pcp rough road ahead_final

Bryan Marcus AutoGenesis Consulting Limited

Auto Retail Network Conference 2016

PCP – a rough road ahead?

A Rough Road Ahead?Changes to the PCP landscape and the impact on key stakeholders

Auto Retail Network Conference 2016 AutoGenesis Consulting Limited

Suppliers

OEMsCaptives

Independents

Dealers & Brokers Private Customers

Introducers End Users

Presentation Assumptions

Auto Retail Network Conference 2016

AutoGenesis Consulting Limited

Captives vs Independents Focus on activities of OEMs and their Captive

partners -- they drive the market and are highly dependent on PCP’s

Independents offer PCP but it is not a core product. Independents have different strategic goals from Captives, different risk appetites etc. and will respond differently to any changes in the economic and political landscape.

OEM vs Captives OEMs, their sales divisions and captives are not

always fully aligned. They have different performance drivers and time horizons, and so could have differing perspectives on PCP, regardless of who is carrying the end RV risk

A little bit of history


In US in 1980s increased use of extended term finance (7- 8 years)to accommodate customers with weak credit ratings

Alternative approach based on leasing, only paying off vehicle depreciation, with benefits of shorter purchase cycle

US domestic OEMs championed the product

Transfer to Europe

Arrival of Ford Red Carpet Leasing and Half-a-Car training

2001/2 problems of high returns caused by market adjustments

Repackaged and re-launched as Options

Increasingly acceptanced by OEMs and customers over next decade

Building momentum after 2008 to become the primary new vehicle acquisition mechanism

OEMs/Captives heavily dependent on PCP. Banks and Independents must offer PCP product

“The Name Game”


Selections

Advantage

i-Deal

Preferences

Elect3

Privilege

Passport

Access Agili

ty

Solutions

Select

Alternatives

Flexible PCPOptionsIndependents’ PCP

Personal Contract Purchase

Increasing share of POS used car financing

Accepted by new car buying public as primary acquisition mechanism

PCP product has clear, positive benefits for the Supplier, the Introducer, and the Consumer

It’s a win, win, win


Further product enhancements – PCH, VWFS e-solutions, Ford Options Cashplan, Peugeot Just Add Fuel, etc.

What’s not to like?

Significant stakeholder benefits


Introducers benefit from customer loyalty► Higher net revenues from returning customers► Customers more likely to use other dealership departments e.g. Used

Cars, Service, RAC

Customers benefit versus using HP or cash► Jaguar XE @ £30755 ORP► PCP 36 months @ £299 per month► HP 82 months @ £299 or 36 months @ £688 per

month► …► …► …

Captives secure more from automotive value chain for their OEM► Increase sales, upspec, shorter ownership cycles, add-ons e.g. service contracts► Increase brand loyalty and retention► Deliver finance revenue stream from financing activities

I’d like a ‘£299’ ... in red please …


Is the industry speeding?


Over the last 5 years industry sales have been much stronger than could

have been expected given the underlying economic indicators

OEM’s have been able to build sales momentum by promoting attractive

monthly payments, taking advantage of very low interest rates and a

strong used car market

Introducers have been presented with a low-cost and effective

solution to the problem of customer retention and loyalty

Consumers have been able to trade up into more aspirational brands, ‘upspec’ their vehicles and reduce

their repurchase cycle

Great motivation for the three key stakeholders to keep it going

Successesand

Opportunities

Some clouds on the horizon?


REGULATORS

PCP / PCH is on the radar of regulators FCA – is PCH consistent with TCF, customer transparency,

does it lead to negative customer outcomes? HMRC – looking for opportunities to reclassify products and

services Bank of England / PRA – concerns about scale of risk on

captives’ balance sheet (Blog ‘Is the industry speeding?’)

CRO’s• OEM’s are concerned about scale of risk created by their

captives. Refinancing entities and Rating Agencies flagged

their concerns during VW ‘Dieselgate’

Consider one possible scenario


Euro exchange rate / Brexit trade negotiations trigger vehicle price increases

Weak economic situation leads to reduction in consumer confidence

Lower industry volumes stimulates pre-registration by OEM’s at same time as oversupply in used car market

Used car values adjust to oversupply

Increase in customer / dealer PCP returns

‘Snowball effect’ -- each element creating further adverse impact

Impact and Response: OEM / Captives


IMPACT RESPONSE

PCP shifted depreciation risk

from consumer to Captives’

balance sheet creating a

significant financial risk.

In a downturn, changes to used

car prices hits 100% of

contracts vs 5-10% of contracts

for credit risk

Adverse impact on OEM’s

credit ratings, share price,

capital requirements, etc.

To address concerns of external funders, rating agencies, and regulators, Captives set lower RV’s and cap RV exposure.

PCP price increase reduces loyalty/renewal rates

Counter pressure from OEM to keep production lines running, minimise stock costs, ensure Sales Director keeps role!

Impact and Response: Introducers


IMPACT RESPONSE

Higher cost PCP makes renewals more

difficult – a more expensive ‘price walk’

Longer contract terms needed to match

monthly payments diluting sales and

finance revenue streams

Adverse impact on customer satisfaction

More demanding manufacturer

expectations (!!) – sales, retention,

customer satisfaction etc.

Dealer funders/shareholders become

‘uncomfortable’

Downturn mindset Smaller dealer groups may

need external help

……

Impact and Response: Consumers


IMPACT RESPONSE

Automatic PCP renewal

less attractive due to

more expensive ‘price

walk’

Increased probability of

vehicle hand back

Will consider reducing spec,

moving to lower cost brand,

increasing contract term and

increasing vehicle holding

period

Reduced confidence in PCP and

may consider reverting to HP /

ownership

Conclusions


Proposed scenario – some elements very likely to happen, but degree of severity difficult to

gauge.

Manufacturers’ resistance to changes will be considerable as PCP is a uniquely

advantageous mechanism for vehicle sales and customer retention. OEM and Captive will

absorb risks and costs as much as possible which could be counterproductive.

Independents will reduce PCP involvement, some may withdraw.

Depending on severity of impact, at some point the industry will dial back on its PCP

dependency

Looking forward…


PCP will not totally replace cash and other financing products for new and used vehicle

acquisition. Should expect PCP to settle at a lower share of POS finance

Captives and independents will set more conservative end values to reduce exposure

Dealers may be expected to become a ‘PCP partner’ e.g. as OEM marketing budgets

erode dealer may need to financially contribute to the retention process

Industry needs to be cautious about FCA and HMRC interest and avoid adverse impact

on customer confidence in manufacturer finance schemes

In the meantime…


o Observations and insights developed by Bryan Marcus, AutoGenesis Consultingo supported by Ernst & Young Global Automotive Finance Team


That’s all folks

pcp rough road ahead_final

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