With questions about what 2008 holds in terms of new-vehicle sales, captive finance companies said their focus is now on customer retention, but that’s not all they covered during a special captive finance panel at the magazine’s fourth annual F&I Conference and Expo last September.

Called “The Changing Landscape of Captive Financing,” the panel was moderated by Marguerite Watanabe. Participants included Chrysler Financial’s Kelly Mankin, Ford Motor Credit’s Todd Trese, GMAC’s David Jones and Toyota Financial Services’ Mike Groff. Each provided their take on how the market has changed and will change in 2008, and each talked about what their companies are doing to help dealers go forward.

The Changing Role of Captive Finance Companies

WATANABE: In the past, the captive role has been to sell cars at a profit. Has this role changed at all in the last several years?

GROFF: The business has changed quite a bit in the last 25 years. The role of captives is, first and foremost, to support the sale of vehicles from our respective companies, but the size of the new-vehicle market has not changed dramatically in the last several years. So that’s put more of a requirement on us to do a better job of retaining customers. That’s why Toyota Financial Services has invested heavily in our customer service centers. We’ve also made a significant investment in our Website, because there’s a lot of activity there. So, I think between that and the relationships we’ve built with our dealers, and listening to what they say their business needs are, we’ve tried to respond and react as best we can.

JONES: Looking back, 10 years ago we were pretty much driven just to help sell the car, but now our parents are demanding that we center our efforts on generating profit. We’re expected to be a significant contributor to the bottom line. Not only do we have to support their efforts to sell as many cars as possible, but we have to make a lot of money doing so.

MANKIN: From a Chrysler perspective, retail market share has been shrinking over the last few years, and the advent of credit unions and aggregation really forced us to be more of a customer-facing competitor. We’ve had to become keener about developing and reacting to our dealers’ needs, and developing our value proposition accordingly.

TRESE: At Ford the relationship between the manufacturer and the credit company has become more integrated. Ford Credit has given back $12 billion to Ford Motor Company in dividends over the last four years, which all goes toward new product development. Ford Motor Company can’t live without us, we can’t live without them, and we both can’t live without the dealers. So the integration for us has become almost inextricable.

A More Unified Relationship

WATANABE: The relationship with the OEM has become more and more of a crucial piece of the business, correct?

MANKIN: Yes, and in order to win games you have to be great at the basics — blocking and tackling — and those haven’t changed over the years. In fact, the need for those basics — consistency and support for brand partners and dealers — has increased. The captives’ role is to be there through thick and thin, to support a full spectrum, not cherry picked by product and FICO score. We have to take risk as it comes from the dealers and customers. I think what’s evolved in the OEM relationship is the need for us collectively to compete to react to those industry changes.

As Mike (Groff) said earlier, customer retention is a big part of what we do these days. Our advantage as captives is that federal privacy laws, by and large, preclude banks from sharing leads with dealers. On the flip side, we have joint marketing agreements that allow us to share leads and drive additional sales.

Technology is another area where we must compete. All of us at this table are investors in RouteOne. It delivers an outstanding credit aggregation system to dealers and it’s the only one that provides a central place to access both captive and bank sources. It also allows you to manage all those applications, and provides you with reporting that drives CSI and a better way of doing business.

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The Internet is also where we must compete. According to J.D. Power, 80 percent of consumers who land on a brand will shop on the Internet. We’re fully integrated with that shopping process, and provide the most productive closing ratio of any lead source available. Chrysler Financial is taking this a step further with our AutOrigination program, which validates contracts at the point of sale so you’re guaranteed the contract is valid and won’t be pushed back on you.

We’ve evolved and matured in our relationship with the OEM to leverage the specific opportunities and strengths that we offer. It’s a three-legged stool. If the dealer, the captive and the OEM aren’t working together, it’s not going to work for any of us.

GROFF: Right. Some people think of the relationship between the OEM and the captive as really supporting subvention programs. It requires a lot more. At Toyota, we looked at the launch of our Tundra pickup truck as the biggest launch since we launched the Lexus division in 1990. So that wasn’t just about subvention programs, that was all about understanding a different market for us. And it took a very close relationship between us and the Toyota division to help support that launch.

On the Lexus side, two years ago we partnered with them on the launch of a Lexus credit card. And that was all about building loyalty, not just to Lexus Financial Services, but to the dealership. It’s intended to encourage customers to have their vehicles serviced at the Lexus dealership. Hopefully, while they’re there, they will look at new vehicles, parts and accessories. It’s much deeper than in the past.

JONES: From our perspective at GMAC, the operative words are partners and integration relative to the OEM. Fifteen years ago [General Motors] did its thing and we did our thing. Today, it’s a real partnership.

Subprime Mortgage Industry’s Impact on Auto Finance

WATANABE: With today’s mortgage concerns, can you tell us your approach to nonprime customers? I know each of you have different approaches. Some of you have auto financing divisions that focus on those customers, some have pass-through programs, some have no program at all.

JONES: The four of us approach it very differently. Some of us have our own standalone division that handles it, some have connections, and some of us have partnerships with third parties. We’re trying to improve that process constantly because there’s been significant change in the credit market over the last 10 to 15 years relative to the level of credit that can get financed.

One of the strongest tools you had 20 years ago in collections was to tell the customer, “If you don’t make your payment on time, you’re never going to get financed again.” That doesn’t happen today. Everybody can get financed somewhere or somehow. So we have to support the dealer body with the full spectrum of credit financing.

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Our focus these days is to get dealerships to move away from having a separate operation that deals with credit-challenged customers. We call it the “waterfall” approach, where we, behind the scenes, can take the customer and do the filtering and the assessment on our end. We believe this will increase the frequency of a “yes” answer. We also believe this will simplify the process from the dealer perspective.

The goal is to place customers in the lineup of credit, determine where they fit, and even get to a point where we can generate and upgrade a customer as he or she improves in credit performance. This is a critical component as we move forward, especially with what’s going on in the subprime mortgage arena. The message that we’ve sent our parent is that the auto industry has such strong disciplines when it comes to credit granting that we can continue to do this successfully going forward. The size of the market has not grown. In fact, we’re expecting it to decline a little bit. That means we’ve got to squeeze more out of what’s there. And in this area, we think the opportunity is definitely there.

MANKIN: While each of us handles subprime differently, the fact is captives buy more subprime than any other finance source available. We buy more near-prime than any other source available to the dealer. But it has to be about balance because no business can survive when it just buys marginal paper; it’s impossible. So that’s where the partnership comes in. Dealers have to provide the balanced paper in order for captives to buy at that level of credit risk. So we can’t lose sight of that.

TRESE: Ford’s perspective is similar to what Kelly just described. The difference is now you have rating agencies staring over your shoulder because we fund ourselves by securitizing our assets. So you have to be careful, and, as Kelly said, it’s about balance. If we can provide balance, we can get funding and we can survive. Hopefully, we get through it to where we can shift the balance and go even deeper. That’s obviously the goal.

MANKIN: We always get this “it’s all about buying deeper.” The market of financed vehicles excludes cash buyers or people who just walk into your stores with a credit union check. If you just look at that database, 7.9 million prime customers financed their car in 2006, regardless of the source. Subprime was about 1.2 million. So, nobody’s going to get rich going after the subprime market. And that’s the way we have to focus on it.

GROFF: I’ve been reading a lot about full-spectrum lending in various trade magazines. The fact is, captives have always bought a full spread of business. That’s been our approach to supporting dealers all along. And if you think about the way we do business as time has changed, each of us in our own way has become more sophisticated in our credit-granting process. We use better tools to rate credit, we do a better job of pricing for the risks we take, and, on the backside of the business, we’re all doing more in terms of collection strategies and customer-service-related strategies that help us service those portfolios. So we’re all used to seeing ups and downs in the marketplace.

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JONES: We’re not only there to handle it from a credit-granting point of view. One of the key aspects of handling the subprime and near-prime markets is to be able to manage the area of repayments so those customers don’t become casualties of the effort. And that’s where the captives bring strength to the table. When you look at our individual experiences in that arena, we’re head and shoulders above the traditional nonprime, non-captive activity.

Taking on the Internet

WATANABE: The Internet has changed the world of buying cars and financing. How has it impacted your business?

TRESE: To say the Internet has changed the automotive business is the understatement of the day. What we’re doing at Ford Credit is trying to leverage the assets and capabilities we have in that area to drive more sales back to your stores. For example, we have 800,000 unique visitors a month that come to our account access site. What we’re doing is leveraging that to drive those customers back. So we’re piloting a micro-site market, so when they come back in we’ll provide them with a marketing effort, and we’ll “dealerize” that effort or offer. If you look at our Website, it’s all about vehicles. It’s all about driving that customer back to you again. Check the banks’ Websites and compare them to the captives’ Websites and you’ll see the difference.

We can probably all get better at online credit applications. And that’s what Ford’s working on. So, in the next six to eight months you’ll see a new credit application coming from us. It’ll be one that we can start placing at different sites to get qualified leads and drive those right back to our dealers.

The Internet really puts pressure on the indirect financing model. The reason the indirect model has worked so well is because of convenience to the customers. They don’t have to worry about financing. They pick out the car and they get financing at the dealership. It works great. But as soon as something comes along that makes it easy for customers to get financing before they go pick out the car, that changes everything. And that’s something we really need to wake up to. There are models out there now. They’re not taking off, but they could. We just need to be prepared.

JONES: I agree with Todd. People are going to embrace this at some point. We’re already seeing it in our world, people sitting home on Saturday night wanting to be able to shop for a vehicle and get it financed. And one of the key things that differentiates the captives from all other finance sources out there is that we’ve been, and will remain, committed. It’s your customer, and we’re going to deliver this live prospect to you, no matter how they arrived to us. And when they come to our Website, it’s key that we create a partnership with the dealers and the dealers’ Websites so it’s a lot easier for us to deliver that live prospect to you.

MANKIN: My belief is that the large dealer groups are going to push that first. We’re already seeing models from AutoNation and Lithia that are more of a hybrid indirect model, where the customer is more in charge. So, it’s just a matter of how quickly it grows, and how big that segment of customers you’re talking about is. If you look at the differences between us as captives vs. our competition, it really comes down to simple math. All else being equal, the longer the term, the higher the interest rate. And all else being equal, that all translates into more money made. So, it’s not in our best interest to pull somebody out of their 60- or 72-month contract while they’re still in the middle of it. But it’s a critical and ingrained part of our marketing strategy to do so, because that’s when the customers are typically in market. I don’t think you see a lot of those programs from our competition.

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Toyota Financial Service’s ILC

WATANABE: Mike, regarding the industrial loan corporation your company has had up and running for about two years now. What benefits have you seen from having that bank?

GROFF: We have a Nevada charter that’s based in Henderson. Its purpose was to build loyalty. Our bank will never be a brick-and-mortar bank. I don’t think you’ll ever see Toyota Financial Saving Banks all over the country. It was intended to provide services that we couldn’t offer as a finance company. So our initial focus was about building dealer loyalty. We’re offering dealer principles and dealer general managers opportunities to do more personal financing, such as home mortgages and lines of credit. We also wanted our dealers to use the bank to finance other business activities we’re involved in. The intention is to tie dealers more closely to Toyota. We’re also using our bank platform to run the Lexus credit card I mentioned earlier.

GMAC’s New Ownership

WATANABE: David, it’s been almost a year since the change. What would you say the biggest difference has been in your day-to-day activities?

JONES: The biggest difference is we were a captive finance company owned by an auto manufacturer, and now we’re owned by an investment company that’s driven from a financial services perspective. A lot of good stuff has come out of it. It’s possible for us to be in a better pricing position, which we hope translates into us being more competitive in that area. However, it also puts us under more scrutiny than we have ever been under. So it’s a challenge in terms of making sure that we keep all the disciplines in place and things like that.

Overall, I think it’s been very positive for us. It’s created a great opportunity for us to better service our customers, both consumers and dealers. It’s also posturing us to be a more profitable company for our parents, Cerberus and GM.

Chrysler’s Credit Card Program

WATANABE: Kelly, your credit card program has been around for almost five years. Do you see this growth continuing?

MANKIN: Yes, we’ve just scratched the surface on this. We have several F&I managers who make a lot of money off of this card. There’s one in the Great Lakes Business Center who makes $8,000 a month selling the credit card. However, this program does suffer from an awareness issue, as only a small percentage of our dealers and F&I managers are participating in this product.

Dealers need to realize that customers value the card, as evidenced by the acceptance rate, the activation rate and the point redemption. Currently, 75 percent of points earned are redeemed in the dealership, the majority of that being in the service department. We’re also making it easier to get a customer approved for the card. Now, a customer’s credit application can be submitted with the car application.

Ford’s Transformation Program

WATANABE: Todd, with Ford Motor Co.’s transformation program going on, what would you like your dealers to know?

TRESE: Ford Motor Credit is moving from branch offices to business centers and service centers. We did that to give you better flexibility to meet your hours, to be able to keep our costs down so the savings will be reflected in the prices we give you. The issue is that this is very difficult to do. Anytime you take your salespeople or your credit analysts and move them away, you lose that relationship. It’s like trying to change a tire on a car that’s moving 80 miles an hour down the highway. And we’ve had some pain with that, as reflected in our dealer satisfaction scores. We recognize that it hasn’t been flawless. We’re doing everything we can to address it as quickly as possible.

We have always prided ourselves on our relationship with our dealers, and having high dealer satisfaction scores. So we’re working very hard at addressing those issues. There have been a lot of dealers who have also told us we’ve done a great job. So I wouldn’t say it’s all been bad news. But my commitment to you is when we get to the end of this transformation, probably by this time next year, you will all be even more satisfied than you were before.

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