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'I drool' over captive finance company profits, says Santander Consumer partner

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'I drool' over captive finance company profits, says Santander Consumer partner

Fiat Chrysler Automobiles NV CEO Sergio Marchionne has no plans to launch a captive finance company prior to his planned 2018 retirement, but he suggested that his eventual successor should keep an open mind on the subject.

The automaker's U.S. arm entered a 10-year private-label financing agreement with Santander Consumer USA Holdings Inc. in 2013. Chrysler Capital, the resulting private-label lender, maintains limited exclusivity rights to participate in certain of Fiat Chrysler's promotional financing programs.

"The reason why I justified not having it when I was young and foolish ... was about the fact that I thought that it would actually distort commercial decisions on the commercial side," he said during a Jan. 26 conference call. "Every time I meet with a commercial team, I'm reminded of how much of an idiot I am."

Marchionne prefaced his remarks by saying he needed to be "careful" out of the "huge amount" of appreciation he has for Santander Consumer majority owner Banco Santander SA and its chairman Ana Botín. The topic arose during the Fiat Chrysler call because of an analyst's question stemming from Ford Motor Credit Co. LLC's report the same day of a full-year 2016 pretax profit of $1.88 billion — a result that did not go unnoticed by Marchionne.

"Every time I see numbers being reported by our competitors, I drool over a portion of their P&L, which I don't have," he said. "And I just saw the numbers come across [from] Ford and the number was in excess of $1 billion. When you see that kind of profitability that's being left on the table and we cannot participate, I wonder whether it's something that we shouldn't look at again."

It will not happen under Marchionne's watch, however.

"I think it's up to my successor in '19 and later to try and determine whether that's a proper strategy to use or not," said the CEO, who has committed to remain with Fiat Chrysler through the completion of its 2014-2018 business plan. "I never had the luxury of having that option, so I will follow it from interest from the outside, but I couldn't afford to do it."

A combination of Fiat Chrysler's capital structure and history previously made the establishment of a captive finance company "pretty unrealistic." And Marchionne said he was mindful of the experience of General Motors with its former captive finance company, General Motors Acceptance Corp.

"Remember that the reason why that went sideways is because of the fact that they started doing things that were really outside of its mandate," Marchionne said of GMAC.

"I remember having conversations with both Fritz Henderson and Rick Wagoner way back into time, bout the fact that they thought that the market had underestimated the value of the subprime mortgage portfolio inside GMAC," he recalled in reference to the two former GM executives. "And within three years, all that world was turned upside down and that reality disappeared. So we need to be careful."

The model Marchionne appears to envision seems to be consistent with the strategy GM has pursued with its current captive, General Motors Financial Co. Inc., which is focused on driving vehicle sales, supporting GM customers and dealers, and contributing to its parent's profitability.

"Our objective is to make money selling cars and the minute that we distort that objective in some fashion by creating ancillary services ... is the minute that we should really rethink the way in which we operate," Marchionne said. "... Otherwise, we will end up with a potentially dysfunctional result for the business."

Santander Consumer, in its recent earnings report, said that it continues to work strategically and collaboratively with Fiat Chrysler to strengthen their relationship and to create value with Chrysler Capital. The company has taken several steps along those lines, and it has made the execution of a flow agreement with Banco Santander regarding Chrysler Capital production a top priority in the first quarter.

At the same time, however, the private-label program experienced steep reductions in origination volume in the fourth quarter of 2016 as well as the full year. Chrysler Capital's penetration rate of 17% in December 2016 marked a two percentage point reduction from September 2016 and a 12 percentage point drop from the year-earlier month. It is far below the targeted rate of 64% in the program's fourth year.

Santander Consumer's inability to meet specified penetration rates represents one of the circumstances under which the Fiat Chrysler agreement is subject to early termination.