Born out of recession, finance firms have become crucial to the future success of their car company owners.
Most of the new marketing innovations from personal contract plans to free mobile phones have been developed in co-operation with the finance companies. The outbreak of hostilities over the value of personal leasing plans (MW last week) illustrates the heightened competition for customers and the rivalry between the players.
“The need to make cars affordable during a difficult time created the schemes which have given the finance companies their power,” says one observer. In the most competitive retail market that many can remember – where volume could drop as much as 15 per cent this year – that power and importance can only grow.
Back in 1992, when Ford launched its Options scheme, the logic was simple. With money tight the retail buyer was staying at home. If the car companies could free some money, or make it cheaper to borrow, then they might encourage people onto the forecourt to buy cars.
Ford Credit now estimates that more than half of its retail buyers will use its Options scheme to buy their car next year and by 1998 almost 80 per cent will use a Ford Credit scheme of some sort. The other big players have similarly sized ambitions.
Figures from the Finance & Leasing Association show that almost 20 per cent of new cars sold in the UK last year were paid for through finance company schemes worth 8.9bn. Not all are manufacturer schemes but it is clear they are offering stiff competition to the more conventional sources of car loans.
At the same time, manufacturers who have ventured into the finance business to sell cars are realising there are opportunities to diversify into other consumer banking areas, from home insurance to personal loans.
“Once we have exhausted finance products associated with the car, there is nothing to stop us expanding into other types of financial services,” concedes Volkswagen Finance Group managing director Malcolm Hill. “All the major manufacturers are looking down the same road so there is ultimately no limit to how far we can expand – but that is four or five years down that road.”
Volkswagen Finance, in line with its Ford and Vauxhall rivals, steered clear of the credit card ventures pursued by their parent companies – the reason being that the cards are “outside core business”.
Significantly, the Volkswagen Audi Group took full control of Volkswagen Finance 15 months ago. It had previously been a joint venture with Lloyds but the takeover underlines its growing importance to the manufacturer. Each brand has its own brand manager in the finance company. All ideas are shared and so incubated with the marketing departments. “No longer can you just sit down and offer a nought per cent finance offer – we have to constantly stimulate the market,” says Hill.
The various finance companies offer a similar menu of stimulating opportunities, ranging from dealer support to retail incentive schemes for fleet management. They also offer – at a time when for many manufacturers the core business is losing money or at best breaking even – a very profitable return: in excess of 20 per cent on their equity investment.
Ford Credit Europe (FCE) and the other companies are no longer just about promoting nought per cent finance schemes. FCE is central to the car company’s plans to expand in Eastern Europe, has assets of more than 9bn and contributes more than 200m of profit to Ford coffers each year.
“We are repositioning ourselves as Ford’s own bank,” says Ford Credit UK spokesman David Nash.
“Market research shows that people would go looking for finance in dealerships if they thought we were Ford’s own bank. We are a worldwide bank borrowing billions of dollars on money markets and then lending that money to people to buy cars.”
The repositioning began in June with the launch of the Acumen personal leasing plan but represents a formalisation of the position in Germany where Ford Credit is already known as the Ford Bank. Volkswagen and other manufacturers have similarly branded operations in Germany.
But Nash is quick to stress that this does not mean Ford will set up a high street operation. “There will be no diversification into non-core financial products. There will be no consumer banking, no personal loans. All we want to do is finance the bulk of Ford sales. The only limit is the size of the individual manufacturer.”
But the opportunity to exploit the Ford name and brand values in other product areas could be too good to miss. FCE has become central to Ford’s European expansion plans offering finance to dealers in new markets in the East where there is little infrastructure to provide such funding.
In recent years, the finance business has grown from a peripheral to a core activity. Within five years, it may well have moved on again to something more than simply offering support to sell cars: standalone business units with a high street presence.