Life as a Captive

by Martin Weissburg June 2007

Volvo Financial Services’ Martin Weissburg provides Monitor readers a captive’s perspective on business development and a look ahead at what’s coming in the future. In considering cyclical industries such as trucking and construction, he concludes that consistency of approach helps to ensure a customer’s trust and loyalty.

As a captive finance company, our mission is somewhat different from independent finance companies, so our approach to the market is at times also different. Captives must win deals and provide an acceptable return on shareholder equity just like independent companies. However, a captive’s primary purpose is to support its manufacturer and dealers by providing the best products and services to facilitate equipment sales. As dealers grow and prosper from product sales, so too do the manufacturer and the captive.

All equipment finance and leasing industry participants — be they captive or independent — confront the same industry conditions. The most notable condition today is excess liquidity: the supply of capital available for equipment loans and leases exceeds demand. Margin pressure has been the result for many months. Increasingly I am also noticing an easing of credit terms and transaction structure by some lenders and lessors. Such is the cycle of the industry.

Captives can and should perform well in all segments of the different cycles (liquidity cycle, equipment sale cycle, etc). Collateral expertise and very close affiliation with distribution networks for equipment remarketing perhaps provide captives with more stable “downside” scenarios. Although economic conditions remain comparatively reasonable, I suggest that lenders and lessors hold their ground and not allow excess liquidity and pricing pressure to result in a transaction structure that unduly shifts equipment value risk from end-user to creditor. I realize that this is common sense, but short memories nonetheless exist.

Captives often don’t have the luxury of portfolio diversification of independents. Volvo Financial Services (VFS) is fortunate that the Volvo Group has several commercial transport segments for which VFS provides financial services: truck, construction equipment, bus, aerospace and marine industries. But a captive’s diversification shouldn’t be limited to collateral types. Ancillary products are needed to contribute to a captive’s portfolio and earnings stability while enhancing customer retention by building a “wall” of services around the customer.

Bundled Commercial Offering
A flexible loan and lease offering is a cost of entry today for lenders involved in commercial equipment segments. Tailoring pricing and deal structures for a dealer or customer conveys a lender’s eagerness to provide custom business solutions. Companies seeking growth must take this approach many steps further. Captives have the opportunity (indeed, the obligation) to partner with the OEM and dealer to provide customers with bundled commercial offerings and a full-service equipment solution. Some old and perhaps over-used phrases still apply: “one-stop shopping” and “easy to do business with.” These remain key strategies to win and retain customers while minimizing the commoditized pricing of the different parts of the “bundle.”

An expanded product offering can include products that support traditional financing, such as insurance, and also new products that are typically purchased separately such as dealer accounts receivable financing or customer parts financing. The key is to be willing to participate in new business areas in which a captive may not traditionally be active.

Service is a Product
Dealers and equipment end-users dedicate their lives and personal capital to their businesses. These customers value and respect financial institutions, which understand their business and deliver products and services that address and anticipate their needs. Providing premium service requires staying in close contact with customers to identify and quickly implement service improvements.

Finding ways for dealers and customers to save time, simplify processes and improve profitability are ways lenders and lessors build service excellence, develop a strong relationship, and create new income opportunities. For dealers, this includes improving the technology they use to submit deals, track wholesale inventory and communicate issues and status. For end-users, it includes providing real–time communication solutions that satisfy their needs while assuring that personal information is handled securely.

Ease of doing business continues to be a top criterion dealers and customers use to assess whether a captive delivers premium service. A growing captive must continuously evaluate and improve the technology it employs to service each party, be it credit scoring, document generation, billing or payment processing. Technology can increase speed, and speed improves responsiveness, which frequently results in winning business.

If a dealer or customer perceives its experience with a captive lender and, by association the equipment brand, as first-class, a captive can price this experience accordingly. Top quality products, service and support substantiate premium pricing.

Replacement Cycle & Equipment Sales
New engine technology and some associated higher costs resulted in a significant truck “pre-buy” in 2006. Some carriers accelerated their fleet replacement cycle. The result has been lower unit sales in 2007. This will be a “down year” for finance companies that support the trucking industry. Additionally, freight volumes are off compared to 2006, which has resulted in some reduced fleet utilization and carrier profitability. Excess liquidity was already in place and, now coupled with lower unit sales, results in fierce competition for truck financing. Used truck prices are softening in general, and history and common sense would suggest lenders should exercise caution.

The construction segment has felt the effects of a soft housing market, but the commercial side of this sector remains fairly steady. Captives can benefit from manufacturer acquisitions, but they must be ready, willing and able to quickly integrate new dealers, customers, systems and risks into the existing operational platform. One example is Volvo Construction Equipment’s recent acquisition of Ingersoll Rand’s Road Machinery division.

Looking Forward
Despite some of the challenges of 2007, a reasonably stable economy exists with moderate interest rates and inflation. Some indicators suggest a firm economy in 2008, which should help freight volumes rebound. Trucking firms should resume more normalized purchasing, hopefully as early as the fourth quarter of this year. Just as we catch our breath in 2008, we must prepare for the next truck “pre-buy” in 2009, just before new 2010 EPA regulations take effect. Truck financing in 2010 will have similar characteristics to 2007.

In the end, relationship selling is the key to success. Captives must work daily to build customers’ trust that they are supported by a strong network of industry-leading sales, finance, parts and service providers. Captives must provide the products and services to keep the customers’ ride to success a smooth one. In a cyclical industry, consistency of approach helps to ensure customers feel they can rely on their captive. Create and maintain a customer’s trust in your business and success will follow.


Martin Weissburg HeadshotMartin Weissburg is the president and CEO of Volvo Financial Services North America. Weissburg has more than 23 years experience in equipment finance and leasing. Previously, he was president of Great Dane Financial and a senior vice president at ORIX. He also held positions with Heller Financial and Caterpillar in the construction equipment and finance areas. Weissburg holds a bachelor’s of science from Purdue University and an MBA from The George Washington University.

Volvo Financial Services is the captive finance arm of the Volvo Group, one of the world’s leading providers of commercial transport solutions with $40 billion in sales and 100,000 employees. Globally, Volvo Financial Services has assets of more than $11 billion and 1,100 employees. Its North American business area, headquartered in Greensboro, NC, opened for business in September 1996 and today has assets of more than $4.4 billion. The company provides financial services for the truck, construction equipment, bus, aerospace and marine industries. The primary brands Volvo Financial Services North America supports are Mack Trucks, Volvo Trucks, Volvo Construction Equipment, Prevost Bus and Volvo Penta.

For more information about Volvo Financial Services, visit www.us.vfsco.com or call 877.865.8623. The opinions, statements and information in this article are those of the author and do not necessarily reflect the views of the Volvo Group.

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