The automotive financial services industry in Canada has evolved significantly over time. Originally, companies like GM established financing divisions to enable customers to purchase vehicles through installment plans. Over the decades, financing and leasing became more complex, with manufacturers and dealers seeking to transfer vehicle value risk to customers. This led to issues like negative equity and longer loan terms for consumers. Manufacturers that maintained control over leasing programs were better positioned, while those relying solely on third-party financing ceded advantages. Technology has also played a major role in analyzing customers and structuring payments.

1. The Evolution of Automotive Financial Services in Canada

2. The Start
At some point folks required
money to acquire
automobiles.
Alfred P. Sloan of GM
recognized that banks were
reticent to make funds
available to acquire this “new
invention” (automobile).
To facilitate acquiring
automobiles General Motors
Acceptance Corporation
(GMAC) was created to
enable time payments.
The rest is history.

3. Capital Intensive
At every level the auto
industry is capital intensive.
It has not changed in
decades, the industry
requires prodigious amounts
of capital to operate.
At the retail level the dealer
requires capital to
operate, and the customer
requires capital to acquire a
vehicle.
Lets focus on the customer
and the his capital needs to
acquire a vehicle.

4. History
Back in the day it was easy
and simple to finance
vehicles.
Most dealers would deal with
a “captive” financial service
provider. The terms were 24
or 36 months and implied an
appreciable down payment
or equity in the trade in.
It was implied that the
customer had “equity” in the
vehicle that was traded, and
more important in the vehicle
that was acquired.

5. Simple Deals
The deals were simple,
compared to today?
Think for a moment: no
calculators, and no
computers, it was pen and
paper with simplified
calculations.
If the customer could not
immediately comprehend the
deal depicted on paper it was
challenging to close a
transaction.

6. Leasing
In the early days leasing
facilitated the lack of
equity, or requiring an
appreciable down payment.
Companies that used
numerous vehicles to
conduct business preferred
leasing. The old “leasing is
for companies/businesses”.
In later years leasing made
vehicles more affordable.
Major reason leasing
became so popular in
Canada, when the Canadian
dollar was low and prices of
vehicles were high.

7. 2008 / 2009
With the strengthening of the
Canadian dollar in late 2007,
followed by the financial and
automotive meltdown in 2008
and 2009.
The money tree was shaken,
buffeted, and the established
levels of comfort evaporated
literally overnight.
Prices are now too high,
money is scarce, the
unthinkable is developing
with manufacturers going out
of business.
Wow the landscape has
shifted to a New Reality.

8. The Unknown
In 2009 it becomes
challenging to have potential
customers approved for
credit – really?
Money is scarcer – for
certain manufacturers not
others.
The unknown engenders a
sense of higher risk.
Canadian banks have cubic
money to lend, and are
anxious to get a bigger share
of the automotive financial
services business.

9. Business
In the meantime everyone is
still in
business, selling, leasing, fin
ancing vehicles.
From the global financial
crisis, Canada barely gets a
dent and keeps on going.
Obvious that everyone is
more cautious – just in case.
Everyone has done their own
risk analysis – just in case.

10. Risk
At the conclusion of a
comprehensive risk analysis.
Canadian banks offer
inexpensive money to
Canadian consumers.
Canadian consumers are
bullish and use the money
from the banks.
Canadian real estate prices
go through the roof.
Canadian auto
manufacturers head for cover
pull out of leasing (most) and
shift the risk to the Canadian
consumer.

11. Automotive Finance
Risk
The auto industry (with a few
exceptions) embarked on a
mission to shift the “value
risk” of a vehicle to the
customer.
Lets take the “residual value
risk” off our books and
transfer it to the customer.
We have done well leasing
vehicles for several years
and assuming the residual
risk.
Lets shift all of this to the
customer – not a big deal –
or is it?

12. Magic Number
The ideal number for retail
finance or lease is a 36
month term.
The industry works well, is
efficient on a 36 month basis.
In Canada leasing
complemented the 36 month
cycle, while improving
affordability.
Starting in 2009…how
manufacturers, dealers, cust
omers positioned themselves
in relation to the 36 month
term influenced the business.

13. Affordability
The “brave thinkers” of the
day who shifted the value
risk. The customer faced an
affordability issue.
Easy…lengthen the term of
the loan.
Increase the cash incentives.
Shifting the emphasis from
lease to retail finance.
From J.D. Power we know
that the average monthly
payment for a finance sale is
$520/month for an average
selling price of $30,000.

14. Term
Longer term loans starting in
2008/2009 are require to
offset the lack of leasing.
To do business in the 36
month time frame.
The loan terms get even
longer to accommodate the
“negative” equity.
Promoting 0% financing,
longer terms, merely
perpetuates the spiral of
negative equity.
Graph from J.D. Power November 2012

15. Negative Equity
The required longer finance
terms to improve affordability
exacerbate the spiral of
negative equity.
The
dealer, manufacturer, financi
al services, provide various
levers to transfer the
negative equity from one
vehicle to the next.
While the customer focuses
on the monthly
payment, assumes the
responsibility and risk.

16. Cycle
The cycle of negative equity
becomes a component in
perpetuating the “optics” of
the Canadian consumer
enduring a high debt level.
In many instances the debt is
not supported by the
collateral (vehicle).
Customer finances a new
vehicle and a portion of the
vehicle traded in to continue.
Imagine if “someone”
tightens auto loans similar to
mortgages…Ouch!!!

17. Leasing
The manufacturers that
remained in leasing in
2008/2009, and continued to
assume the residual risk.
Are they in a better position,
are the customers in a better
position?
What do you think?
Look at the sales success of
MerBimAu during the past
few years, and the ever
increasing sales of their
Certified Pre Owned.
MerBimAu=Mercedes, BMW, Audi

18. FINANCE LEASE
 Trend = longer term  Trend = stable terms
 Farther from 36  Closer to 36
 Customer assumes value risk  Manufacturer assumes value risk
 Customer must deal with negative equity  No negative equity for customer
 Carry over negative equity  Simply start a new lease
 Monthly payment higher or term longer  Monthly payment stable/term stable
 Cash flow + Risk  Cash flow + wear and tear
 No insurance for negative equity  Customer can buy wear and tear insurance
 Financial service has a lien on vehicle  Financial service owns vehicle
 Customer must roll over negative equity  Customer starts a new lease

19. Technology in the
Business Office
Where would the industry be
without technology in the
business office to “make
payments fit”?
Reflect on this for a moment!
There are a myriad of
possibilities, strategies, tactic
s that are deployed to “make
payments fit”.
Factor in the various “peace
of mind” products that are
offered in the business office.

20. Financial Products
Manufacturers that offered
the full spectrum of financial
products generated an
appreciable competitive
advantage in the Canadian
market.
MerBimAu is the most
obvious example of using
financial products and
remarketing to control, and
create barriers of entry to a
market segment.
The Detroit 3 are an example
of relinquishing financial
products and providing
opportunities to others.