4 takeaways from the 2021 Auto Finance Summit

After nearly 19 months of Zoom meetings and virtual conferences, the Auto Finance Summit returned to Las Vegas last month, bringing together auto finance executives from all corners of the industry to discuss changing market dynamics amid a year marked by growth. While the industry recovered faster than expected from the COVID-19 pandemic, aftershocks continue to be felt across auto finance, and lenders and manufacturers still have plenty of challenges to navigate in the coming year. Here are the top takeaways from the Summit. 1. The ripple effect of manufacturing lulls The ongoing semiconductor chip shortage has made it nearly impossible for auto manufacturers to plan for when new-vehicle inventory will rebound, impacting every facet of car sales and financing. “It's been very challenging for us as manufacturers to plan our car flows,” Kevin Cullum , president and chief executive of Nissan Motor Acceptance Company (NMAC), said at the Summit . “We believe we have accurate information as to the chip supply, then it changes or delays. We’re trying our best to plan for it.” [caption id="attachment_82896" align="aligncenter" width="2560"] At AFS from left: JJ Hornblass, CEO of Royal Media and Kevin Cullum, president and chief executive of Nissan Motor Acceptance Company. Photo credit: Renowned Photos [/caption] Pre-COVID, new-vehicle inventory typically hovered around 3 million units, but supply dropped below 1 million units in June, said Kristen Lanzavecchia , manager of industry insights at JD Power . “We're seeing this disconnect of vehicles on dealer lots, versus where they had historically been,” she said. As a result, manufacturers such as General Motors and Ford Motor Co. — along with retailers such as Sonic Automotive and Asbury Automotive — are likely to work with fewer cars on lots for the near future. Ford Motor, for one, has placed greater emphasis on build-to-order sales to fulfill demand. Meanwhile, demand outpacing supply has nearly eliminated the need for incentives . NMAC, for example, completely halted its offerings of cash rebates on new cars for the first time, with no planned return of incentives on the horizon, Cullum said. For the four years prior to the pandemic, average incentive spending industrywide sat around 11%, JD Power’s Lanzavecchia said. Now, with no certain date in sight for manufacturing to pick back up, incentive spending has dropped to less than 5% of MSRP, a historic low. Looking ahead to 2024, new-vehicle production is expected to ramp back up, and new cars bought today will be entering the used market, prompting an incentive spend increase to 8.3%, Lanzavecchia said. Low incentives, coupled with a shift toward used vehicles that has been driven by a lack of new supply, have also pushed up used-car prices for much of the past year. Used-vehicle residual values are up 4% compared to pre-pandemic and will likely remain elevated for the next three to four years, depending on when production returns, Lanzavecchia said. 2. Digitizing auto finance The pandemic has propelled the auto finance industry into a digital-first mentality, with captives, banks and credit unions adopting more online capabilities, such as e-contracting. Ford Credit , for one, has increased the use of e-contracting to 90% in the past 12 months from about 50% in recent years, said Jim Drotman , executive vice president of U.S., Canada and international markets. “There's a benefit for the dealers in this, there's a benefit for the customers in this,” he said at the Summit. NMAC, too, recognizes that improving the customer experience means embracing digital. “The online buyer is becoming a big topic,” Cullum said, noting the lender has offered online credit applications for more than two years. “[Consumers] know what they want to buy. They shop the cars, they shop the prices and narrow down at the dealership what they want to get, and then they go get it and complete the financial transaction,” Cullum said. “One thing that dealers have always pushed back on is to complete the transaction at home.” Auto lenders are adopting new processes and technology as consumer preferences change. “About a year and a half ago, the industry decided, ‘I don't think we're going to get customers to come into a dealership for three hours and sit in a small room in the back,’” said Scott Painter , industry veteran and co-founder of fintech NextCar . “We're going to have to rethink how we relate to our customer.” “That willingness to change ... has really been embraced by the industry across the board. Getting a car to a customer at their home or at their office without having to force them to come in is absolutely going to be the way the cars are bought in the future,” Painter said. [caption id="attachment_82892" align="aligncenter" width="2560"] At AFS from left are: JJ Hornblass, CEO of Royal Media; Brian Allan, president of HyreCar; Scott Painter, founder and chief executive of NextCar; and Drew White, senior director of lender development at MotoRefi. Photo credit: Renowned Photos [/caption] Consumers also expect to be able to complete more of the buying and financing process from their phones, said car-sharing marketplace HyreCar President Brian Allan , noting that keeping the company’s app up to date is key to establishing a positive customer experience. While many consumers still want to shop at dealerships, online is gaining traction, Cullum noted. “I don’t see our entire customer base moving to online, but I would be happy to see 10% of our volume [digitally] next year,” he said. 3. Lenders prioritize DEI Auto lenders have implemented diversity, equity and inclusion (DEI) efforts within the frameworks of their companies in the past year. Exeter Finance , Santander Consumer USA and Wells Fargo have adapted their DEI efforts to create workplace environments that bring people together, even when that wasn’t physically possible. Wells Fargo, for one, shifted their DEI program online to keep the company connected, Wells Fargo’s Head of Auto Tanya Sanders said at the Summit. “[Employees] were able to host events in a virtual environment that included many people from across geographies. We benefitted so much from having those tools at play.” The lender also focused on creating a “culture by choice instead of chance,” Chris Bishop , head of auto change management at Wells Fargo Auto, said. The company is making diversity and inclusion efforts more intentional through video promotions that share what actions are being taken internally to encourage inclusivity. Similarly, Exeter Finance’s DEI program “fosters a more inclusive environment for women and underrepresented groups,” Chief Information Officer Michele Rodgers said. Rodgers is incorporating diversity and inclusion efforts in the hiring process. “Both my success, and Exeter’s success, is dependent on me hiring diverse resources and skill sets that are outside of my own,” she said. [caption id="attachment_82885" align="aligncenter" width="2560"] Exeter Finance Chief Information Officer Michele Rodgers. Photo credit: Renowned Photos [/caption] As lenders begin bringing employees back to offices in the next few months, Santander Consumer USA is focusing on utilizing technology and offering hybrid options for employee interaction both in-office and online, SCUSA Senior Vice President and Diversity Officer Richard Conde said. SCUSA has implemented a bilingual training program and plans to continue investing in DEI technology, he added. 4. Electric vehicle demand ramps up Electric vehicle (EV) sales are predicted to grow in the coming years as mileage ranges increase and charging times decrease, analysts said at Summit. Manufacturers such as Hyundai , Kia and Nissan are expected to deliver more EV options in the next year that will meet consumer needs and drive up demand. In the first nine months of the year, EV sales were up 89% year over year to 400,000 vehicles, said Eric Ibara , director of residual values at Kelley Blue Book , noting overall auto sales increased 13% during that time frame. “Judging from what happened this year, you could be very optimistic about EV sales,” he said. EVs currently account for 2.5%-3% of the market share and are estimated to increase to 5%-10% in the coming years, Ibara said. “We have seen a lot of improvements, with range becoming more comparable to what you can get on a tank of gas,” JD Power’s Lanzavecchia said, noting that even as consumers access a wider selection of EVs, they are likely to make up "no more than” half of the market in the next four to five years. [caption id="attachment_82883" align="aligncenter" width="2560"] At AFS from left are: Joey Pizzolato, editor of Auto Finance News; Eric Ibara, director of residual values at Kelley Blue Book; Kristen Lanzavecchia, manager of industry insights at JD Power; and Alex Yurchenko, vice president of data science at Black Book. Photo credit: Renowned Photos [/caption] For manufacturers to remain competitive in the EV market, the focus must be on range and charging time, but even more importantly, price, said Alex Yurchenko , vice president of data science at Black Book . “Anything that OEMs can do to bring down the price will improve residuals and demand for those vehicles,” he said. Infrastructure will be crucial to widespread EV adoption, Yurchenko noted. “The main driver would be us as a country investing in infrastructure. How fast and how much we're going to invest, that’s going to drive that adoption,” he said.

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