Facing lower projected car sales in Europe and increasing overcapacity and competitive pressures in the emerging markets, the finance and lease businesses of automotive original equipment manufacturers (OEMs) would stand to benefit by adjusting their operating models to meet the changing global conditions, finds a KPMG International report.
"Auto leasing and financing companies will need to start executing on a number of different fronts if they plan to remain relevant to the customer and - in the case of 'captive' organisations - to their owners, i.e. the auto manufacturers," said Mathieu Meyer, KPMG's global head of automotive and a partner at KPMG's German firm. "Those that take a wait-and-see approach, in the hope that their traditional markets will rebound, will quickly find themselves commanding a shrinking share of the market while competitors active in growth areas rapidly surpass them."
The report, Global Automotive Finance and Leasing: The Role of Product Diversification and Emerging Markets in Future Growth, provides a unique and comprehensive comparison of the business environment, market potential, business characteristics and prospects between the US, Western Europe, China, India and Russia. It finds that, while the risk potential is higher in the emerging markets, strong prospects exist through the offering of traditional finance services as well as the further expansion of lease and additional services business.
"The real story here is about the massive potential that China, India and Russia offer to leasing and finance organisations," noted Meyer. "Not only are these markets experiencing tremendous development and increasing affluence indicating high growth potential for auto sales overall, but customers in these markets are also starting to become much more accepting of leasing and financing arrangements. Ultimately, we expect that the emerging markets will deliver tremendous growth to the leasing and finance business of the OEM captives."
At the same time, new services such as mobility-as-a-service programmes, battery leasing, green fleets, and additional banking products offer new ways to generate profit, not only over the long-term horizon in the emerging markets, but also in the more established, yet mostly saturated finance and lease markets of Western Europe and the US.
The report also finds that while the introduction of alternative propulsion systems (such as hybrids and pure electric cars) is a key growth agenda item for auto manufacturers, the vehicles create significant opportunities for their captives as well.
"Auto leasers and financiers will need to develop new concepts to align their services to technological improvements," added Meyer. "For example, the leasing of batteries may well prove to be a sustainable and rewarding venture for auto leasers and financiers to expand into, particularly given the high cost of batteries. Indeed, by separating the lease of the battery from the car itself, auto leasers and financiers can both reduce their risk and generate additional revenues simultaneously."
However, given that the value of an electric car is highly dependent on the expected lifetime of the battery (which can vary widely) and the technology, leasers and financiers will find that their residual value formulas become increasingly complex. Moreover, the introduction of new technologies may well devalue the resale potential of a vehicle at the end of the lease.
According to the report, shifting customer preferences and the rise of hybrid and electric vehicles will force captive leasing and financing companies to develop and promote their own mobility services like car-sharing or multi-mode transportation models. According to Gavin Maile, KPMG's Africa Automotive Leader, "the South African automotive sector is a few years away from having a thriving electric vehicle market due to greater distances travelled, a small but rapidly-growing number of available electric vehicles and a lack of the required infrastructure. The opportunities that exist in the developed countries for financing of batteries and availability of mobility services, for example, do not currently exist locally". When it comes to captive financing, Maile explains that, according to KPMG's recent Global Automotive Executive Survey, 64% of respondents believe that a captive financial services arm can contribute significantly to an OEM's future success.
The delivery of new services, such as credit cards and deposit banking, will also help shore up revenues in the more mature markets of the US and Europe. At the same time, the ongoing credit crisis is pushing many organisations towards creating their own banking services in order to reduce their reliance on banks for refinancing.
In South Africa, automotive financing is either supplied by retail banks which can service an existing client with or without a joint venture with an OEM, vehicle dealers that work in joint ventures with the major banks, captive finance companies which are finance companies wholly-owned by OEM's, and lastly, private finance companies that offer car loans and rent-to-own options of used cars. The automotive finance industry in South Africa has adapted well to the implementation of the National Credit Act and the global economic crisis, and is seeing an improvement in approval rates of applications for finance, partly impacted by the historically low interest rates.
Global Automotive Finance and Leasing: The Role of Product Diversification and Emerging Markets in Future Growth is based on desk research and in-depth interviews with senior executives representing key leasing and financing participants including banks, captive and independent auto leasing and financing organisations from China, France, Germany, India, Japan, Russia and the UK.
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