Foreign automakers have learned what domestic manufacturers like General Motors and Ford Motor Co. have known for decades: Captive finance companies help sell cars. And a captive finance source is invaluable in the retail lease business.
In the push to expand leasing business, import companies are forming their own captive finance arms, reorganizing or forging alliances with companies like Primus Automotive Financial Services Inc. or General Electric Capital Auto Financial Services, which provide private-label financing packages for dealers.
Since 1990 a dozen importers have sprouted captive finance companies or linked up with third-party finance companies in a stampede to provide financing programs for dealers and retail customers.
As a result, dealers like Paul Holloway are directing more of their retail and wholesale finance business to captive finance companies like BMW Financial Services Corp. of Woodcliff Lake, N.J. Holloway said the company has dramatically improved its financial products for new-car dealers now that it is a wholly owned subsidiary of BMW of North America Inc.
'It is light years ahead of where it was,' says Holloway, owner of Dreher-Holloway Buick-Pontiac Inc. in Exeter, N.H.
He is impressed by the quality of services offered by BMW Financial including its retail leasing programs.
Forming a wholly owned subsidiary is one way to provide financing to dealers. Another is to hook up with a financial institution that specializes in automotive financing.
William Jensen, manager of dealer financial services for Mazda American Credit Inc. of Nashville, Tenn., said the company's agreement with Primus to offer private-label financing works to its advantage.
Still a young company, Primus has years of financial business experience because of its affiliation with Ford Motor Credit Co.
Ford Credit purchased Marine Midland Bank's automotive receivables and offices in 1990 and changed the name to Primus in 1991. The company is Ford Credit's non-Ford financing subsidiary, providing finance programs for Mazda, Jaguar and Subaru.
'Mazda had a service relationship with Marine Midland Bank, but Marine Midland backed out and so did other banks,' said Jensen. 'We began looking for a different type of operation.'
Even an importer as small as American Isuzu Motors Inc. has seen the value of financing vehicles. Isuzu established American Isuzu Motors Credit Inc. in April under an agreement with General Electric Capital Auto Lease Inc. The company offers competitive retail, lease and wholesale financing services to Isuzu customers and dealers.
And Ferrari North America Inc., based in Englewood Cliffs, N.J., announced in May the formation of Ferrari Financial Services Inc. 'The financial program offers fast service and attractive low rates through our servicing agreement with Chase Automotive Finance,' said Michael Vecchione, president of Ferrari Financial Services. 'This is just one method we are using to be more service-oriented into the 1990s.'
Ownership of finance firms gives importers more control over financial products offered to dealers and customers. It gives them the flexibility to react quickly to market changes.
JUMP INTO LEASING
Captive finance arms have enabled the importers to jump into retail leasing, which has grown dramatically in the last few years. Captive finance companies were able to react swiftly to the new trend by creating and rolling out a variety of lease programs.
Without captive finance companies, dealers would have to rely on local banks. Those arrangements aren't always in the dealer's best interest because banks seek profits while the dealer may want to move vehicles. Moreover, the lessee becomes the bank's customer rather than the dealer's or manufacturer's customer. So captive finance companies help dealers retain customers.
Importers recognize that dealers need a financing source they can count on. Banks and other financial institutions have proven unreliable in providing floorplanning and financing retail sales for dealers. That's what prompted Hyundai to form its own finance company in 1990.
'All the other lenders bailed out,' said Marty Brennan, vice president of sales and marketing for Hyundai Motor Finance in Fountain Valley. Calif. 'We got into the business because our dealers needed us, not because of the profit potential.'
General Motors Acceptance Corp. helped boost business for captive finance companies owned by importers in January 1993 when it halted retail financing of vehicles other than those made by GM. The company also threatened to stop wholesale financing of vehicles other than those manufactured by GM
GMAC's decision was devastating for many GM dealers who are dualed with foreign makes. GMAC pulled the rug out from under 175 Subaru dealers who relied on GMAC financing through dualed with GM.
As a result, Subaru now offers vehicle financing to dealers under private-label agreements with Primus and Nissan Acceptance Corp.
GMAC's decision also prompted Paul Holloway to move his Mazda business to a local bank even though GMAC later offered to continue his financing. 'The strength of GMAC was that they would always be there for dealers no matter what,' said Holloway. 'That was not exactly accurate.'
GMAC reversed gears on its decision to withdraw wholesale financing from dealers on makes other than GM, and it provides retail financing to dealers on makes other than GM on a case-by-case basis. As a result, many dealers moved their wholesale and finance business to newly formed captive finance companies owned by importers. Others like Holloway shared their business with captive finance companies and local banks with which they had done business before.
But moving business to a bank can be risky. Banks have a history of getting into and out of financing cars and trucks at the drop of a hat, leaving dealers in the lurch.
Today, banks are chasing dealer business. But there is a new dilemma. Some dealers complain about the rampant consolidation under way in the banking industry. When one bank acquires another, services and people are likely to change.
'Years ago we saw banks jump in and out of the business,' said Mark Herrmann, owner of Mark Buick Corp. in Yonkers, N.Y. 'What we are seeing now is a consolidation, so people from banks out of our area are coming in to solicit us.'
Captive finance companies also buoy manufacturer profits during market downturns, but importers downplay earnings; they say their financial services companies were created to support dealer sales.
'The main reason Honda, Mazda, Subaru and the others have formed captive finance companies is that it enables the manufacturers to offer retail incentives,' said Ramsay Gillman, a dealer and owner of Gillman Cos. in Houston. 'They couldn't offer subvented rates on retail leasing without a finance company.'
Following is a rundown of captive finance companies in the import field.
More than a decade ago, American Honda Finance Corp. recognized the important role a finance company plays in the sale of cars.
It began floorplanning motorcycles and power equipment in 1980. It moved into financing vehicles for customers in 1985, and a year later it began floorplanning vehicles for dealers.
More than three years ago the company launched its first retail leasing programs. 'In the first year, lease volume was low, But it has risen significantly the last two years,' said John Weisickle, assistant vice president.
Honda has shied away from low-interest loans but has embraced retail leasing incentives.
'We are a profit center but our goal is not one of growth,' Weisickle said. 'We look at the company as still being young, so we are selective about the loans we purchase.' The company provides retail and wholesale financing for Honda and Acura vehicles.
'Honda Credit supports the sale of Honda and Acura products to our dealers and through our dealers to the customers,' said Stephen Smith, assistant vice president for leasing and retail financing.
BMW Financial Services Corp. was formed in 1991 and became operational in January of this year to make its dealers more competitive. Prior to opening in January, BMW offered financing to dealers through an agreement with GE Capital.
'We recognized the competitive advantage of setting up our own finance company,' said David Paul, senior vice president of marketing and operations. 'We brought the company in-house to step up support of our dealers.'
BMW Financial is a full-service finance company; it offers dealers floorplanning, operating and capital loans, mortgages, retail loans and retail lease financing.
'Finance volume is up this year because of improved sales in the luxury segment and because BMW is providing a better level of service,' said Paul.
The company finances only its own make. All BMW dealers have used the finance arm's retail financing services. Twenty percent of the dealers currently floorplan vehicles through BMW Financial.
'This is a block-and-tackle operation to help dealers sell BMW products,' said Paul. 'We have a lot of opportunity for growth on the dealer side.'
Hyundai Motor Finance Co., based in Fountain Valley, Calif., has shown dramatic growth since it opened two years ago. The company finances 27 percent of Hyundai sales, up from 12 percent in 1990.
Marty Brennan, vice president of sales and marketing, said the company plans to expand into capital or commercial lending but has no launch date for those programs. 'We have some potential for growth,' said Brennan. 'We have grown from financing 12 percent of sales in 1990 to 27 percent of sales today.' He hopes the company can raise that to the mid-30 percent-range in 1994.
'We are a conservative lender, and we have a track record,' he said. 'Of the 238 Hyundai dealers doing business with us, we are furnishing financing for 70 percent of total dealer sales.'
The company's primary purpose is to support dealers in retail sales. 'We have looked at retail leasing but our residual values are the lowest in the industry so we can't be competitive in leasing,' Brennan said.
Hyundai's interest rates are competitive with local banks. 'We are a bright spot for Hyundai,' he said. 'The dealers rate Hyundai Motor Finance highly.'
Paul Payne, Mercedes-Benz Credit Corp.'s executive vice president and chief executive officer, said captive finance companies are meant to be counter-cyclical to the product side of the automotive market, helping profits when car sales are in a downturn.
Unlike the newly formed captive finance companies, Mercedes-Benz Credit Corp. started in 1981 and is a relatively mature business.
'Mercedes-Benz Credit is profitable within the expectations of the company,' said Payne. 'We make an appropriate contribution to the profits of the North American group.'
He said the company has business on its books from all Mercedes-Benz dealers. The company provides a wide variety of financial services for dealers including wholesale and retail financing.
To help its customers, Mercedes-Benz Credit opened a customer service center in Dallas in July to process contracts and billing and handle inquiries.
Payne said it is difficult for a manufacturer to sell vehicles effectively while using a third-party provider. 'Unless the third party offers financial products dictated by the automaker, an outside agency may not do what is best for the manufacturer or dealers, but what is best to make a profit for itself,' he said.
Mercedes-Benz Credit was formed for many of the same reasons as other finance companies. 'Other sources of financing for dealers have proven to be unreliable in the long run,' Payne said.
Mitsubishi Motors Credit of America Inc., based in Cypress, Calif., was created to support dealer floorplanning and retail sales and to help dealers avoid the problems caused when banks or captive finance companies abruptly pull out of the retail finance market.
Like other captive finance companies, Mitsubishi Motors Credit also wants to make its dealers more competitive. 'Mitsubishi Credit was created to assist dealers in making retail loans and leases. The company needed a mechanism to compete with the special marketing programs offered by other manufacturers,' said Charles Tredway, executive vice president and general manager.
Mitsubishi Credit introduced its first special retail lease program in the fourth quarter of 1992 on its luxury models.
'We are new but growing fairly rapidly,' said Tredway. 'We concentrate on financing just Mitsubishi products.' Tredway said the company will continue to grow as long as special incentives are popular. 'There is a lot of room for growth on the retail side of the business,' he said.
Tredway said 84 percent of Mitsubishi dealers use the retail lease program; 45 percent use Mitsubishi Credit to provide customers with retail loans, and 30 percent of Mitsubishi dealers floorplan with the company.
Nissan Motor Acceptance Corp. has seen a dramatic rise in retail leasing.
'We are at about the same volume level as last year,' said James Rode, executive vice president. 'Retail financing is down, and leasing is up.'
The company only finances its own vehicles. Thirty-three percent of Nissan dealers finance their vehicles through Nissan Motor Acceptance Corp.
The finance arm offers both retail financing and floorplanning for its dealers.
'There is growth potential,' said Rode. 'We support 25 to 30 percent of sales of Nissan U.S.A.'
Porsche Credit Corp. began operations in Lisle, Ill., just over a year ago, and already the company has a portfolio valued at $91|million and is making a profit.
Chrysler Credit administers the program using Porsche's funds.
Porsche offers financing only on its own vehicles but said it might add dealer floorplanning.
'We are looking at a fairly static portfolio in the $400 million range in 1996 when the Porsche Boxster is launched,' said Robert Dwyer, vice president of operations. 'Most of Porsche Credit's growth will be on the retail and lease side. Our penetration is 33 percent of sales and should be relatively constant.' He said Porsche formed the finance arm to improve vehicle sales.
'It was not created to lose money, but that's not our primaryconcern,' said Dwyer. 'Porsche never had consistent lease and lending sources like other manufacturers have.'
He said the company had private-label financing in the past provided by Marine Midland Bank, but the results were not what Porsche expected.
The finance arm gives Porsche control over the quality and consistency of finance services available to dealers. 'Banks in the United States are inconsistent,' Dwyer said. 'They are in and out of the market.'
Porsche decided against a private-label finance program from a third-party provider. The reason: Porsche figured its sales are so low, it would get poor service from a third party. Porsche only sells about 4,000 cars a year in the United States.
'We could have entered into an agreement with another company for a private-label package but it wouldn't have performed any better,' said Dwyer. 'So we decided to control our own destiny.'
'Without our own company, we would be at the mercy of other financial companies,' said Kenneth Adams, president of Saab Financial Services, based in Orange, Conn. Formed in 1988, Saab Financial Services moved its leasing business to General Motors Acceptance Corp. in 1991 and its financing business to GMAC a year later, after Marine Midland sold its portfolio. General Motors owns 50 percent of Sweden's Saab Automobile.
'Saab Financial uses outside services,' Adams explained. 'We used Marine Midland from 1988 until 1991 when we transferred funding and ownership of all future leasing activity to GMAC.'
GMAC processes the paperwork and does the credit analysis for retail leasing. Retail financing is done by Saab Financial but is serviced by GMAC.
'Our own finance company gives us the opportunity to provide dealers with a competitive finance rate and the ability to offer subvention programs,' he said.
Subaru Financial Services, formed in 1981 as a joint venture with Borg-Warner Acceptance Corp., has undergone several incarnations.
Its relationship with Borg-Warner ended in 1985 when Subaru entered into a deal with Marine Midland Bank N.A., based in Buffalo, N.Y., to finance vehicle sales by dealers. That agreement ended in 1989 when Ford purchased Marine Midland's automotive portfolio and formed Primus in 1990.
Subaru is now on a sure footing, delivering its financial services to dealers through Primus in some parts of the country and through its own in-house company formed two years ago in New England and certain mid-Atlantic states under an agreement with Nissan Acceptance Corp.
'We have had good relations with Primus for the last two years,' said Scott Beagle, vice president and general manager of Subaru Financial Services.
He said the alliance with Primus allows Subaru to control pricing on financial products and decisions on credit-buying.
'We are working though a third party so we can reap the benefits of economies of scale,' he said.
At the same time, the private label allows Subaru to be perceived as a true captive finance company. 'Our purpose is to support our dealers in the sale of new Subaru products,' he said. 'We are not a financial services company interested in building a finance portfolio.' As a result, the company does not share in profits or losses under the private-label relationship with Primus. But Subaru does maintain input into the marketing support of pricing of various programs.
'We continue to promote retail leasing and to train dealers to take advantage of leasing,' Beagle said. 'We see leasing as a critical tool in selling vehicles, not an afterthought. We will focus on shorter leases as time goes on.'
He said reviews by dealers of the agreement with Primus and the formation of Subaru Acceptance Corp. have been high.
Still, the company has to struggle against its tumultuous past. Even Beagle is reluctant to discuss what happened prior to two years ago. 'We have dealt with outside parties and the results were not acceptable to us,' said Beagle. 'The way to earn our dealers' trust is to perform, help them make money and provide a stable financing source, and that is what has happened over the last two years.'
Beagle said the company is pleased by its dealers' reception of both of the new arrangements and the results of those arrangements.
In New England, the company uses Nissan Acceptance Corp. to administer the program but Subaru Acceptance buys the assets and manages them.
'We like to focus not on the two arrangements Subaru has, but our support of our dealers with consistent programs,' Beagle said. 'I would like to be in the position of financing 50 to 70 percent of our retail business within the next 18 months.'
About 15 percent of the dealers floorplan with the company, and 30 percent of the vehicles sold are financed through the private labels, up from 10 percent a year ago. He said 30 to 40 percent of dealers use the finance programs.
For more than a decade, Toyota Motor Credit Corp. in Torrance, Calif., has supported dealers. It has expanded from one branch in 1982 to 33 branches today. Thirty-five percent of Toyota Motor Sales dealers floorplan with Toyota Motor Credit, and 95 percent of them use the company as a source of financing retail sales.
Leasing has been a hot product at Toyota Motor Credit, according to Jim Aust, corporate marketing and finance programs manager. 'That's where the market is and has been for the last couple of years.'
He said the company expects to grow, but not at the rate it has for the last decade. 'We will reach a point where we are a mature company,' said Aust. 'Our concentration will be on servicing dealers.'
He said Toyota established the finance company because banks were in and out of the automotive financing arena in the early 1980s, mostly to take advantage of double-digit interest rates.
VW Credit Inc. has a new identity. The finance arm was formed in 1981 with Chrysler Credit servicing the company's portfolio. Dealers asked for the creation of a captive credit company because of the high interest rates rampant a decade ago.
But the relationship with Chrysler ended in June 1992 when the VW Credit set up its own field organization to process wholesale and retail financing for Volkswagen and Audi dealers. The move was made to give the company more control and flexibility over financial products, said VW Credit president John O'Green. 'It was time,' he said. 'Chrysler did a good job. We just decided to grow up.'
The company provides retail and lease financing for customers as well as wholesale financing, working capital and real estate loans for dealers. O'Green expects continued growth for the company in leasing and floorplan financing. In excess of 280 VW and Audi dealers currently floorplan through the company.
Volvo Cars of North America Inc., announced last year that it had formed a joint venture with GE Capital to provide financial services to Volvo customers and dealers in the U.S. and Canada.
Volvo Finance North America provides the same services offered to Volvo dealers by Volvo Finance America, including floorplanning, commercial and real estate loans.
Volvo contributed its existing organization and products to the new venture. Volvo Finance was founded in 1974.
The company provides leasing or financing for about 50 percent of all Volvo vehicles sold. Its portfolio was valued at $2.8 billion at the end of 1992.