Introduction to Auto Ancillary Products in the US Market: A Blueprint for China

Transcription

1 Introduction to Auto Ancillary Products in the US Market: A Blueprint for China

2 Agenda 1. Ancillary Products Overview 2. China Opportunities 3. Next Steps 2

3 Ancillary Products Overview 3

4 Introduction to Auto Ancillary Product A variety of products exist, which enables dealers to have a comprehensive product offering and strengthens the relationship between OEMs, dealers and customers. Certified Pre-Owned Vehicle Service Contracts: A certified pre-owned car or CPO is a type of used car. Most often late-model, they differ from other used cars by having been inspected, refurbished, and certified by a manufacturer or other certifying Tire & Wheel Protection: authority, and usually include a warranty. Vehicle Protection Products A protection product is applied to or installed on a customer s vehicle, and the product is warranted to prevent certain damage. In the event that the product fails, customers are eligible for repair or replacement of the damage, or reimbursement for the repair or replacement Roadside Assistance Excess Wear & Tear: Roadside Assistance: Certified Pre-Owned Vehicle Protection Products Services to assist motorists who have been left stranded as a result of a mechanical failure of their vehicle Extended Warranty Common Ancillary Products Roadside Assistance Extended Warranty Covers the costs associated with vehicle repair, including parts, labor, and/or sales tax, for certain repairs or replacements that may be required after expiration of the factory warranty Tire & Wheel Protection Appearance Protection Tire & Wheel Protection Repair or replacement of tires and/or wheels damaged due to contact with a curb, pothole, or debris on the road such as a nail, rock, or tree limb Appearance Protection Protection against vehicle wear such as interior stains, tire wear, chips, dents and dings that can incur substantial costs at end-of-lease 4

5 Common Sales Channel Ancillary products can be sold by a dealer but administered via an OEM or third party, where the OEM / third party generally assumes all claim payout responsibility. How Dealers Offer Ancillary Products Dealer Group makes an agreement with OEM / third party provider to offer their ancillary at a fixed price per product sold. The third party assumes all risk. Dealer Group updates process as necessary to offer the ancillary products to customer within their dealerships. Customer Journey The product price is marked up at the dealer s discretion. This markup is configured into the dealer s platform(s). As part of the car purchasing process, a Dealer Salesperson is able to rate and sell ancillary products off of the configured platform. Customer purchases a car. They are also offered to purchase an ancillary product to add additional protection. Customer meets with a Dealer Salesperson representative to go over ancillary product options and chooses one or more such as appearance protection and extended warranty. Dealer increases revenue from the sale of ancillary products. OEM / third-party increases revenue from premiums minus payouts. 5

6 Ancillary Products Sales Channels Ancillary products can be sold to consumers through a variety of sales channels, both within and outside the dealership Dealership Dealership sells after-market products to customer at time of sale as part of financing package Service Drive Customer is sold after-market products at the time their vehicle is being serviced OEM OEM sells after-market products directly to the customer packaged with the vehicle sale Digital After-market products can be purchased through a digital portal, such as an app for a lender, dealer, OEM, or service provider Third Party Third party providers, such as lenders, offer after market products directly to the consumer in conjunction with other products purchased Online Customer purchases after-market products through an online website from varied sources 6

7 Extended Warranties Overview An extended warranty provides coverage distinct from and sometimes in addition to an OEM warranty, insulating borrowers from repair costs. Dealer Cost: - 3,200 Dealer revenue: 6,400 Illustrative Example Dealer sales profit: 3,200 Dealer revenue from repairs: 3,100 Dealer purchases an extended warranty product from a OEM / third party provider. The third party provider assumes all risk. The dealership sells an extended warranty contract to expand coverage beyond OEM warranty. Dealer Group profits the markup of the extended warranty sold to the customer. OEM / Third Party profits from premiums minus payouts/expenses. The dealer services the vehicle, resulting in repair income for the dealer from the OEM/ third-party claims payout. The dealer and OEM strengthens customer relationships and loyalty through repeated visits. Concept AFC Financial Impact Dealer Impact Customer impact Protect vehicle beyond factory warranty Prevent sale of non-oem after market products Drive service business to franchise dealer Administrative profit, investment profit, underwriting profit Mark-up opportunities Peace of mind Increase parts sale Increase part sales Assurance of quality Increase partner profit Servicing profit Leverage OEM quality Enhance relationship Increase loyalty potential Increase repeat business potential No unpleasant surprises 7

8 Appearance Protection Products Overview Appearance protection products allow product purchasers to obtain repairs for minor cosmetic damages to their car. Dealer Cost: - 2,200 Dealer revenue: 3,800 Illustrative Example Dealer sales profit: 1,600 Dealer revenue from repairs: 1,900 Dealership purchases an appearance protection product from a OEM / third party provider. The third party provider assumes all risk. The dealership sells the appearance product to protect the vehicle against minor cosmetic damage. Dealer profits the markup of the appearance product sold to the customer. The dealer services the vehicle through it s stores, resulting in repair income for the dealer from the OEM / third-party claims payout. The OEM / dealer strengthens customer relationships and brand loyalty through repeated visits. Concept AFC Financial Impact Dealer Impact Customer impact Maintain vehicle appearance Underwriting profit, investing profit, administrative profit Mark up, cross sell opportunities Protected from unexpected costs 8 Increase pride in ownership Increase loyalty Increase loyalty Higher perceived value of investment Increase residual values Supports leasing brand perception Support used car business Maintain resale values 8

9 Certified Pre-Owned Overview Certified Pre-Owned (CPO) provides customers a vehicle inspected, refurbished, and certified under an OEM program. CPO car sales are becoming increasingly more profitable than new car sales. Used Dealer cost for Dealer Cost: conditioning: - 1,000-10,200 Dealer cost for refurbishing to CPO CPO standard and captive license fee: - 2,400 Illustrative Example Dealer sales revenue: 14,000 Dealer sales revenue: 18,200 Dealer Profit: 2,800 Dealer Profit: 5,600 Dealer purchases a used car via it s standard retail and wholesale channels. Dealer performs an inspection of the used car and makes any necessary repairs to certify the car per the OEM standards. Additional costs include a license fee to the captive. Dealer profits from selling the certified car at a premium price, and the customer has assurance the car is higher quality than typical used cars. By investing in performing the CPO inspection, the dealer is able to earn a higher profit than selling a noncertified used car. Concept AFC Financial Impact Dealer Impact Customer impact 8 Refurbish / Certify Used Car Additional revenue / Increase brand perception Mark up, cross sell opportunities Confidence in the safety / condition of a used car Increase Used Car Business Increase loyalty Increase loyalty More economical pricing option versus a new car Increase residual values Supports brand perception Support used car business Maintain resale values 9

10 Here s How a Dealership Could Profit Hypothetical based on 1,000 car sales / per annum Price Per Unit Estimated Penetration Units Sold Total Revenue Cost Per Unit Total Cost Total Profit Extended Warranty 6,400 35% 350 2,240,000 3,200 1,120,000 1,120,000 Appearance Protection 3,800 15% ,000 2, , ,000 Certified Pre-Owned 18,200 20% 200 3,640,000 12,600 2,520,000 1,120,000 Total 6,450,000 3,970,000 2,480,000 These products can also result in incremental revenue for a dealership / OEM through OEM parts purchases, service repairs and customer loyalty. 10

11 Benefits of After-Market Ancillary Products In addition to increased revenue and profitability for Auto Finance institutions, ancillary products produce benefits for dealerships and customers. Profitability Customer Loyalty Part Sales Ancillary Product Driver Appearance Protection Residual value Dealer profitability Maintenance Brand image Extended Warranty 11

12 Ancillary Product Profitability Components- Underwriter Underwriting profit, administrative profit, and investment profit each contribute to the overall profitability of most ancillary products. Underwriting Profit Underwriting profit is the difference between the remaining money in a reserve and the pay-out of all accepted claims over the lifetime of an ancillary product. Actuarial models determining estimated pay-out are modelled conservatively to minimize the likelihood of a negative underwriting profit. Administrative Profit Administrative profit is the remaining revenue after S,G&A expenses have been covered. For administrators that assume no risk of the ancillary product and handle only sales, marketing, and distribution of an ancillary product, this is the sole profit source. Investment Income Investment income is the interest earned on the funds in the reserve for claim pay-out that are not withdrawn from the reserve. The interest compounds over the contract lifetime. 12

13 Cumulative Claim Payout (Yuan) Sample Profitability Analysis of Ancillary Products Underwriting profit emerges when cumulative claim payouts are less than the conservative actuarial models for expected cumulative claims. 3,500 Expected vs. Actual Cumulative Claim Payout 3,000 2,500 2,000 1,500 1, Profit Contract Year Unused payout reserves will accrue investment income over the lifetime of the ancillary product contract Cumulative Expected Claims Cumulative Actual Claims 13

14 Cash on Hand Sample Profitability Analysis of Ancillary Products (continued) The prepaid sum received at the beginning of a contract is the basis for cash on hand over the contract lifetime, generating investment income. 3, , ,500.0 Prepaid Contract Funds Balance Cash on hand is a combination of reserve funds and administrative funds, both of which are received in full at the beginning of the contract 2, , , Ancillary Product Contract Year Administrative funds Payout Reserves 14

15 U.S. Market Assurance Providers A variety of assurance product providers are offered in the US market, including in-house products and third party providers. OEM s Offer their own assurance products through dealers Independent Providers Offer third party assurance products at dealer partners Large Dealer Groups Offer their own assurance products through their dealer network Source: Market Research *Underwriting risk owned by dealer group *Underwriting risk owned by dealer group Note: Only OEMs provide certified plans in the US 15

16 China Opportunities 16

17 Auto Finance Is Expected To Grow Rapidly in China Auto finance penetration in China is currently low, but is anticipated to gain popularity to the level of other markets. As the China market matures, the opportunity for assurance products will also rise. 80% - 60% - 40% - 20% - Japan (50%) Penetration* of Auto Financing 2015 China (27%) UK (70%) Germany (65%) US(84%) China lagged behind developed countries in penetration of auto finance products in 2015 Penetration of auto insurance products was estimated to be below 5% in 2014 in China Asia Europe Americas Projected Growth in Penetration of Auto Financing (China) 12% 20% 27% 43% 50% Figures in China are expected to match current penetration in developed Asian markets (Japan) by E 2018E 2020E Source: Autofacts; China Association of Automotive Manufacturers; China Auto Finance Report 2014 and 2015 ; Bloomberg ; NexAssure Group 17

18 The US Market May Serve as a Template for Product Penetration While there are many differences between the US and China market, factors such as over-dealerization and shrinking front-end profits could lead to a push towards more finance and insurance profit, as observed in US historically. Vehicle Service Contracts 20%- 50% 5% - 10% Lease Wear / Tear GAP Insurance 25% - 40% US Market Penetration (Range) 10% - 20% Appearance Maintenance /PPM 15% - 25% 10% - 20% Road Hazard / Tire Source: Market Research 18

19 Case Study: Major AFC s Entry into Established F&I Market A major captive AFC recently entered the US F&I market with branded products, gained 9% market penetration in one year, and forecasts penetration to grow to 20% in 3 years. Challenge: Enter the mature US F&I market with branded after-market products, targeting a penetration of 20% in three years Year 0: 0% market penetration Year 1: 9% market penetration Year 2: 11% market penetration Year 3 (F): 20% market penetration Product Offerings: The OEM chose the most significant F&I products in the market* to offer through their captive, including: Vehicle Service Contract (VSC) Appearance Guaranteed Auto Protection (GAP)** Planned Prepaid Maintenance (PPM) *non-exhaustive list Road hazard Long Term Profitability of F&I Products in the US Market Lease wear and tear **GAP may not be a permissible product in China US captives generate on average ~$800 profit from F&I products with an approximate penetration of ~20% across all vehicles leased and sold, resulting in an increased profit of ~$160 per sale Mature players in the F&I market see on average a ~40% market penetration, resulting in an increased profit of ~$320 per sale Source: market research 19

20 High Growth Potential Products As China s Dealer Groups profitability from car sales begin to flatten, sees Ancillary products as a new revenue opportunity as demonstrated by the US and other developed markets. Certified Pre-Owned, Extended Warranty, and Appearance protection products may have the greatest initial potential viability in China. Extended Warranty Extended Warranty Covers the costs associated with vehicle repair, including parts, labor, and/or sales tax, for certain repairs or replacements that may be required Tire & Wheel Protection: Excess Wear & Tear: Certified Pre-Owned A certified pre-owned car or CPO is a type of used car. Most often late-model, they differ from other used cars by having been inspected, refurbished, and certified by a manufacturer or other certifying authority. Vehicle Protection Products A protection product is applied to or installed on a customer s vehicle, and the product is warranted to prevent certain damage. In the event that the product fails, customers are eligible for repair or replacement of the damage, or reimbursement for the repair or replacement Roadside Assistance Certified Pre-Owned Vehicle Protection Products Common Ancillary Products Roadside Assistance Tire & Wheel Protection Appearance Protection Tire & Wheel Protection Repair or replacement of tires and/or wheels damaged due to contact with a curb, pothole, or debris on the road such as a nail, rock, or tree limb Appearance Protection Protection against vehicle wear such as interior stains, tire wear, chips, dents and dings that can incur substantial costs at end-of-lease Services to assist motorists who have been left stranded as a result of a mechanical failure of their vehicle Roadside Assistance: 20

21 Maturity of China s Auto Market Chinese automotive market is 0n a trajectory to further mature despite double digit growth in recent years new car sales are gradually declining. With an aging car population and OEM parts passing their manufacturer warranty, ancillary products along with other aftermarket products/services should gain viability, similar to the U.S. market. China Percentage of Revenue from Sales Type (Top 100 Dealer)* In 2015, less than 20% of China s major dealers revenue comes outside of new car sales. As China s automotive market continues to mature, this percentage will likely to increase to a level that is similar to the U.S. US 0% 20% 40% 60% 80% 100% New Car Sales Used Car Sales Services and Accessories Financing and Insurance Other Dealer Revenue Streams Current + Potential Future Revenue from Ancillary Products **- Hypothetical Current Revenue Level (2015) Potential Additional Revenue (+46%) As China s automotive market matures, developing other profit centers (i.e. through offering ancillary products and certified used car) could bring an enormous amount of additional revenue and are the main source of revenue growth potential, as evidenced in the matured automotive market Dealer Revenue Top 100 Dealer Total Revenue (in 100,000 RMB) New Car Used Car Services and Accessories Financing and Insurance Additional Used Car Sales Additional Ancillary Product Sales * China Automobile Dealers Association, ** China Automobile Dealers Association, 2015 and Analysis

22 In Near Future, Chinese Lenders Are Anticipating a Surge in Volume and Variety of Ancillary Product Offering Most lenders participating in s 2016 Auto Lending survey strongly indicate an interest in expanding and growing their ancillary product offerings to the Chinese market. 25% Respondents plan on expanding their current or adding new VSC products 58% Respondents intend on adding new liability or comprehensive insurance offerings 75% Respondents are considering adding new ancillary vehicle protection products There is a strong push to expand or grow Ancillary Vehicle Protection and Liability Insurance in China. Assurance/Ancillary products will play an increasingly significant roles in market Source: 2016 Auto Lending Survey - China participant responses 22

23 Next Steps 23

24 Profiles Where are you on the Auto Assurance product adoption curve? Various factors play into where you are relative to the industry. The questions to address are: where are you now, where do you want to be, and how do you get there? Traits Idlers Highly risk-averse and cost conscious Followers Quick to adopt proven methods once costs are reduced Leaders Risk-tolerant and willing to pay a leader premium Digitization Mainframe Based Legacy Platforms Paperless Contracts Cloud Based Platforms Predictive Analytics Digital Integration Product mix Limited Product Diversity No Dealer Customization Diversified Multi-Product Line-Up Tailored Programs for Dealers Reinsurance Program for Dealers Common Sales channels At Point-of-Sale Online Sales Service Drive Mobile Sales Other considerations Dealer / Customer expectations Company strategy Market necessity Business transformation needs Technology impact Ease of adoption 24

25 Idlers: Considerations for a successful product launch Strategic Considerations Develop strategic positioning for an ancillary product unit to support profitability across divisions Gain an early mover advantage in the market and gain dealer loyalty Position products to help cement customers loyalty in addition to driving core financial profitability. Financial Considerations Conduct Actuarial analysis and projections to understand costs and revenues over time Creation of business case justifying investment into ancillary products Understand and estimate incremental profitability to the AFC, the OEM, as well as dealer partners Capabilities Considerations Create or leverage a sales channel to deliver products to deliver System to support amortization of premiums and tally claims Servicing, claims and risk management functions to supports product Build capabilities to support multiple products and allow for future growth in Chinese market Product Considerations Work closely with dealer partners in development of products Start simple and expand product line-up over time Be prepared to fine tune products and offerings quickly to respond to market demands Design customer and dealer friendly products 25

26 Leaders/ Followers: Considerations for a successful product launch Strategic Considerations Review initiatives / planned investments for the existing ancillary product unit to support the firms strategic objectives Conduct gap assessments against industry benchmarks to assess areas needed for improvement Gain competitive advantage with dealerships by offering reinsurance programs Capabilities Considerations Leverage existing platforms to the extent possible when expanding the product line-up Enhance system capabilities to support new products and service offerings Rollout and retrain field teams, dealerships and additional sales channels on new products/services Financial Considerations Investigate tax and accounting benefits of setting up a reinsurance structure Actuarial analysis to determine best new products opportunities in Chinese market Leverage existing product data to underpin projected financials on new products Understand and estimate incremental profitability to the AFC, the OEM, as well as dealer partners Product Considerations Utilize data mining and predictive analytics to promote products with maximum profitability Design products and dealer programs to facilitate the sale of multiple products per vehicle Consider linking financing products with ancillary products to create bundled offerings Support larger dealer groups with customized solutions to meet their needs 26

27 Building trust in society and solving important problems Thank you! Please contact us with questions or for more information. PricewaterhouseCoopers LLP Three Embarcadero Center, San Francisco, CA 9411 USA PricewaterhouseCoopers LLP 601 South Figueroa Street Suite 900 Los Angeles, California USA Bryan Ignozzi Principal, Vehicle Lending and Leasing Paul Kramarz Director, Vehicle Lending and Leasing This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors All rights reserved. refers to the China or Hong Kong member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details.