Lending Helps Imports

While it is clear that many Americans are giving up their long-time commitment to domestic vehicles in favor of Asian and European competitors, not all of the forces driving the change are understood.

It is commonly thought that American consumers are choosing imports with greater frequency due to real or perceived advantages of quality, value, and fuel efficiency. Whether these advantages are real or not, they are influencing buyers' behavior.

My firm, mPower Auto, has completed a study that suggests that there may be yet another force causing domestic vehicle owners to chose import competitors.

It has nothing to do with consumer product perceptions. It has to do with the basic realities of economics, and more specifically, financing.

Our conclusion is that many loyal, domestic owners simply cannot refinance their large negative equity balances at their domestic dealerships, but find that they can at competing import dealerships.

This is because, although both domestic and import captive finance companies have stated limits on their loan balance advances, the domestic captives are much less willing to make exceptions than their import counterparts.

To test this conclusion, mPower Auto performed a study of Honda and Chevrolet dealers.

We analyzed the quantity of late-model domestic appraisals at both types of dealerships.

We observed that Honda dealers were not given the opportunity to appraise as many of these late-model domestic vehicles as may have been thought likely. Importantly, however, when Honda dealers had the opportunity to appraise such vehicles, their success rate of making the deal was much higher than that of their Chevrolet counterparts.

The mPower Auto scoring system also revealed that the trade-appraisal amounts were comparable. In other words, the same vehicle was commonly appraised for the same amount of money at both the Honda and the Chevrolet dealerships. In spite of this, Honda dealers enjoyed much greater success.

This trend caused us to ask questions to both import and domestic dealers. The answers indicate that often the late-model domestic owner only goes to the import dealer after a domestic dealer is unable to provide an adequate financing solution.

More specifically, the problem is in the amount of down payment the customer has to produce in order to qualify for the loan. Simply stated, the import dealer's captive finance source is willing to advance more money with less collateral equity.

Therefore, many consumers choose an import vehicle because of its “financeability.”

The difference in the behavior between domestic and import captive finance sources may be due to several factors.

First, the domestic captive finance source is likely to be more cash constrained and burdened by the parent auto company to be a highly profitable stand-alone organization.

They also have been hit hard by repossession losses due to insufficient collateral.

In contrast, many of the import captive finance sources are flush with cash, and their manufacturer parent views them in more of a supporting role to achieve higher market share. And they have not experienced the same losses from repossessions.

The result: By restricting the amount of loan advances to customers, domestic captive finance sources are fueling the trend towards import purchases.

Depending on your franchise, there is either a competitive opportunity or threat associated with this market dynamic.

Share this with your managers so they can watch for and respond to situations in which this may be the case. Feel free to contact us for more information.

Dale Pollak is a former Cadillac and GMC in metro Chicago. He is chairman and founder of mPower Auto.com He is at 630-926-9016 and [email protected].