Choosing ‘true captive' or ‘captive-like'

Many dealers reward automakers' captive finance companies with their loyalty, in large part because captives have skin in the game.

Philadelphia-area dealer Dave Kelleher is nostalgic for those days, back when Chrysler had its own captive — Chrysler Financial.

"A true captive is interested in the car company succeeding. That's something you just can't replace with a private-label company," said Kelleher, president of David Auto Group, which sells Chrysler, Dodge, Jeep and Ram in Glen Mills, Pa.

Bank-based Santander Consumer USA has provided the former Fiat Chrysler, now Stellantis, with private-label captive-financing services since 2013 under the Chrysler Capital name. Kelleher said he does plenty of business with Chrysler Capital and likes that they're "pretty aggressive" at buying deals. But, "it's still not the same" as a captive, he said.

Kelleher said he's still grateful the former Chrysler captive took a risk on him when he started in 2005, putting "every single penny we had and another $2 million we borrowed," into a small Dodge dealership that needed renovating.

"The difference is, with a true captive, sure, they have a profit motive, but the good of the corporation probably wins out," he said. "In my case, I was a young manager at the time and I had saved up a little bit of liquidity, and Chrysler wanted me to be a dealer. Their captive was more interested in helping the company get a good dealer.

"Their motivation was to make sure I could make it work."

A white-label company, such as Santander, is mainly motivated by profits and must answer to shareholders, Kelleher said. "A captive has the same shareholders the OEM does," he said.

For a true captive, for instance, it's OK if wholesale loans to dealers are down because of smaller inventories — as they are today — since the tradeoff is higher profit margins for dealers, said Marion Harris, CEO of Ford Motor Credit Co., at a recent American Financial Services Association event.

"While it hasn't necessarily been the best for the captive finance companies in terms of lower-rate financing programs, it continues to demonstrate the value that a captive finance company offers to an OEM," Harris said. "And it's a challenge we're going to have to work through this year with lower dealer stocks. But at the same time those challenges come with lots of benefits."

Another more direct advantage for automakers is that captive finance companies are typically profitable, and the parent company reaps the benefit. Ford Credit paid cash distributions to Ford Motor Co. of $2.4 billion in 2020 and $2.9 billion in 2019, the company reports. Over the last 20 years, Ford Credit has generated $31 billion in distributions to the parent company.

However, a wholly owned captive also carries a lot of responsibilities, especially in a financial crisis, said Ian Smith, CEO of BMW Group Financial Services Americas.

"If you think about the financial crisis or the COVID pandemic, what people don't realize is dealers rely on you, consumers rely on you to be there," he said. "When you've got supply chains looking for access to liquidity, and customers looking for payment deferrals, and dealers looking for financial deferrals, everybody — everybody — is looking for the financial service companies, especially the captives, for access to liquidity."

Meanwhile, the captives have their own bills to pay, he said.

"The other side of it is, when deferring payments for consumers, when negotiating terms and conditions for suppliers, when deferring obligations for dealers, our revenue streams are diminished," Smith said. "But we still have obligations to the markets, payments we have to make, to preserve the lifeblood of the business.

"This is not something a bank has to worry so much about."

In defense of private-label banks in auto finance, Jagdeep Dayal, head of partnerships for Chase Auto, said banks are just as capable of raising capital for all stakeholders in a captive-like relationship.

In fact, he said a big, global bank such as parent company J.P. Morgan Chase & Co. is more capable of raising capital and has a lower cost of funds. "I would argue our cost of funds is better than any captive can bring to the marketplace," Dayal said.

Chase Auto provides private-label captive finance company services in the U.S. market to the Jaguar-Land Rover, Subaru, Aston Martin and McLaren brands. In January, Chase added electric-vehicle startup Rivian as a private-label partner.

Mazda Motor of America was a private-label customer of Chase Auto since 2009, but the Mazda brand switched to captive lender Toyota Financial Services in April 2020.

Mazda dealer Annette DiLorenzo Thayer, owner of Quality Mazda in Albuquerque, N.M., said she misses the former Mazda Capital Services under Chase. That's mostly because the dealership had a good, personal relationship with its former Mazda Capital representative.

She said she has nothing against Toyota Financial Services — if anything, she said Toyota Financial's electronic funding is probably a little faster.

"It's going OK, but as you know with every institution you do business with, it's all about the people, the relationships," Thayer said. "So, we have to build new relationships."

Mazda's switch to Toyota Financial Services is part of a growing, strategic, global cooperation between Toyota and Mazda, and not due to any dissatisfaction on the part of either Chase or Mazda, Dayal believes.

Chase Auto signed on with Mazda in 2008 and Jaguar-Land Rover a year later — during the Great Recession — after Ford Motor Co. sold the car companies.

"They were on the brink of not having any captive capabilities," Dayal said. "We never stopped lending in any material way in the last recession.

"That is one of the strengths of Chase. We don't have to worry if we can raise capital. That's not true for every captive."

For example, back in 2006 a cash-strapped GM sold a majority stake in its former captive, GMAC. Later, the credit crisis and the collapse of subprime mortgages that preceded the Great Recession hit GMAC's ResCap — for Residential Capital — mortgage subsidiary hard, and eventually drove it into bankruptcy.

GMAC became a bank holding company, later renamed Ally Financial, when GMAC accepted a U.S. government bailout in late 2008. GM and the former Chrysler Group also went through bankruptcy restructuring in 2009. For a time, Ally, which later became an independent financial services company, was the captive finance company for both GM and the former Chrysler Group.

Without mentioning GMAC by name, BMW Financial's Smith said size alone isn't enough to keep a captive finance company in business.

"There certainly are major investments needed," he said. "You need equity to fund these businesses. It's also about the quality. If you can't drive the quality of the product, or the financial performance of the OEM, the cost of capital could offset a lot of the benefits."

He said the captive finance business is not to be taken lightly.

"It's a highly complex field," Smith said. "The obligations under consumer protection, fraud prevention, anti-money-laundering, good governance — that's a lot of expertise required to run these businesses today."