LAS VEGAS ― With rising new-car sales, pent-up demand, and strong capital markets, the pieces are in place for a solid auto finance rebound. But to lock in the recovery, lenders will have to weave innovation into their strategic plans, said George Borst, president and chief executive of Toyota Financial Services, during his keynote address at the 12th annual Auto Finance Summit.
“We need to be nimble, flexible, innovative, and fast to acknowledge trends, while at the same time recognize risks and respond at rapid speed,” said Borst, who led the nation’s second-largest auto finance company to record earnings of $1.5 billion in fiscal year 2010, on the heels of the captive’s first-ever loss ― $800 million ― in the year prior. In fiscal year 2011, TFS saw operating income hit $2.8 billion.
TFS (www.toyotafinancial.com) has long embraced a culture of innovation. “During difficult times, it becomes imperative to do more with less,” Borst said.
As such, the captive challenged employees to develop offerings to bolster customer satisfaction. Some results: The ability to scan a QR code to make a payment, and communication via Twitter to resolve issues.
TFS holds workshops that pull employees from all sectors of the company to brainstorm creative solutions to specific issues. “Some are successful, some aren’t,” he said, but the goal is to get associates to think outside the box.
Also, once a year, the top 40 or so Toyota Financial Services executives meet offsite to map the captive’s strategy for growth based on trends in the market. Discussion revolves around what the company needs to do to grow, not just organically, to move ahead. The group determines volume objectives, residual value estimates, and other key benchmarks.
LEARNING FROM HISTORY
In his address, Borst urged attendees to learn from the difficulties of the credit crisis. “The experience of the past few years shouldn’t be wasted,” he said.
Borst cited as an example TFS’s 2007 foray into the subprime sector. “We narrowly averted failure,” he said. “Like everybody else, we focused on aggressive growth. We started to dip our toe into the subprime business. We thought the market was so good we could buy a little deeper. But we saw performance dip rather quickly.”
“I’m not saying that subprime isn’t a good business,” he reiterated. “It is, if you have the right structure for it.”
The bottom line: “You need to stick with what you do well and expand on that.”
As such, TFS redoubled efforts in the leasing space, at a time when its captive counterparts were pulling back. “As the recession deepened in 2009, we placed a huge bet on leasing,” Borst said. “During the last four years, our lease marketshare [has grown]. This helped our dealers, customers, and division through some very turbulent times. Not only then, but now that we’re starting to get these cars back, it will help us again.”
Typically, leasing engenders strong customer loyalty. According to the captive, 62% of TFS lessees return to buy a new Toyota, and half return to their original dealer ― solid stats for a company whose goal is to support manufacturer sales.
While a solid product menu will influence growth, strong relationships are the key to auto finance success, Borst said.
“At the end of the day, this is a relationship business,” especially during difficult times, he said.
In addition to forging strong bonds with dealers, though, Borst encouraged lenders to reach out to regulators. “We need to make people more aware of the value propositions” that auto finance offers, he said, citing examples like helping single parents get back into the workforce or granting extensions to borrowers who have fallen on hard times.
“We have to form these relationships to enable regulators to do their jobs,” he said. “We have to point out the differences between what we do and what derivatives traders do. What choice do we have, but to try to influence the outcome?”
In addition to his prepared remarks, Borst answered questions on a host of other topics. Here is a sampling:
“I think we’ll avoid the fiscal cliff. Autos and auto financing are one of the key things that will lead the way back. I expect auto sales volume of 14.5 million this year. Economists say there is a legitimate 9 million to 11 million units of pent-up demand, based on the last six years of a SAAR below average. Cars are 11 years old, on average. And they’re more affordable. In 2006, it cost 26 weeks of median income to buy a new car. Now it takes 23 weeks.”
“Our delinquencies and credit losses are low. We do little outsourcing, and we’ve reduced some of that. We also have a number of IT systems that we’re investing in to improve the way we collect. We’ve adjusted our scorecards. We have lot of people in customer service centers monitor how we’re doing. We always have continuous improvement programs. Collections is one of the biggest cost structures in the company, so we’re always looking for ways to fine-tune that.”
“With things changing so much, one of the most difficult things is to recognize the difference between fads and trends. A fad is something that’s going to have everyone talking about it for six months, and then they move away.
“The most important thing for leadership is to set the direction strategy. You have to reinforce over and over about where we’re going and why we’re going there ― reinforce why we need to cut expenses. You need to do that all the time. The key thing the leader can do is remove obstacles, to remove things that get in the way of innovation.”