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Automakers' finance arms expand into mobility services to grow revenue

Financing arms for Toyota Motor Corp. and Daimler AG are experimenting with flexible mobility services as many customers move away from individual vehicle ownership.

Captive finance companies, the subsidiaries of automakers that provide financial services, are looking at how to retain customers and generate revenue beyond the traditional avenue of providing loans and leases for cars. One option is by investing in mobility services, including car subscriptions, ride-sharing and perhaps even managing fleets of self-driving cars.

Revenue from mobility services is projected to hit approximately €1.2 trillion globally by 2030, with profits expected to reach about €220 billion according to consulting firm Accenture. Captive finance companies, or captives, account for up to a third of some automakers' profits and half of their total assets, and a boost from mobility offerings could increase automakers' profits, experts say. If captives lose direct contact with customers from a drop in vehicle sales without a revenue alternative, it could mean a drop in profits for automakers.

Other automakers are experimenting with mobility services under their parent companies instead of finance arms. But captives, which have direct access to customers and records on payments to dealers, can help automakers test new services, Gary Silberg, Americas head of automotive for KPMG, said in an interview.

"They're thinking if they want to get new business models and subscription models or connected different things, the only place [the automaker] could actually do that would be the credit company," Silberg said.

Toyota, Daimler move beyond traditional financing

Toyota Financial Services, or TFS, is already experimenting with service-based businesses as Toyota transitions to a "mobility company" that provides "all kinds of services related to transportation," Toyota President Akio Toyoda has said.

One of those experiments is a California pilot program that offers short-term rental options to people who want to drive for rideshare companies such as Uber Technologies Inc. and Lyft Inc. but need the right car.

"We have these off-lease vehicles that are 3 years old," Toyota Financial Services CFO Scott Cooke said in an interview. "What we're doing is we're making them available for drivers, primarily Uber drivers."

TFS partnered with Toyota's dealers in California to make 50 vehicles available for this program. The pilot launched in Santa Barbara in December 2017 and in Los Angeles in the first quarter of 2018.

"We think we've gotten to a place where we've tested it and we can do something with it," Cooke said.

A TFS spokesman said the company is evaluating next steps for the program.

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Cooke said TFS has more than 100 million contacts with customers each year and exploring more avenues than traditional financing and leasing keeps customers with Toyota for a longer period of time.

"Continuing to recapture more of the value chain for us is a way for us to grow," he said. "We wanted to find a way to leverage the scale and size of customer reach that we have."

Traditionally, Cooke said, Toyota finances vehicles for three years then they drive off into the ecosystem for 20 years. TFS is hoping to stay involved throughout the lifespan of the car.

Toyota's U.S. captive finance arm, which has about $120 billion in assets, is partnering with Toyota Motor North America and Toyota Connected as it transitions to mobility, Cooke said. In fiscal 2019, Toyota's overall assets made up ¥51.9 trillion, or $477.53 billion.

Toyota Financial Services Corp., the global parent group of TFS, is also investing in mobility services in the automaker's home base of Japan. In February, the global finance arm invested a combined ¥1.8 billion, or about $16.6 million, with a Japanese auto service company to launch Kinto, a car subscription service company.

In July, German automaker Daimler even went as far as to rename its captive finance arm to Daimler Mobility AG from Daimler Financial Services. Along with managing its traditional financial services, the renamed division is also an investor in joint ventures with Bayerische Motoren Werke AG, which includes services for car-sharing, ride-hailing, parking and electric-vehicle charging stations.

Daimler Mobility is also establishing a joint venture with China's Geely Group Co. to offer a premium ride-hailing service in China, according to Jörg Lamparter, member of the board of management of Daimler Mobility's digital and mobility solutions.

"This joint venture will offer mobility services for passengers in premium vehicles in China before the end of 2019," Lamparter said in an emailed statement. "The fleet will initially include the Mercedes-Benz models: S-Class, E-Class, V-Class and Maybach. Premium electric vehicles from the Geely Group may complement the fleet."

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Daimler Mobility, formerly Daimler Financial Services, offers several mobility services including PARK NOW, where users can locate and manage parking.

Credit: Daimler AG

Finance companies an easy path for mobility

Franz Reiner, Daimler Mobility's chairman of the board of management, said customers are increasingly expecting flexible solutions when it comes to vehicles.

"The boundaries between financing, leasing, subscription, rental and on-demand mobility are blurring," Reiner said in an emailed statement. "Many of these offers distinguish themselves mainly by ... how long the customer can flexibly use a car. As a result, we expect the market to develop towards such models."

Since mobility services are capital intensive, automakers' finance arms could help more with funding, according to Nathan Flanders, global head of nonbank financial institutions at Fitch Ratings.

"The finance company is typically a more frequent debt issuer and typically represents in excess of 85% of the consolidated company's total debt outstanding," Flanders said in an email.

Putting mobility services at the financial services level instead of with manufacturing could help automakers clearly see the performance of their core manufacturing versus other services, Flanders said.

Scaling mobility services is also easier for captives than for automakers, which would have to stand up an entire servicing organization, said Robert Shaw, a managing director with Deloitte Consulting.

"[Auto manufacturers] do have pockets of servicing around warranties and marketing and sales, but not at the scale level that the captive finance company has," Shaw said in an interview.

Flanders said the future profile of auto finance companies depends on the market demand for services such as ride-sharing and autonomous vehicles.

"The greater the market demand for these services, the less demand there will be for traditional auto loan/lease products, as retail car owners migrate towards becoming consumers of mobility services," he said, adding that the finance companies could lease to third parties or buy cars from the manufacturers and operate these platforms themselves.

'Experiment a bit and see what works'

Moody's U.S. auto analyst Bruce Clark said connectivity, autonomous driving and electric vehicles will "radically change the landscape in the auto sector," but the way to that future is unclear.

"The problem is nobody knows what the pathway is to get from here to there," Clark said. "No one knows which one is going to make money. No one knows which one is going to be commercially viable."

Morningstar analyst David Whiston said adding mobility services will not make a company's stock "drastically more or less attractive." However, if the preference for flexible vehicle usage increases, it could hurt captives that have not expanded into a mobility role.

"Much longer-term it just becomes an issue of in an autonomous world, does it dramatically impact the finance arms of business?" Whiston said in an interview. "Especially if volumes go down … if volumes go down enough, at the point the dividend that the finance arms pay back to the parent gets shrunk or even goes away, that's a negative obviously."

Right now, Whiston said nobody really knows what will happen because it is a new market.

"You just have to experiment a bit and see what works," he said.

As of Oct. 21, US$1 was equivalent to ¥108.56.