July 26, 2021

Captive finance companies boost auto sales during pandemic

As the coronavirus pandemic swept across the U.S., domestic captive finance companies immediately took control. Working alongside automaker leaders, captive lenders gained significant new-vehicle market share even as dealerships shuttered and consumer demand plummeted.

The actions taken mirrored those from past crisis situations, with automakers rifling through their toolkits for reliable sales-stoking instruments such as subvented interest rates, payment relief and lease extensions.

Every step of the way, captives worked closely with automaker and dealership partners to craft new programs to quell customer concerns and navigate business in a country under serious financial strain.

The result?

Captives nabbed business from competitors, stoked vehicle sales and preserved dealership profitability in one of the darkest periods of U.S. auto sales history.

Auto finance experts say the captive business model, an enticing yet expensive business line for automakers, proved itself once again during the coronavirus pandemic.

Similar to the Great Recession, banks and credit unions pulled back in new loan and lease origination in the spring while captives charged in, Jonathan Smoke, Cox Automotive’s chief economist, told Automotive News.

“It was the captives that were really helping to get the market kick-started again,” Smoke said. “Effectively, we had seen sales shut down in that period.”

Captives disseminated financing offers that supported the “total picture” of what dealerships and automakers needed most at the time, Smoke said.

Aggressive activity included a plethora of 0 percent finance offers, extended loan terms of 84 months and even months of payment deferral for new-vehicle sales within certain time frames. These measures helped drive profitability to dealerships and attracted customers otherwise wary of spending during the unsettling times that began last March, Smoke said.

Still, while these quick actions drove business to dealerships, captives weren’t gambling too much in the process.

“Those offers were not being made to subprime consumers or deep-prime consumers that represented a lot of risk,” Smoke said. “While I can characterize it relative to what we see in normal loan terms as aggressive, it wasn’t necessarily aggressive to a point of being risky for the captive finance companies.

“What we’ve seen over the past 12 months … you see the most dynamic changes in the captive aspect of lending.”

As the oldest captive finance arm in the U.S., Ford Credit has weathered many storms.

The pandemic stands out as one of the most critical, said Jim Drotman, executive vice president for Ford Credit’s U.S. and Canadian operations.

The captive lender worked closely with the automaker and dealer council members to deploy incentives, offer relief and pull together new programs specifically designed to assuage consumer concerns about losing their jobs or struggling to pay auto bills. Some of the activity mirrored Ford’s strategy during 9/11 and the 2008 financial crisis, though certain programs were pandemic-specific.

“We were all experiencing something that we’ve never been around and hopefully never will witness again with the pandemic,” Drotman said. “2020 taught us quite a bit.”

Though the automaker determines the incentives it pumps into the market, the captive arm has a pivotal seat at the table, he said.

“In a time of uncertainty, we were working around the clock, as all of us were,” Drotman said. “We launched the go-to-market strategy joined at the hip.”

The chaos the coronavirus unleashed on the U.S. economy and the retail environment allowed GM Financial to prove itself to dealership partners and its automaker parent.

A key pillar of the captive value is support in all economic cycles. As a relatively new captive, GM Financial hadn’t had a chance to showcase that, said Jonas Hollandsworth, COO of North America for GM Financial.

“If you think back to when we were acquired and why we were acquired, it was for that very reason,” he said.

GM purchased subprime lender AmeriCredit in 2010 and turned it into GM Financial.

Since then, GM Financial has been working to return a profit to GM and recruit more dealers to its portfolio, attempting to lure dealers away from its original captive, GMAC — now Ally Financial. Pandemic conditions and the measures GM undertook to preserve sales and dealership profitability gave its captive a boost in these key areas.

The captive is still working to grow its market share in retail and floorplan origination, though the goodwill and strong incentives during the height of the crisis went a long way to displacing Ally as the true captive and primary source of floorplan financing for GM dealers.

“We were able to fully, we believe, deliver on the value proposition, not only for floorplan dealers, but for non-floorplan dealers as well,” Hollandsworth said. “And some of that has stuck and continues to benefit us as we look to grow our retail penetration as well as our floorplan penetration.”

The captive acts as a bridge between the automaker and the dealer, but in many ways it’s important to distinguish the captive as a business wholly owned by the manufacturer.

When Nissan Motor Acceptance Corp. interacts with consumers and franchised dealers, “We are the OEM,” said CEO Kevin Cullum. “All the revenue we generate stays with the motor company and the brand to help support new-product launches and support new retail sales.”

The exclusive automotive focus is why captive lenders offer an advantage to automakers regardless of the economic backdrop, said Mark Lovely, vice president of Mercedes-Benz Financial Services USA.

“With almost 30 years of history in the U.S., MBFS has stood by our dealers and customers consistently through phases of growth and decline in the industry and the broader economy,” he said in an email.

“This long-term commitment facilitates close, communicative relationships with our dealers. We have been able to retain this focus over the long term because, as a captive, we only provide finance, lease and insurance products for Mercedes-Benz cars and vans sold by Mercedes-Benz dealers.”

As the pandemic has shown, the captives certainly have an advantage during a crisis.

However, the market tends to normalize in the years following a shock. Too much in new-vehicle incentives can diminish the residual value in the aftermarket, which harms the captive when those vehicles are sold at auctions.

It stands to reason the risk appetite of other lenders diminish in a crisis, Drotman said.

Captives tend to charge in with finance offers in down economies, but incentive activity fluctuates depending on the needs of the market. For the past year, those consumer, dealer and automaker needs have been filled — in large part — by captives.

“That’s where a captive is such a value,” he said.

“Every day, we’re already supporting Ford and Lincoln and whatever plan they’ve got out in the marketplace. Others may not have the appetite to do so during those more strenuous periods.”