Dr. Neitzsch, for the start and in a “nutshell”, could you please give us a short general overview on the Automotive Finance Industry?
Yes, sure! Automotive Finance is on the one hand a global industry but at the same time has to adapt to legislation and business environments in specific local markets.
Main players in that industry are the Financial Services Divisions / “AFC” (1) of Global Automotive Groups / “OEM” (2) as well as “independent” universal banks / finance companies which could serve numerous OEM / brands / dealers in specific markets.
In general, the large Global OEMs have a very integrative approach with their AFC, and that concerns ownership, strategy and tactical actions. Here we could mention especially Toyota Motor Corporation, VW Group, Renault – Nissan Group and Ford Motor Company as well as the two premium groups Daimler and BMW – all of them covering their numerous Automotive Brands. General Motors is somewhat specific: although one of the “Top 3” OEM in car sales and having had their own AFC named “GMAC” for a long time – in the last few years they have changed ownership and strategy several times – so it remains to be seen how that plays out for them long-term. Also, Hyundai – Kia Group has only entered a few markets so far with its own AFC; in many others they work with external providers, so there is still some potential to be captured. Usually, all these AFC go into “larger” (3) markets and support their OEM there.
In “smaller” Automotive Markets, those AFC which focus on the brands of their own OEM could find it challenging to achieve the necessary scale for a Business Case. So, especially in smaller markets, local Universal Banks / Finance Companies often cover Automotive Finance and work directly with OEM and / or the car dealers.
It is important to note that “Automotive Finance” means not only Retail Finance but also includes Corporate / Dealer Finance as well as related services such as Leasing, Fleet Finance and Insurance “packaged” with Finance products.
In Developed Markets, what financial support is expected by both OEM and Dealers?
In Developed Markets both OEM and Dealers expect an “integrated” approach by the Automotive Finance supplier and that means:
- Delivering both Retail and Corporate Finance products
- Support not only during “good” times but also during “bad” times, such as market depression and financial difficulties in the Dealer Network
- Cooperating very closely with OEM and Dealer Network regarding mid and long-term strategies but also a flexible and “sense of urgency” approach on short-term tactical actions
As the OEM is their Shareholder, the AFC has these three above mentioned priorities in their “DNA”. However, even in smaller Markets where OEMs cooperate with “independent” providers, OEMs expect no less – so either the Universal Bank delivers or the OEM considers changing the partner or somewhat “adjusting” KPI due to the local market environment.
How is that in Emerging Markets?
In general, clients in Emerging Markets expect the same level of service, if not even higher, at least in the mid-term. So, especially in the larger Emerging Markets, the leading OEMs already have their AFC there and they deliver the same kind of services to the Dealer Network and to their Retail Customers.
However, when a new market is entered, usually not everything can be done at once with a “Big Bang”, but rather a staged step-by-step approach is deployed, setting priorities. That being said, if in Developed Markets it took 50 years to come to today’s levels, in New Markets it should be done not in 10 or 20 years but in 5 – provided the local market environment allows for a Developed Market level of efficiency (4).
Tata Motors of India acquired Jaguar Land Rover and Zhejiang Geely of China took over Volvo Cars. How do players from Emerging Markets drive changes in the Automotive Industry in general and how does this affect Automotive Banking?
That’s an interesting one! Let’s first recap: Jaguar and Land Rover, both beacons of the British Motor Industry for a long time now, at some point run into problems and were acquired by Ford Motor Company at a time when FMC was the most profitable company globally – not just in the car industry, but of all. However, later on Ford also had problems and that US Motor Giant had to sell … and sold to an Indian Company. It was a similar situation with Volvo Cars, that synonym of Swedish Steel and toughness, so it became part of FMC but in 2010 was sold to Geely.
So, coming back to your question: although Jaguar Land Rover and Volvo Cars are not large manufacturers but rather fit into special niches, the fact that a Giant and founder of the Global Automotive Industry – Ford – had to sell to Indian and Chinese companies shows that the world is changing! Both Tata and Geely are far from being Global players yet, but they could use JLR and Volvo as a test in Global Markets and, if successful, and if building up a sufficient “war chest”, they could repeat such acquisitions in the future with a larger OEM, establishing a real global footprint.
In Automotive Banking however, that has no impact as yet. On one hand, both Tata and Geely have no global AFC as they are not a global player themselves yet. On the other hand, both JLR and Volvo Cars have a very diverse structure to support their Finance needs, differing from market to market: in some large markets they established their own AFC, in some smaller markets their long time existing AFC was closed after ownership change, in some they are served by independent external banks and finance companies. But as I said above, if Tata and Geely really were to go Global, all that could change and they could also become a player in Automotive Finance.
According to a PwC Study, there is a backdrop of Macroeconomic uncertainty and major transitions are under way that will transform Auto Manufacturing over the next 10 years. With this transformation approaching, how will OEMs build Market Share and Profitability in the short-term and how should they position themselves for long-term success?
First let me say that I will focus on the Automotive Industry in general without going into technical details of Manufacturing.
Let’s first address Macroeconomic uncertainty. During my 25 years in the Industry, I have seen many ups and downs, booms and recessions, sometimes on a global scale and sometimes limited to specific regions. In general I think today we have no more or less uncertainty than 10 or 20 years ago. And if 10 years ago someone was too certain, then something unexpected hit and all the plans fell through like a house of cards – see the “Firestone” problem which hit Ford very hard in 2000 or the 2008 Global Finance Crisis hitting all OEMs brutally! Of course, OEMs cannot really influence the Global Economy, but they must prepare. How? Global Reach and Flexible Structures are key! Global Reach means that an OEM plays in all global key markets, not only with sales but also with (local) production, so they are better “buffered” if in one region recession hits, leading to a falling Car Market, because such an OEM can accelerate in other regions instead. The same applies if that recession region were to come back to growth, the OEM could increase production and sales there again. OEM with a strong global reach are, for example, Toyota Motor Corporation and VW Group; rather weak examples in this area are PSA Peugeot Citroen and FCA Fiat Chrysler, and level of global reach is one reason why these 4 OEM are either at the top of the automotive league or just average. Flexible Structures come into play when there is a global downturn and it is necessary to adjust capacities for a certain time and to ramp up production afterwards once again. That flexibility is required in production (e.g. using external Assemble Capacities in peak times instead of opening a new plant or increasing / decreasing number of shifts) but it is also necessary in sales (e.g. having some flexibility to increase / decrease Car Stock in the Dealer Network (5) or directly at the OEM; or increasing / decreasing tactical Sales Support (6) depending on how Supply and Demand balance or not).
Major Transitions: besides the importance of new Production Systems and sharing Platforms, Powertrains, Engines and Modules between Brands and Car Models within the Group, I would just mention a few points (there could be a full article on each of them) which are crucial to being successful:
- Products & Innovation
- Needs strong CORE Brands (Client must desire it, not just buy because of pricing)
- Needs to LEAD in future SUCCESS Technologies (e.g. Hybrid, Hybrid Plug-in, Electric Cars) AND still make a profit with these products mid-term
- Local production & local content purchasing
- Group’s Integration of Manufacturing, Sales and Financial Services
Having spoken about points for long-term success and being prepared for the future, these are heavy investments which do not pay off immediately. To fund them, the OEM needs some present Profit Generators and today, whether we consider that “progressive” or not, these are still gas guzzling pick-ups, SUV and large Limousines.
Let me give you two iconic examples: Toyota started to develop the Hybrid Technology very early on, at a time when nobody could be certain if that would become the next big thing – today they start reaping the rewards of that courageous decision! Ford has already had an absolute profit machine in their portfolio for decades – and that is the gas thirsty “F-150” pick-up which does not really seem to be the “transitional thing” but has already saved Ford through several crises!
So to summarize my answer to your question: a successful OEM must master the fine balance between generating cash and profit today and investing into the future – not easy but that distinguishes the leaders from the average!
Many Automotive Industry studies discuss the changing face of Retail based on evolving consumer demand. Can you explain this change and how it plays out for all participants?
Yes, there are changes. It’s important to put them into context to the whole Industry, to their weight and to either their regional or global relevance, so let’s take a “balanced” view.
E-commerce: Of course, today automotive consumers have a complete and easy way to access information. They can compare brands, dealerships, car models, specs, pricing and special actions. So, before they even hit the Dealer Showroom, they are very well informed and can negotiate as empowered partners. As that is the case for all OEMs and brands, it does not really shift the balance between them, unless somebody had in the past tried to “play with closed cards” – he would now lose to the players who value long-term customer satisfaction over short-term gains. Now looking at Direct Sales via the web: cars are not books or shoes, so Automotive Sales work somewhat differently, and the after-sales process is even more important, for example regular inspections, warranty repairs and servicing. During the last decade some OEM already looked deeply into the possibility of Web-based Direct Retail Sales, but did not go ahead with it for a number of logistical, organizational and “political” reasons (it’s not possible to go into all details here). Tesla Motors is an exception, but they are a small niche player and they are new, without Dealer Network “asset & liability”. So, I cannot predict what will be in 2045, but for the next decade I do not foresee dramatic shifts away from retailing via the Dealer Network.
Ownership: Especially in Western European urban areas, we have recently seen that “desire” and “convenience” of owning a car is somewhat fading. For example, in London, Paris and Berlin one has to deal with traffic jams and shortage of parking facilities, so it’s faster and more convenient to go by public transportation, to take a Taxi or, when you really need a car, to take a “rent-as-you-go” vehicle. And during their holidays, they fly to the south anyway. So, if not everyone who could afford a car wants to own one, that means, of course, less Retail Sales. On the other hand it means more Fleet Sales, but taking into account that these “rent-as-you-go” vehicles are often rather small and E-powered vehicles. So, overall, less Retail but a bit more Fleet still means less Total Sales. However, at the moment that is a development seen mainly in Western Europe, not in China, USA or other Regions. As “old” Europe does not rule the automotive world anymore, (as we will see in the next paragraph), I would call the global impact “limited” so far.
New Technologies: Of course consumer demand will go even more into Hybrid, Hybrid Plug-in, Electric Cars and other new evolving Technologies, but so far I don’t see how that would really change the way Cars are sold and serviced in Retail and Fleet, at least not over the next decade.
Impact on Automotive Finance: As Finance is closely related to Car Sales, even “bundled”, the trends described above also have an impact on the AFC. So, the Client considering Finance will also collect information on that before entering the Dealer Showroom. If in Western Europe less people intend to own a car, this would mean less Retail Finance but on the other hand increased Fleet Finance for all these “as-you-go” Fleets. As for New Technology Cars, they are also bought with credit or leasing, so it does not change the total picture … even more … sometimes OEM and AFC jointly launch special programs to attract consumers to these vehicles which often are more expensive than the same models with conventional engines.
By 2030, what three Countries do you predict will be on Top of the Global Automotive arena and why?
First let me say that we should look at Sales, at Production and also at the Global Players regardless of their country of origin. When predicting what will be in 15 years from now, we should take into account strengths and weaknesses (present) as well as opportunities and threats (future development).
Sales (7): It is not difficult to foresee that China will be No. 1 and the USA No. 2 – China is already “THE Giant” and is still growing; the US is “a Giant” but already saturated (just the usual ups and downs depending on how the US economy is going). As No. 3 in 2030 I would not pick a country but a group of countries having some market similarities. Today that would be the EU, but as they are saturated as well, I think the “B-R-I” (Brazil-Russia-India) have the long-term potential, even if facing some specific challenges presently.
Production (8): Of course China as No.1; their production is almost in parallel with their sales. As the US is losing capacities to Mexico, I would see them at No. 3 and “B-R-I” would go up to the No. 2 spot, also overtaking Japan and Germany.
Balance of Sales and Production – Importers and Exporters: China is almost the only country with a real balance and should stay so. “B-R-I” as a group is almost balanced today, and by 2030 could even be exporting. The US is an Importer today and will be even more so by 2030. In general, the OEMs increasingly shift production from their countries to Emerging Markets, often within a region, so by 2030 we will see that: Mexico supplies the US; Thailand, Vietnam and Indonesia also produce for Japan; and Czech Republic, Slovakia, Romania and Turkey supply the German, UK and French markets!
Players (9): As with China, here we have two “easy” predictions at the top: VW Group and Toyota Motor Corporation will make No. 1 and No. 2 between them, just trading places several times during the next 15 years. They are the two giants today, each of them having some weaker and some stronger spots, but clearly the leaders in the industry. At No. 3 there could be a “Dark Horse” emerging, for example a Chinese Player teaming up with an “old” OEM. If not, than we have four potential candidates: GM, Renault – Nissan Group, Hyundai – Kia Group as well as Ford. I would bet on Hyundai – Kia, as during the last decade they got up a great momentum: in Developed Countries they increased reputation and market share steadily and in Emerging Markets they grew aggressively. So, I think Hyundai – Kia could make it to No. 3 … and last but not least … recently Pope Francis started to drive around in a new Hyundai “Papamobile” – what else could be better support!?!
- AFC: “Captive” Automotive Finance Company owned by Global Automotive Groups
- OEM: “Original Equipment Manufacturer”, in this case Global Automotive Groups which produce, export-import and distribute Cars and Light Commercial Vehicles
- Each AFC / OEM has to define what is sufficient “large” for them, for example 500 Thousands New Car Sales / year in the Market could be the point to go in for some, whilst others would look for 1 Million at least
- For example, do Credit Bureaus exist and hold sufficient data to allow for a fast Underwriting Process? Also, can Client and Bank close their Contract remotely via the Dealer based Point of Sales or does the local Bank Legislation still require the Client’s Identity to be checked by a Bank employee (“KYC” / “Face-control”)?
- Importance of AFC provided Dealer Finance!
- Importance of Special Interest Rate programs jointly offered by OEM and AFC / Finance Provider!
- Sales 2014 (Mills.): China 23.6, USA 16.5, JAP 5.5, BRA 3.3, GER 3.2, IND 3.0, UK 2.8, RUS 2.5, FRA 2.2, CAN 1.9, S-KOR 1.7, ITA 1.5
- Production 2014 (Mills.): China 23.7, USA 11.7, JAP 9.8, GER 5.9, S-KOR 4.5, IND 3.8, MEX 3.4, BRA 3.1, ESP 2.4, CAN 2.4, THAI 1.9, RUS 1.9
- OEM Sales 2014 (Mills.): VW 9.9, TOY 9.8, GM 8.0, R-N 8.0, H-K 7.6, Ford 5.9, FCA 4.6, HON 4.4