Fred  Crawley, Senior Reporter at Leasing Life reports “The days of the wholly manufacturer-owned captive finance model may be numbered.”

These were the words spoken by Chris Sullivan, chief executive of corporate banking for RBS in the UK, at a conference held recently by systems provider Sword Apak.

The comment was made in a discussion on the future of manufacturer finance programmes, in which Sullivan expressed his expectation that the majority of manufacturers would soon need to partner with banks in order to achieve access to capital at a sustainable price.

He argued that the cost of funding would only increase in the years to come, putting margins under pressure and forcing manufacturers either to think like banks in terms of the management of their treasury functions, or enter into risk-sharing partnerships with banking partners in order to provide both wholesale and retail finance.

Speaking exclusively to Motor Finance, Leasing Life’s sister title, Sullivan explained: “Of course, every set of circumstances is unique and a generalisation can’t be made. However, banks are increasingly acting as both advisors and funders to manufacturers, and even when manufacturers are providing finance themselves, it is likely that they are borrowing from a bank to fund that lending.”

Colin Maddocks, director of network development for Mazda Europe, agreed that manufacturers had to begin thinking about more than just “moving metal” in their provision of finance programmes.

“In working with bank partners across Europe, we have had to think about cost and profit implications for them – so we have learnt to think like a bank,” Maddocks said.

Change expected

Across the industry, business leaders have responded to the issue with unanimous agreement that captive strategy will have to change to reflect shifts in the capital markets, but have stopped short of sounding the death knell for the traditional captive model.

Black Horse managing director Chris Sutton commented: “Money costs are undoubtedly going to rise in the short term to counteract inflation, as economies continue to recover and money supply stimuli reduces. Manufacturers have been particularly active in supporting sales of new vehicles by providing subsidised finance, but as interest rates rise, this becomes increasingly expensive, especially around provision of zero/low rate APRs.”

Sutton contended, however, that manufacturers need not necessarily be at a disadvantage to banks in terms of access to capital. Traditionally, Sutton argued, banks have had the ability to raise funds to lend out at lower rates than major corporates, but that this had changed as the risk premiums attached to financial institutions had increased in recent years.

“Some corporates can now raise funds in their own right more cheaply than via their bank – depending on the strength of the balance sheet,” he said.

“Since the credit crunch, the importance of liquidity and availability of capital is now much more apparent for both banks and manufacturers. With any joint arrangement the profit element is usually required to be shared, which can place pressure on the margins needed.

“Personally, I believe that we will still see both models in operation in the future – some manufacturers will want, or need to, rely on banks to provide funding and some will be able to raise their own funding by other means.”

Adapting for survival

Meanwhile, consultant and former head of Mazda Bank, Ian Dewsnap, agreed that there would be ways for the current captive model to survive into the future.

“I would not for one minute argue with Darwin. Evolution is constantly going on, and the only constant is change – or whatever expression you care to use. However, I would not buy the argument that captives are dead for a while yet. To answer the question of how they will change, however, one needs to look beyond the UK.”

A dry securitisation market, poor access to funding and consequent higher operational costs, Dewsnap posited, had made some smaller markets no longer viable for single brand “true” captives.

He explained: “Creative solutions have emerged, with some manufacturers taking back ownership of wholesale and moving their point of revenue from wholesale to retail. Some have set up white label operations, others perhaps JVs.

“Certainly the landscape has changed, and the days of the captives in every market their parent brand operates in are gone.”

The survival of wholly owned captives, Dewsnap said, will depend on both the motives and the financial positions of their parents. The German captives in particular, he argued, had particularly strong treasury operations, and might prosper “for a long while yet.”

At the same time as these comments were being made, one German-owned captive – BMW Financial Services – made a muscular demonstration of its group’s confidence in its profit-making ability by completing the acquisition of ING Car Lease by fleet subsidiary Alphabet.

It was certainly enough to cause fleet provider Leasedrive’s commercial director, Roddy Graham, to re-evaluate his view of the viability of the captive model.

“Until last week, I would have agreed with the view that partnership with banks will become the only realistic way for manufacturers to offer finance programmes. However, the news that BMW has acquired ING Car Lease for a not insignificant consideration, and the fact that they will need to feed the business ongoing with a huge level of asset finance, suggests that this particular captive is alive and well.”

If, then, the captive model still has life in it, what will be the next phase of its evolution?

Dewsnap thinks that the situation may change dramatically once Chinese brands start to develop momentum in Europe.

“As and when the Chinese brands have a market share foothold, it will be interesting to see what their decision might be for the use of what seems to be plentiful capital access. Will they partner with existing players, bring Chinese banks with them as partners – or set up their version of the traditional captive model in larger markets?”

While few would disagree that those manufacturers who have chosen to ally themselves with banks will have an advantage in preserving their margins in a pricier funding climate, it remains to be seen whether truly in-house funders will fall foul of their traditional methods, or find new ways to compete.

Article contributed by Fred Crawley, Senior Reporter – Leasing Life & Motor Finance