive finance being used as a means to acquire a new vehicle.

New car financing in selected European markets

Improved finances
The creation of financing options in the new vehicle market creates a number of positive knock on effects for OEMs. “From the OEMs' perspective it makes sense to have a broad product offering partly because it enables them to generate customer data that would not normally be seen by anyone but the financing banks," says Philipp Grosse Kleimann, Partner at Roland Berger. 

Customers whose new vehicle is financed tend to decide to purchase a more extensive configuration to their new vehicle, at 39%, a new car instead of a used one, at 38%, a new car earlier, at 28%, and a larger model, at 19%. They also tend to spend more money on a new vehicle, at an average of €27,635 compared to the €25,762 for cash payments. The average length of time a vehicle was driven is also significantly lower if the car was financed, at 4.5 years, compared to 6.2 years for cash buyers. “Captive banks often draw customers in with low interest rates and attractive payment terms in a bid to boost sales of their own brand,” says Grosse Kleimann. “A nice side-effect that stems from this is the fact that many customers will then have their car equipped with optional extras. Which for OEMs means higher revenues and bigger margins.”

Effect of providing financial services on car sales

Captivating customers
The research finds that captive financing creates considerable benefits to the OEM across a range of metrics. Customer loyalty to the brand of the captive finance owner came in at 53% compared to 47% that changed brand, while for non-captive customers only 38% stayed loyal, with 62% shopping elsewhere. Captive customers also said that they were more likely to opt for the same dealer, at 62% compared to 59% of non-captive customers. Captive customers were also more likely to recommend the dealer, at 75% compared to 61% for non-captive customers.

The report highlights that captive financing deals have the potential to create considerable value above those that have traditionally been realised by OEMs. The deals are able to bolster a number of after-market benefits – which have high margins – such as sales from garages and spare parts. The financing agreements in addition allow them to learn about their customers to better tailor innovative products in the future, while customer ignorance about the value of cash discounts compared to low financing terms allow OEMs to better capitalise on their total profit from the customer.

Effects of providing financial services on car sales - 2

The consulting firm concludes by stating that the further expansion and development of financial products through captive banks has the potential to deliver considerable benefits for automotive players, Grosse Kleimann explains: "Established captive banks have since realized that an extensive range of financial services brings more advantages for the parent OEM: they have the capacity to increase the customer value and with it the revenue per customer.”

* The study is titled ‘New captive finance – Optimizing customer lifetime value’.