Most mainstream manufacturers have their own captive finance company. Dealers swear by them for sticking with auto lending through thick and thin, and manufacturers appreciate the fact that they are usually reliable money makers.
But if captive finance companies are such a great idea, why doesn’t everybody have one?
Size is one reason, auto finance leaders say. It takes a lot of capital to establish even a relatively small captive finance company, let alone maintain it.
But size doesn’t matter so much as the fact that capital investments are a zero-sum game, said Jagdeep Dayal, head of partnerships for Chase Auto. Whatever an automaker spends on one thing, it can’t spend on something else.
Chase performs private-label captive finance services for the Subaru, Jaguar, Land Rover, Maserati, McLaren and Aston Martin brands in the U.S. market.
Dayal said it is a “big, tall order” to set up a captive that requires things such as licensing in all 50 states. And foundationally, not every automaker has the necessary capital or expertise.
“Even for some of the larger OEMs, what is the most efficient deployment of capital?” Dayal said. “To set up a captive finance company? Or to invest it on your core R&D, your core business of products? The answer is different for everybody.”
Subaru of America is a huge success story for Chase Auto, which belongs to J.P. Morgan Chase & Co., the global banking giant based in New York. Chase and Subaru renewed their 20-year-old relationship last year.
Subaru of America CEO Tom Doll said Subaru temporarily maintained a captive arm in the 1980s in the U.S. market but discontinued it because of the expense.
Captives make a lot of sense once an automaker achieves a certain size and scale, he said, “but we didn’t achieve the appropriate size and scale until probably around 2013 or 2014.”
Once Subaru reached a maturation stage it felt comfortable with, the industry faced other challenges that pulled the automaker’s focus away from establishing a captive.
With stricter standards for greenhouse gas emissions and safety features, Subaru chose instead to focus capital on pursuing fuel efficiency and vehicle design, Doll said.
Subaru added a bigger product line, and bigger vehicles, better suited to U.S. customers. Sales grew each year from 2008 to 2019, with a drastic jump to 582,675 in 2015, from 2011 sales of 266,989. Sales in 2020 were 611, 942.
Doll said Subaru’s close relationship with Chase provided substantial financial assistance during the Great Recession. “Many of the captive finance companies couldn’t get financing,” he said. “But we had no problem.”
On a smaller scale, Jeff Dyke, president of Sonic Automotive, offered similar reasoning for Sonic not being interested in creating its own captive finance company, even though it once had its own subprime captive.
Sonic aims to more than double its total revenue and significantly increase profitability over the next five years, but that hasn’t changed its stance on forming a captive again.
Sonic’s growth strategy is focused on its EchoPark chain of used-vehicle-only locations.
In addition, the retailer said it intends to acquire some dealerships this year.
“We have a very clear and narrow focus,” Dyke said.
“The last thing I want to do is create a big distraction. I’ve got enough to deal with, with EchoPark. If the opportunity comes up down the road, and we’re selling half a million cars a year, we’ll consider it then.”
Sonic’s competitor Lithia Motors Inc., on the other hand, is doubling down on its captive finance arm. Lithia launched Driveway Finance Corp., previously known as Southern Cascades Finance Corp., nationally in the fourth quarter of 2020 and integrated it into its new omnichannel retailing platform Driveway.
Lithia’s goal is to leverage the indirect lender to boost the public group’s profitability 10 percent, with up to 20 percent of all vehicle sales captured by the captive.
Someday, Sonic might want its own captive to sell its F&I products.
But for now Dyke is happy with the banks and captives it uses for retail and wholesale finance.
“The way the banks are, and with all the regulations in place for financial companies, at this point with the dealers we’ve got and our finance partners are so good, we just don’t see the value,” he said.
“The money is cheap.”