Lease push in downturn gives Toyota an edge
George Borst: “There is potential for things to be pretty solid for the next couple years, offset by what is happening in Europe.”
Fifteen years ago, George Borst moved from a high-profile job managing Lexus Division through the early-1990s recession to become CEO of the then-lesser ranks of Toyota Financial Services.
Since that time, Toyota Financial has grown from $20 billion in managed assets to more than $91 billion and has sprouted its own savings bank. Not that it was smooth sailing.
In fiscal 2009, the captive lost $623 million in the thick of the recession. But within a year, Borst helped guide its earnings back to $1.1 billion -- a new record for the company, followed by $1.9 billion in earnings last year.
"I can't blame my predecessor for anything," says Borst, with more than a hint of self-deprecation. "I've been here for tough times. I'm planning on staying for the party."
Borst, 64, spoke with Staff Reporter Mark Rechtin about what the future holds for Toyota's captive finance company.
Q: What's your assessment of the market and where Toyota fits in?
A: Back in 2009, in the height of recession, Toyota was spending $1 million an hour in r&d. You can see the pride in the product deluge coming. Combine that with all the vehicles coming off lease. Then there's the affordability of cars, costing 23 weeks' of salary versus 28 weeks of salary seven years ago, combined with historic low finance rates. Plus the proverbial pent-up demand automakers always talk about? This time it is for real. If the SAAR [seasonally adjusted annual rate of sales] at 14 million is real, the pent up demand is 9 to 11 million units. If people can have confidence the world isn't going to implode and Europe gets a direction, the possibilities are strong. Come November, there is going to be clarity in the direction the country is going to go.
There is potential for things to be pretty solid for the next couple years, offset by what is happening in Europe. The opportunities outweigh the risk going forward. People want a reason to commit to a new car, but there's still some economic skittishness. We're cautiously optimistic.
Previous recessions had a quick recovery. This one is slow and painful.
Are you increasing residual forecasts for leases that are being written now, coming due in 2015, because the market should be at 16 million units then?
Go back to 2009, when everyone pulled out of leasing. We doubled down on leasing. So for the next 12 months starting now, one of four lease returns industrywide is a Toyota, Lexus or Scion. A lack of leasing threatens brand loyalty, so this is a real advantage for us going forward. We actually raised residuals in 2009.
Prior to 2007, the SAAR had been 16 or 17 million for 10 years straight. If you go back to 2009, the number of 1- to 5-year-old cars was 85 million. But when the SAAR dropped to 11 million, then the number is 60 to 65 million. That's why the residuals are at a historical peak, and it will stay high for the next 12 to 18 months. It will be a couple more months before we hit the bottom of the [inventory] curve before we start to come back up. We've now made some slight adjustments because we're coming back into an 80 million vehicle used-car market.
That's the gift that keeps giving, because in 2009 we were able to be aggressive in leasing and help Toyota, Lexus and Scion in a tough economic time. And now it's coming back when dealers are selling record numbers of used cars. Plus, we're using off-lease customers to help fuel the new-car market.
We sell 87 percent of our off-lease vehicles online, on weekends. That's more than anybody. If you go to an auction, you are at the mercy of just 60 people there. Selling vehicles online, you have the whole country, and certain regions are hotter than others. That adds two or three points on residual value, just from our system.
Any other new programs specific to Toyota Financial?
In December we launched Enterprise Lead Management. We call customers starting six months before their lease ends. We find out what the customer is interested in and we provide the lead to a dealer. Every dealer has his own CRM tool, so this feature directly loads onto their tool. And 94 percent of those people are contacted within three hours. If they want to buy their car and get a loan, the dealer brings them in, signs them up as a certified pre-owned car, and gets them the new-car financing rate. They have a retail loan for three, four or five years. With all the equity in off-lease, we see a lot of that.
Are Toyota customers who use Toyota Financial more loyal?
If a customer uses us versus a bank, the loyalty to the dealer goes up 58 percent. It's a three-way win.
What would you say is Toyota Financial's balance of loan and lease deals in its portfolio?
We're consistent at about 25 percent leasing. And we were 25 percent in 2008, 2009 and 2010, when a lot of folks exited the business. The overall market has started to trend up in the last year, and lease asset-backed securities are available in the funding market.
Are you planning to expand leasing and, if so, where will you tail off?
We'll go where the market takes us. Our appetite could go up 5 points and be fine. It depends on what offers are out there and what we're competing against.
Are you doing more deals with nonprime customers? What's the lowest credit score you're willing to approve?
There's been a lot written about subprime and nonprime.
We have not changed our credit criteria. We are not expanding in subprime or nonprime. We made adjustments in 2007 and we haven't wavered from that. We have proprietary custom scorecards of 15 to 18 factors. People think it's just a FICO score; if it's 680, you get bought, if it's 640 you don't. We look at things in groups, which determine the likelihood of default. We have eight tiers. That's how we decide to purchase.
In a recent interview, you said, basically, that if someone is 120 days behind on his mortgage, but the rest of his credit is good, he'll still get a loan. True?
Look at the housing market. A lot of good people got hurt. There's a difference between a credit criminal and someone who lost 50 percent equity in their house. We see if the rest of their credit is fine, if they paid on time, they had previous loans with us, and there were no blemishes other than the mortgage. Not only is that a good customer, but they are a Tier 3, not a Tier 7. Our subvention is on Tier 1 through 3. So they're not looking at a 14 percent interest rate. They qualify for 1.9 percent. And the performance on that in terms of delinquencies has been very good. I'm not sure anybody else has that program, and our dealers in Nevada and California, where people have really been affected by real estate, really appreciate that.
Are you planning to have more subvented deals?
The subvention strategy is dictated by the manufacturer, and we support on a formula basis. They pay X, we pay Y. They determine the strategy. That's one of the advantages of a captive.
Will Toyota Financial step up its used-vehicle financing?
One of our focuses is to expand our presence in the used-car financing market. According to August figures from J.D. Power, TFS is the No. 1 mainstream captive in used-vehicle share, just under 50 percent of what the dealer sells.
If you look at the growth of the used-car market in the future, that's a growth segment. We used to have an up-rate on used cars versus new. But if it's a certified pre-owned car, it's the same rate as new. We're looking at used-car leasing because the big depreciation hit is in the first three years. We're giving our field offices objectives for used-car share and quality. We don't want Tier 6 or 7 paper and have a real surprise in three years.
Why does Lexus offer GAP while Toyota Division does not?
We have included GAP in Lexus for years. With Toyota it's an option. A lease is a combination of the package, rent charge, rate, residual and whatever programs are on the car. GAP isn't free. Some people elect to put it in the mainstream market and feel it's attractive.
We would rather give a better rate and a better residual and make GAP available for the person who wants it. Only 25 percent take it. But if it's priced into the lease, 75 percent are paying for something they don't want. Toyota is in a more price-driven, payment-intense segment. Sometimes $5 a month can make a difference. GAP is baked in somewhere. So we give the consumer the choice.
You can reach Mark Rechtin at firstname.lastname@example.org. -- Follow Mark on