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Captive finance – a multipurpose strategic tool for manufacturers

Portrait of Dominik Löber
Senior Partner
Frankfurt Office, Central Europe
+49 69 29924-6105
28 oktober 2019

Captive finance companies are on the rise. Is it time to join the trend?

Currently, the majority of OEMs does not have a clear sales financing strategy and rely on loose partnerships with third-party financing providers to offer some form of financing to their customers. But given the changing customer demands, increasing competition as well as major changes in the international accounting standards, OEMs have the last chance to react now and develop a holistic sales financing strategy. This does not only maintain the competitiveness of the OEMs, it also boosts sales due to the enhanced offering – especially one-stop-solutions – as well as it allows OEMs to tap new revenue and profit pools from its new financial services activities. Thus, OEMs need to act now decisively.

Facing up to the new reality

In the past, companies producing industrial goods such as trucks, agricultural machines, medical equipment and production machinery built informal relationships with businesses that could provide their customers with financing or leasing options. The goods that they manufactured were in great demand and they had relatively few competitors, so customers were willing to accept these arrangements. However, the new accounting standards IFRS 15 and 16 mean that working with a third party is not as attractive or viable as it once was. Customers also increasingly expect "one-stop shop" solutions – and with global competition on the rise, those customers have the option of going elsewhere if their needs are not met. Original equipment manufacturers (OEMs) have been forced to react, and many are looking for fresh solutions.

One such solutions is captive finance – a multifaceted strategic tool for OEMs. It should be high on the Chief Financial Officer's agenda, as setting up a captive finance company can generate major advantages for refinancing in the area of leasing, besides boosting profits and improving revenue steering. It will be of interest to the Head of Strategy, as it means that OEMs can offer customers the one-stop shop they expect; it also strengthens the support provided to the Sales department, makes it easier to control prices and discounts, and removes any dependency on third-party providers. And the Head of Sales will likely be in favor, too, as captive finance can be a powerful means of boosting sales.

"Growing globalization, rising transparency and macroeconomic factors are forcing OEMs to react."
Portrait of Dominik Löber
Senior Partner
Frankfurt Office, Central Europe

A question of strategy

OEMs need to consider a number of strategic questions with regard to captive finance. Should they bundle all their sales financing activities in a central entity? Can they provide the entire sales financing themselves? If they do so, how will they meet their refinancing needs, bearing in mind the new accounting rules? And if they continue working with a third-party financing company instead, what is the most appropriate partnership model for them: referral or white label?

In a recent project with leading industrial truck manufacturer KION Group, Roland Berger helped develop a long-term strategic plan for sales financing. We identified three levers: optimizing processes and IT systems, changing the refinancing strategy and increasing geographic reach. By using these levers and implementing the new strategic plan, KION managed to cut its refinancing costs in half, achieve significant portfolio growth, improve risk management and start systematically tapping economies of scale. This led to a substantial increase in the profitability of the business model.

Our work with companies such as KION has given us many insights, which we can summarize as five rules of thumb:

  1. Align the financial services unit as a support function for the sales units
  2. Involve the sales units early on in the strategy process
  3. Refinance the portfolio intelligently
  4. Standardize processes and the IT system
  5. Modify the KPI system

Following these rules can help OEMs develop an effective sales financing strategy – not only protecting their current profit levels but revealing new areas of untapped potential.

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Captive finance – a multipurpose strategic tool for manufacturers

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Captive finance companies are on the rise. Increasing competition, changed customer expectations and new accounting rules are leading growing numbers of OEMs to join the trend.

Published October 2019. Available in
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Portrait of Dominik Löber
Senior Partner
Frankfurt Office, Central Europe
+49 69 29924-6105