introduction to auto ancillary products in the us market ... · dealer purchases an extended...

PwC China Autofacts Seminar 2016

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

December 2016

www.pwc.com

PwC

Agenda

1. Ancillary Products Overview

2. China Opportunities

3. Next Steps

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December 2016PwC China Autofacts Seminar 2016

PwC

Ancillary Products Overview

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PwC

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.

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Vehicle Service Contracts:

Tire & Wheel Protection:

Excess Wear & Tear:

Roadside Assistance:

Extended Warranty

Certified Pre-Owned

Tire & Wheel Protection

Appearance Protection

Roadside Assistance

Vehicle Protection Products

Certified Pre-Owned

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


Services to assist motorists who have been left stranded as a result of a mechanical failure of their vehicle

Roadside Assistance

CommonAncillary Products

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

Extended Warranty

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


Protection against vehicle wear such as interior stains, tire wear, chips, dents

and dings that can incur substantial costs at end-of-lease


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, and usually include a warranty.


PwC

Common Sales ChannelAncillary 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.

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Customer Journey

How Dealers Offer Ancillary Products

Customer purchases a car. They are also offered to purchase an ancillary product to add additional

protection.

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 increases revenue from the sale of ancillary products. OEM / third-party increases

revenue from premiums minus payouts.

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.

As part of the car purchasing process, a Dealer Salesperson

is able to rate and sell ancillary products off of the configured

platform.

Dealer Group updates process as necessary to offer the ancillary

products to customer within their dealerships.

The product price is marked up at the dealer’s discretion. This markup is configured

into the dealer’s platform(s).

¥

¥


PwC

Ancillary Products Sales ChannelsAncillary products can be sold to consumers through a variety of sales channels, both within and outside the dealership

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Online

Customer purchases after-market products through an online website from varied sources

Third Party

Third party providers, such as lenders, offer after market products directly to the consumer in conjunction with other products purchased

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

Service Drive

Customer is sold after-market products at the time their vehicle is being serviced

Dealership

Dealership sells after-market products to customer at time of sale as part of financing package


PwC

Extended Warranties OverviewAn extended warranty provides coverage distinct from and sometimes in addition to an OEM warranty, insulating borrowers from repair costs.

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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.

Illustrative Example

Dealer purchases an extended warranty product from a OEM / third party provider. The third party provider assumes all risk.

Dealer Cost:-¥3,200

Dealer revenue:¥6,400

Dealer sales profit:¥3,200

Dealer revenue from repairs:¥3,100

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 factorywarranty

Administrative profit, investment profit, underwriting profit

Mark-up opportunities Peace of mind

Prevent sale of non-OEM after market products

Increase parts sale Increase part sales Assurance of quality

Drive service business to franchise dealer

Increase partner profit Servicing profit Leverage OEM quality

Enhance relationship Increase loyalty potential Increase repeat business potential No unpleasant surprises


PwC

Appearance Protection Products OverviewAppearance protection products allow product purchasers to obtain repairs for minor cosmetic damages to their car.

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Maintain vehicle appearanceUnderwriting profit, investing profit, administrative profit

Mark up, cross sell opportunities Protected from unexpected costs

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

The dealership sells the appearance product to protect the vehicle against

minor cosmetic damage.

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.

Dealership purchases an appearance protection product

from a OEM / third party provider. The third party provider

assumes all risk.

Dealer Cost:-¥2,200

Dealer revenue:¥3,800

Dealer sales profit:¥1,600

Dealer revenue from repairs:¥1,900

Dealer profits the markup of the appearance product sold to the

customer.

¥


PwC

Certified Pre-Owned OverviewCertified 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.

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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.

Dealer purchases a used carvia it’s standard retail and wholesale

channels.


Dealer Cost:-¥10,200 Dealer cost for refurbishing to

CPO standard and captive license fee:

-¥2,400

Dealer sales revenue:¥18,200

Dealer Profit:¥5,600

By investing in performing the CPO inspection, the dealer is able to earn a

higher profit than selling a non-certified used car.

CPO

Used Dealer sales revenue:¥14,000

Dealer Profit:¥2,800

Dealer cost for conditioning: -¥1,000

¥


Refurbish / Certify Used CarAdditional revenue / Increase brand perception

Mark up, cross sell opportunitiesConfidence in the safety / condition of a used car

Increase Used Car Business Increase loyalty Increase loyaltyMore economical pricing option versus a new car

Increase residual values Supports brand perception Support used car business Maintain resale values


PwC

Here’s How a Dealership Could ProfitHypothetical based on 1,000 car sales / per annum

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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% 150 ¥570,000 ¥2,200 ¥330,000 ¥240,000

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.


PwC

Benefits of After-Market Ancillary ProductsIn addition to increased revenue and profitability for Auto Finance institutions, ancillary products produce benefits for dealerships and customers.

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Residualvalue

Brand image

Dealerprofitability

CustomerLoyalty

Part Sales

Profitability


Maintenance

Extended Warranty

Ancillary Product Driver


PwC

Ancillary Product Profitability Components- UnderwriterUnderwriting profit, administrative profit, and investment profit each contribute to the overall profitability of most ancillary products.

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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.

Underwriting 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.

Administrative Profit

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.

Investment Income


PwC

Sample Profitability Analysis of Ancillary ProductsUnderwriting profit emerges when cumulative claim payouts are less than the conservative actuarial models for expected cumulative claims.

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¥0

¥500

¥1,000

¥1,500

¥2,000

¥2,500

¥3,000

¥3,500

1 2 3 4 5

Cu

mu

lati

ve

Cla

im P

ay

ou

t (Y

ua

n)

Contract Year

Expected vs. Actual Cumulative Claim Payout

Cumulative Expected Claims Cumulative Actual Claims

¥ Profit

Unused payout reserves will accrue investment income

over the lifetime of the ancillary product contract


PwC

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.

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¥0.0

¥500.0

¥1,000.0

¥1,500.0

¥2,000.0

¥2,500.0

¥3,000.0

¥3,500.0

0 1 2 3 4 5

Ca

sh o

n H

an

d

Ancillary Product Contract Year

Prepaid Contract Funds Balance

Administrative funds Payout Reserves

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


PwC

U.S. Market Assurance ProvidersA variety of assurance product providers are offered in the US market, including in-house products and third party providers.

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OEM’sOffer their own assurance products through dealers

*Underwriting risk owned by dealer group

Note: Only OEMs provide certified plans in the USSource: PwC Market Research


Independent Providers

Offer third party assurance products at dealer partners

Large Dealer Groups

Offer their own assurance products through their dealer network *Underwriting risk owned by dealer group

PwC

China Opportunities

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PwC

Auto Finance Is Expected To Grow Rapidly in ChinaAuto 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.

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12%

20%27%

43%

50%

2011 2013 2015E 2018E 2020E

Projected Growth in Penetration of Auto Financing (China)

Penetration* of Auto Financing 2015

Asia Europe Americas

20% -

40% -

60% -

80% -

China (27%)

Japan (50%)Germany (65%)

UK (70%)

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

Figures in China are expected to match current penetration in developed Asian markets (Japan) by 2020

Source: PwC Autofacts; China Association of Automotive Manufacturers; China Auto Finance Report 2014 and 2015 ; Bloomberg ; NexAssure Group


PwC

The US Market May Serve as a Template for Product PenetrationWhile 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.

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Maintenance /PPM

GAP Insurance

Vehicle Service Contracts

Road Hazard / Tire

Appearance

Lease Wear / Tear

US Market Penetration

(Range)

20%-50%

10% -20%

5% -10%

15% -25%

10% -20%

25% -40%

Source: PwC Market Research December 2016PwC China Autofacts Seminar 2016

PwC

Case Study: Major AFC’s Entry into Established F&I MarketA 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.

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Challenge: Enter the mature US F&I market with branded after-market products, targeting a penetration of 20% in three years

Product Offerings: The OEM chose the most significant F&I products in the market* to offer through their captive, including:

Long Term Profitability of F&I Products in the US Market

• 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

Year 1: 9% market penetration

Year 2: 11% market penetration

Year 3 (F):20% market penetration

Year 0:0% market penetration

*non-exhaustive list

Vehicle Service Contract (VSC)

Guaranteed Auto

Protection (GAP)**

Planned Prepaid

Maintenance (PPM)

Road hazardLease wear and

tearAppearance

**GAP may not be a permissible product in China

Source: PwC market researchDecember 2016PwC China Autofacts Seminar 2016

PwC

High Growth Potential ProductsAs China’s Dealer Groups profitability from car sales begin to flatten, PwC 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.

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Tire & Wheel Protection:

Excess Wear & Tear:

Roadside Assistance:

Extended Warranty

Certified Pre-Owned



Roadside Assistance


Certified Pre-Owned

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


Services to assist motorists who have been left stranded as a result of a mechanical failure of their vehicle

Roadside Assistance

CommonAncillary Products

Covers the costs associated with vehicle repair, including parts, labor, and/or sales tax, for certain repairs or replacements that may be required

Extended Warranty

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


Protection against vehicle wear such as interior stains, tire wear, chips, dents and

dings that can incur substantial costs at end-of-lease


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.


PwC

Potential Additional Revenue (+46%)

Current Revenue Level (2015)

0 6000 12000 18000

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

Maturity of China’s Auto MarketChinese 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.

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Percentage of Revenue from Sales Type (Top 100 Dealer)*

Dealer Revenue Streams – Current + Potential Future Revenue from Ancillary Products **- Hypothetical

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.

0% 20% 40% 60% 80% 100%

US

China

New Car Sales Used Car Sales Services and Accessories Financing and Insurance Other

* China Automobile Dealers Association, 2015** China Automobile Dealers Association, 2015 and PwC Analysis


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

PwC

In Near Future, Chinese Lenders Are Anticipating a Surge in Volume and Variety of Ancillary Product OfferingMost lenders participating in PwC’s 2016 Auto Lending survey strongly indicate an interest in expanding and growing their ancillary product offerings to the Chinese market.

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25%Respondents plan on expanding their current or adding new VSC

products

Respondents intend on adding new liability or comprehensive insurance

offerings

58%

Source: PwC 2016 Auto Lending Survey - China participant responses


There is a strong push to expand or grow Ancillary Vehicle Protection and Liability Insurance in China.

75%Respondents are considering adding new ancillary vehicle protection

products

Assurance/Ancillary products will play an increasingly significant roles in

market

PwC

Next Steps

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PwC

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?

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Digitization

Product mix

Idlers

Highly risk-averse and cost conscious

Followers

Quick to adopt proven methods once costs are reduced

LeadersRisk-tolerant and willing to pay

a leader premium

Common Sales channels

Pr

ofi

les

Traits

Other considerations

Dealer / Customer expectations

Technology impact

Business transformation needs

Market necessityCompany strategyEase of

adoption

Mainframe Based Legacy

Platforms

Paperless ContractsCloud Based Platforms

Mobile Sales

Limited Product Diversity No Dealer

Customization

Diversified Multi-Product Line-Up

Tailored Programs for Dealers

Reinsurance Program for Dealers

Predictive AnalyticsDigital Integration

Online Sales

Service Drive

At Point-of-Sale


PwC

Idlers: Considerations for a successful product launch


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December 2016

Financial Considerations

Product 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 customersloyalty in addition to driving core financial profitability

.

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

Strategic 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

• 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

PwC

Leaders/ Followers: Considerations for a successful product launch


26

December 2016

Financial Considerations

Product 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

Strategic 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

• 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

Building trust in society and solving important problems

Thank you!

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2016 PwC. All rights reserved. PwC refers to the China or Hong Kong member firm, and may sometimes refer to the PwC network. Each

member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

PricewaterhouseCoopers LLP601 South Figueroa StreetSuite 900Los Angeles, California 90017USA+1 213 [email protected]

Paul KramarzDirector, Vehicle Lending and Leasing

PricewaterhouseCoopers LLPThree Embarcadero Center, San Francisco, CA 9411 USA+1 415 [email protected]

Bryan IgnozziPrincipal, Vehicle Lending and Leasing

Please contact us with questions or for more information.

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