Captive and vendor equipment finance organizations in the US are evolving in significant ways that were recently explored in an in-depth article by Paul W. Frechette, Valerie L. Gerard and David S. Wiener. As part of a broader story, the authors made several observations about relationships between some captive/vendor programs and their manufacturer parents – and a few recommendations for improving the family dynamic moving forward.
In certain cases, problems arise when the parent manufacturer’s expectations are based on older equipment finance models. This is particularly true for captive and vendor programs that are, or will be, offering managed solutions transactions (MSTs) to customers.
MSTs, which bundle financing for equipment and related products and services into a single transaction for the customer, often generate revenue that can only be realized as payments are received. So from a manufacturer’s point of view this can appear to indicate declining sales. In fact, some captives have reported that their parents are questioning why their equipment finance operations are costing them the same amount of money for seemingly lower sales.
Educating parent manufacturers about MST trends and their implications, then, is critical for today’s captive and vendor programs. With MSTs expected to generate more than 22% of equipment finance industry volumes in the next three to five years, they represent an obvious growth opportunity but one that must be explained and worked through to realize the benefits. For example, some captives will need to be able to show outside partners that the parent can provide certain performance guarantees that will better enable financing partners to book transactions.
Additionally, there is a more traditional pressure that seems to be on the rise: the need to produce results for parent companies eager for increased product sales. Captive and vendor programs must continue to address the ongoing issue of training sales teams to sell equipment finance to customers, and not just focus on selling “products,” to support manufacturing growth.
Many manufacturers indeed appear to be expanding though the data is mixed on this. Jeffrey Sparshott of The Wall Street Journal recently reported that US factory activity increased for the eighth consecutive month in April, indicating continued but slower growth for the manufacturing sector compared with a two and a half year high in February. His reporting was based on the Institute for Supply Management’s monthly index, which showed a drop in new orders and hiring plans in April compared with March but overall growth in 16 of 18 manufacturing industries tracked.
Manufacturing expansion is certainly good news for captive and vendor organizations that want to make a solid relationship with their parent manufacturer even stronger. The captive or vendor can play an important role in helping multinationals grow in new geographic markets, for example. Even if their parents are already operating in target areas, they can identify the legal, administrative, and compliance issues involved in expanding equipment finance into new geographic regions that are quite difficult to navigate.
In the Closing Thoughts section of their article, the authors offer general recommendations on ways captive and vendor organizations and parent companies can work together to achieve equipment finance success. The article covers the growth and scope of the sector, key changes and challenges, and innovations taking place. Read more at http://thealtagroup.com/the-transforming-world-of-vendor-captive-finance/.