Financing the future of mobility - Deloitte

Financing the future of mobility

Auto finance in the evolving transportation ecosystem

Part of a Deloitte series on the future of mobilityTM

The Deloitte US Firms provide industry-leading consulting, tax, advisory and audit services to many of the world's most admired brands, including 80 percent of the Fortune 500. Our people work across more than 20 industry sectors with one purpose: to deliver measurable, lasting results. Deloitte offers a suite of services to help clients tackle future of mobility-related challenges, including setting strategic direction, planning operating models, and implementing new operations and capabilities. Our wide array of expertise allows us to become a true partner throughout an organization's comprehensive, multidimensional journey of transformation.

About the authors

Cameron Krueger is a managing director in Deloitte Services LP and leads the Automotive Captive Finance practice. He has spent most of his career focused on the financial services industry, concentrating on lending and leasing against hard assets, both consumer and commercial. His work includes transformational projects across the entire auto lending and leasing life cycle, helping clients build competitive advantage and improve the customer experience. Krueger has served on the board of the Equipment Leasing and Finance Association (ELFA) and the ELFA Executive Committee, Finance Committee, and Nomination Committee, as well as chaired the Operations and Technology Committee.

Tiffany Johnston is a principal in Deloitte Consulting LLP's Financial Services practice, specializing in banking and securities. She plays a key role in managing significant transformations for clients: merger integration, cost reduction, and navigating disruptions due to technology, regulatory, or market factors. Johnston currently leads Deloitte Consulting's Lending Center of Practice, which focuses on innovation and operational excellence in consumer and commercial lending.

Financing the future of mobility

Contents

Introduction|1 The future of mobility|3 Auto finance in the future of mobility|5 Preparing for the future of mobility|8 Emerging opportunities|12 Conclusion: New levels of engagement|13 Endnotes|14 Contacts|16 Acknowledgements|17

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Introduction

Auto finance in the evolving transportation ecosystem

FEW consumer-facing businesses are as dependent on well-functioning and widely available financing as the automotive industry.1 Roughly $500 billion in new loans and leases are originated annually, and 86 percent of new car purchases and 55 percent of used ones rely on borrowed money, with banks, captives, and fleet financiers all playing important roles (figure 1).2 Collectively, the US auto finance industry held roughly $1 trillion in outstanding loans and leases in 2015, translating to nearly $111 billion in revenue.3

The well-established role of auto finance will be deeply challenged in the coming years as the extended global automotive industry evolves into a new mobility ecosystem. A series of converging social and technological forces, from advanced powertrains to shifting consumer preferences and the emergence of autonomous vehicles, will reshape the way people and goods move about in the coming years. Most notably for auto financing, the rise of shared access to vehicles and drop in the number of consumer purchases could dramatically alter the number and size of loans--and who needs them.4 Customers will increasingly be businesses in addition to individual consumers, and overall loan volume--and its associated revenue--could decline dramatically in the long run.5

To thrive in the emerging mobility ecosystem, auto finance companies will need to rethink their traditional value chain, from sales

Figure 1. The US auto finance market, 2015

Total outstanding loans and leases

~$978 billion

Consumer lending for personally owned vehicles

~$67 billion

Commercial lending

for shared vehicles

Total industry revenue

~$111 billion

Captives

38%

57%

Banks

42 million

New and used

cars financed

in US in 2015

5%

Fleet financiers

Source: Experian; IBISWorld; Deloitte analysis. Graphic: Deloitte University Press |

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Financing the future of mobility

A series of converging social and technological forces, from advanced powertrains to shifting consumer preferences and the emergence of autonomous vehicles, will reshape the way people and goods move about in the coming years.

and origination to servicing and asset disposition. The scope of the required transformation will vary across lenders. Large diversified banks may have many of the needed capabilities already; their challenge will be imparting knowledge across business units and managing the rebalancing of volume between consumer and commercial auto lending. By contrast, captives focused primarily on dealer-driven loans to individuals will need to explore developing new business models to serve tomorrow's larger pool of commercial borrowers.

For finance companies grappling with these changes, our hope is to share insights derived from our work on the future of mobility and to commence an ongoing dialogue around the evolution under way, its implications for incumbents and disrupters, and the sources of new value creation.6 In short, we seek to help key stakeholders explore "where to play" and "how to win" in the evolving mobility ecosystem. And we believe there are concrete steps auto financiers can take today to prepare for the future.

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Auto finance in the evolving transportation ecosystem

The future of mobility

THE way people and goods move about is on the cusp of a fundamental transformation.7 Advances in powertrains and materials, increasing vehicle connectivity, shifting consumer preferences, and the emergence and adoption of self-driving vehicles will ultimately give rise to a new mobility ecosystem. The

contours of that ecosystem are likely to be determined by two key factors: the degree to which mobility is personally owned or shared, and whether vehicles remain in human control or are fully autonomous. The combination of those factors yields four potential future states of mobility (figure 2).

Figure 2. The future states of mobility

Extent to which autonomous vehicle technologies become pervasive:

Future states of mobility

3 The driverless revolution

4 A new age of

accessible autonomy

Autonomous*

Vehicle control

? Depends upon

several key factors

as catalysts or

deterrents--e.g.,

technology,

Low

regulation, social

acceptance

Asset efficiency

High

Assist

? Vehicle technologies will increasingly become "smart"; the human-machine interface shifts toward greater machine control

Driver

1 Incremental change

2 A world of

carsharing

Personal

Vehicle ownership

Shared

Extent to which vehicles are personally owned or shared: ? Depends upon personal preferences and economics ? Higher degree of shared ownership increases system-wide asset efficiency

*Fully autonomous drive means that the vehicle's central processing unit has full responsibility for controlling its operation and is inherently different from the most advanced form of driver assist. It is demarcated in the figure above with a clear dividing line (an "equator"). Source: Deloitte Future of Mobility analysis.

Graphic: Deloitte University Press |

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Financing the future of mobility

? In future state 1 (Incremental change), vehicles remain personally owned and driver-driven. Private ownership remains the norm, with consumers opting for the privacy, flexibility, security, and convenience that come with owning their own vehicles. Importantly, while incorporating driver-assist technologies, this vision assumes that fully autonomous drive won't become widely available anytime soon.

? Future state 2 (A world of carsharing) anticipates continued growth of shared access to vehicles through taxis, limos, rental cars, ridesharing, and carsharing. Economic scale and increased competition drive the expansion of shared vehicle services into new geographic territories and more specialized customer segments. Here, passengers more heavily value the convenience of point-to-point transportation created through ridesharing and carsharing. Plus, the system offers options for non-drivers such as seniors, low-income families, and minors without licenses.

? In future state 3 (The driverless revolution), autonomous drive technology proves to be viable, safe, convenient, and economical, yet private ownership continues to prevail. Individuals seek driverless functionality

for its safety and other potential benefits but continue to own cars for many of the same reasons they did before the advent of autonomous drive. They might invest in even more expensive vehicles as a new era of customization dawns and it becomes appealing to use vehicles tailored for specific occasions and circumstances.

? Future state 4 (A new era of accessible autonomy) anticipates a convergence of both the autonomous and vehicle-sharing trends. In this future, mobility management companies offer a range of passenger experiences to meet widely varied needs at differentiated price points. The earliest, most avid adopters seem likely to be urban commuters, but as smart infrastructure and driver usage expand, fleets of autonomous shared vehicles could spread to densely populated suburbs and beyond.8

The transition from future state 1 will not happen uniformly or linearly. Because mobility needs vary with demography and geography, and because technology and social attitudes will progress unevenly, the four future states will likely exist in parallel for the foreseeable future. For stakeholders, that means preparing to operate in a much more complex, multifaceted mobility ecosystem for the foreseeable future.

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