Vorsprung durch finance
The in-house finance operations of Volkswagen, Daimler and BMW are among Germany’s most prosperous financial institutions. Some rivals in auto finance, and some much larger banks, could learn from their example.
The results are impressive. The returns on equity at Daimler’s and BMW’s financial services businesses – captives, as they are known in the industry – have averaged 22 percent over the last three years. At Volkswagen, the largest of the three with a balance sheet of 100 billion euros, the average ROE was 14 percent. Deutsche Bank, the country’s biggest lender, managed 4 percent.
It’s easy to see why car companies love captive finance operations. They boost sales, promote brand loyalty and encourage sales of more expensive vehicles and more rapid replacement. And customers are also happy. The captives control almost two-thirds of the German new car financing market. They also sell 20 percent of all third-party insurance policies for newly registered vehicles.
Not all captives do as well as the Germans. The erstwhile financing arm of General Motors, GMAC, needed a whopping $17.2 billion U.S. taxpayer bailout in 2009. In 2012, the French government guaranteed 7 billion euros of credit to keep struggling Peugeot’s Banque PSA afloat. And, of course, few big banks have anything like the German auto lender’s record.
Bankers could learn from the German captives.
The first lesson: lend to people who can repay. The goal of the three Germans is not to help marginal buyers, but to encourage basically affluent customers to buy more up-market vehicles. Selling premium cars rather than mass-market vehicles also helps. There is none of the subprime auto lending which is causing trouble in the United States and similar excesses elsewhere. It helps that the up-market cars they finance tend to have high and less volatile residual values.
The result is very low loan losses. Average credit losses over the last decade have been 0.5 percent, significantly below American peers. Net losses rose during the financial crisis but still remained below 1 percent.
Another lesson: expand in related areas. While GMAC went into mortgages and commercial banks tried to cover the waterfront, the German captives stayed close to home. They offer car-related products such as fleet management, insurance and warranty extensions. They are also the test bed for new business models like car sharing in large cities, for example Daimler’s Car2Go scheme, which runs a fleet of 11,000 Smarts in 27 cities.
Also, secure good funding. The German operations have full banking licences, giving them access to central bank financing if things go wrong. But things are unlikely to go badly wrong. Moreover, all three captives offer current and savings accounts that cover up to a third of their refinancing needs.
There’s one more thing that regular banks cannot really hope to copy. The owners of the German captives are all strong companies. It is easier to do well as part of a global industry leader. The carmakers have solid investment grade credit ratings and keep billions of net cash on hand to ensure rating agencies are happy. But these companies do not limit their excellence to technology, as in the famous catchline of VW’s Audi: “Vorsprung durch Technik.” They also go for “Vorsprung durch finance.”