AutoNation CEO Mike Manley: ‘Important' to have captive lender

AutoNation is "aggressively looking" into restarting a finance company as a source of profits and strategic advantage as it looks to grow its used-vehicle business.

"I think it's important for the largest automotive retailer in the country to be able to offer finance through a captive where we can tailor-make services, where we can make sure that the relationships that we build with our customers are deep, where we can be flexible to make sure that we account for different cycles, different changes in buying habit," Manley said last week on an earnings call. "So I am strongly in favor of that."

A captive lender also is important to competitor Lithia Motors Inc.'s growth plans, and other big retailers are mulling the idea. They are typically profit centers for automakers, though Fiat Chrysler, which Manley led as CEO for two and a half years, didn't have one.

Manley said he felt it made sense to explore a captive given AutoNation's volume and plans to expand the AutoNation USA platform of used-vehicle-only stores from 10 today to more than 130 by the end of 2026.

"And I think this is an area where, let me say, 'aggressively looking' is probably as close as I would put it right now, because it's something that I think really could add value in multiple ways, not just from a profit contribution perspective," he said.

Other large publicly traded groups discussed the idea of a captive during earnings calls this month.

Penske Automotive Group Inc. CEO Roger Penske was asked during a Feb. 9 earnings call what opportunities he saw for his group in the next five to 10 years. "We have opportunities to add, I think, a finance company at some point, maybe," Penske said.

Asbury Automotive Group Inc. closed on finance-and-insurance product provider Total Care Auto in December but does not have a captive finance company. Asked about the possibility during an earnings call last week, CEO David Hult described Asbury as "in the really early stages" of studying whether a captive would be worthwhile. "It's too early to tell at this point," he said.

Lithia said its Driveway Finance Corp. generates three times as much profit on its own loans as it does arranging a third-party loan. The unit completed its first asset-backed securities offering and grew its portfolio to $700 million in the fourth quarter. It aims to expand to a $9 billion portfolio by 2025 and ultimately $15 billion to $20 billion to support $50 billion in annual sales, according to an investor presentation this month.

AutoNation once had a finance unit, but former CEO Mike Jackson ended the money-losing business in 2001. It made a foray into restarting a captive finance company in 2014, with Jackson describing active negotiations related to the concept. However, by 2015, those plans were dead, with Jackson citing factors such as cost, return on investment, scale and competition.

"It's really capital-intensive" to establish a captive, Michael Buckingham, managing director of J.D. Power's PIN Auto Finance, told Automotive News.

Other challenges include a need for personnel and state lending licenses and investors' reluctance to buy bundles of auto loans until a lender has a history.

For a large national group, it would make more sense to buy an existing lender and turn it into a captive than to start from scratch, Buckingham said. "That's a much quicker way to do it," he said.

A captive can be extremely lucrative, according to Buckingham, who pointed to Ford Credit and GM Financial. A dealership captive can even offer its services to and profit from other dealerships, he said.

Financing income is one rationale for establishing a captive, according to Buckingham. "More importantly, it's to close deals," he said.

Dealership captive finance companies would likely seek to fund loans to midprime and subprime customers on used vehicles, Buckingham said.

It would be too difficult to compete against large banks and credit unions on rates for low-risk prime borrowers, and subprime borrowers are largely priced out of the new-vehicle market, Buckingham said.

A captive finance company also provides the opportunity to package F&I products with the sale — the true F&I revenue generator, according to Buckingham.

"When you look at our F&I, 70 percent of it is coming from product," AutoNation CFO Joe Lower said last week. AutoNation posted an F&I gross profit per vehicle of $2,703 during the fourth quarter.

Lenders might get spooked in situations where financing products such as GAP insurance requires larger advances, according to Buckingham.

"If you're your own lender ... you can finance what you want to finance," he said.

Melissa Burden contributed to this report.