Captive financial firms are the key to customer access, profitability

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At the effect of the captiveaccounting change of es, and the last on consumer credit

Earlier this year, the captives implemented a significant accounting change. And I don’t want to be bored [you] with the details, but the basic goal was to assume that losses on leases would occur in advance rather than at some point. And that increased the reserves of Ford Motor Credit and GM Financial at the start of the year. And now, with high recovery rates and robust consumer credit quality, automobiles have been able to reassess what the assumed total losses might look like. And essentially, they’re getting back that profit potential that was taken away from them at the start of the year and is coming back.

Now, when we talk about consumer credit and the state of the consumer, they are the ones leading the charge in the market. And you can see it through the GDP data with double-digit growth in goods and services in July. I’m sure it would have been higher too if there had been more vehicles available.

But I think what that means for Ford Motor Credit and GM Financial, they were able to record over half a billion in second quarter pre-tax profits thanks to lower expected credit losses. I would expect this trend to ease a bit in the second half. And that’s because there were government programs that were given at the height of the pandemic that are passing. And so you will see credit increase a bit in terms of losses, but should still be positive year over year for finance companies.

At if a Subaru-Toyota Financial marriage makes sense

I think Subaru is an interesting element, especially because about 20 percent of Subaru’s business is rental business. So having access to very low cost financing – and Toyota has the cheapest financing in the global auto industry – is a mechanism they could use to further increase their bottom line and certainly share that with their partner Subaru.

Yes Stellantis and Tesla could also be targets for Toyota Financial

I think with Stellantis… now that they’ve combined and the merger seems to be going pretty well, they should really think about their own captive finance company. Obviously, they have an interest in one. But having captive global funding to really tackle the Ram and Jeep business, I think, would be a really good competitive move on their part, especially when you think about Ford and what they do, tackle the business customer in a more significant way. In my opinion, being able to offer the Ram customer the same type of product would be a wise move from a competitive point of view.

Tesla, as we know, is vertically integrated. They do it all themselves, and as their credit quality improves – and I think they’ll eventually go investment grade, maybe in the next 24 months – it’ll open the doors for them to have also a fully-fledged financial company.

At if Stellantis could extend its European captive in North America

I don’t want to pretend I’m a regulatory analyst, but what I would tell you is that this is something the old Fiat Chrysler talked about before the merger as one of their goals. And that was one of the reasons they wanted to be investment grade, was to have access to low cost financing for it. I think they understood the value of having a full captive, both from the strategic point of view that we talked about, as well as the financial benefits of having one. I guess that will be something they will look at, especially as their consolidation continues. And if the merger goes well, it will free up time for them to do it. I guess that would happen in the years to come.

The tThe obstacles Tesla would face in starting his own finance company

Departure [a captive lender] starting from scratch is difficult. And that’s why GM bought it back after selling GMAC. Maybe this is something they would consider as part of an acquisition. And the same goes for Stellantis too. It does not necessarily have to be an organically grown business. It could be something that could be acquired. Because really being able to put together the kind of talent and tech infrastructure you need would take a lot of time and for something like that it might be cheaper to run such an event through an acquisition than it does. an organically developed business.

At how GM Financial grew and strengthened

They have done a really good job over the past five years in reducing risk on an asset basis. If you look at their portfolio of personal loans in 2016, maybe 40% of it was subprime, which obviously exposes the company to operating losses during a downturn. They’ve reduced it to about 19 percent now and it’s still going down. They managed the risks there very well.

Yes a lack of a floor plan is a concern for automakers and captives

If anything, I would say it’s probably a net benefit to the dealer because the dealer has less capital tied up right now, both in inventory and I guess the other side of the balance sheet would be on the planning they have with their manufacturing partner. I think the question for the entire auto industry, and this is a major problem, is going to be, what is the right amount of inventory for the dealership? Because clearly, as the supply starts to ease, we’ve seen how powerful prices can be right now. If you replenish them at the same levels as in the past, it will again bring back big discounts and reduce your total profitability. I’m sure they’re all working on their algorithms to try and figure out what’s the right amount of inventory to make sure you’re giving the customer what they want when they want it and in the style they want. wants . But at the same time, don’t overstock resellers, and that way they can somehow maximize total profitability. This will help the entire food chain of automobiles and auto suppliers and dealers over time. But who knows in such a fragmented market if everyone will play well or if someone will go for market share. It has certainly happened in the automotive world.


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