Bad news on the subprime front, as credit rating agency Experian reports a rise in delinquencies and repossessions for auto loans in Q1 2013.

Melinda Zabritski offered a rather dubious explanation for the nearly 17 percent rise in repos (as well as the 1.3 percent uptick in 30 day delinquencies and 12.4 percent rise in 60-day delinquencies)

“Obviously, we never want to see a rise in delinquencies or repossessions, but when you compare the current findings with previous years, they are still lower than the recession-level rates…However, one thing most lenders will agree upon is that today’s subprime borrower is less delinquent than those in the past.”

Zero Hedge, reporting on the latest data from the Fed, is reporting a nearly 24 percent rise in delinquent balances year-over-year. Experian only expects things to get worse, stating

“As we continue to move forward, we should start to see more increases as some of the subprime loans coming onto the books begin to deteriorate.”

And still, financial institutions are happy to keep pumping out bad loans. The total dollar volume grew to $726 billion, up from $663 billion in Q1 2012. Banks increased their loan portfolios by $20 billion, finance companies by $18 billion, credit unions by $14 billion and captive finance arms by $12 billion, while but average charge-off amounts rose by 9.8% to $7,401 on each defaulted loan. But, as Experian kindly reminded us, “Charge-offs are still well below recession levels, however, as Q1 2009 average charge-offs were $10,126.”

That’s definitely reassuring news!

Following in the footsteps of Spanish bank Santander, GM Financial announced that it would enter the prime lending market in 2014.

SNL Financial, a subscription-only financial news service, reports that

General Motors Financial Co Inc officials said on a May 2 conference call that the company plans to launch a prime retail product in North America on a limited basis with an initial focus on General Motors dealers with which the captive finance company maintains a commercial lending relationship.

GM Financial, formerly AmeriCredit, was acquired by GM in 2010 to provide leasing and subprime financing options, alongside Ally Financial, which absorbed the former GMAC. While GM Financial claims that they don’t want to become the ”predominant” prime lender for GM dealers or “supplant the banks and other providers in this market,” CEO Daniel Berce said the move would help achieve “strong growth in our earning asset base over time.”

Given GM Financial’s portfolio, it’s not hard to see why Berce is eager to transition to prime lending and see some growth in its earning asset base. In 2012, 85 percent of GM Financial’s portfolio was subprime, while delinquencies grew by $200 million, to $933 million according to its latest SEC filing. Meanwhile, GM Financial’s prime customers are said to have default rates in line with the industry average. Small wonder that the firm is looking to capture more of these lenders and eliminate some risk from its subprime-heavy portfolio.

Subprime aside, the move into prime lending will help GM Financial transition into a full-fledged captive financing arm. In addition to offering lending services to consumers, GM Financial also offers commercial lending products for its dealers. SNL reports significant expansion in these areas for GM Financial

GM Financial’s lease originations for GM vehicles of $620 million in the first quarter marked a sharp increase from $384 million in the year-ago period; the captive is a full-spectrum lease provider for its parent company. GM Financial also reported $882.7 million of commercial finance receivables as of March 31, up from $560 million on Dec. 31, 2012. The company rolled out the commercial loan products in mid-April 2012.

With Chrysler forming their own captive arm with Santander and GM Financial’s expansion, Ally stands to be the biggest loser. According to SNL, their commercial floorplan financing business saw a 3 percent decline in Q1 2013 versus the same period last year, and both Santander and GM Financial will undoubtedly take a good bite out of Ally’s consumer lending business, which previously targeted Chrysler and GM buyers. Ally’s President, William Muir, was rather blunt in his assessment of the Chrysler situation, stating ”pure subvented business from Chrysler should go to zero pretty quick”.

Tesla Motors, Inc. released its first quarter financial results yesterday, which featured a number of milestones for the auto maker. Among them, Tesla’s revenue rose 83% from the last quarter to $562 million, a record high for the company.

Tesla also posted the first ever profitable quarter in its history, with a net income of $11 million, or $0.10 on a per share basis. This large growth in revenue was largely aided by the fact that Tesla was able to recognize revenue on 4,900 out of the 5,000 Model S vehicles it managed to produce in the quarter. It is worth noting that $68 million, or 12% of Tesla’s revenue was earned through the sale of Zero Emission Vehicle (ZEV) credits to other automakers. Tesla notes in its letter to shareholders that they expect the sale of ZEV credits to decline in the future, and expect the amount to reach $0 by Q4 2013. Tesla’s move away from the sale these credits and towards growing the sale of their automobiles demonstrates their confidence in projected global demand of 30,000+ units annually. An improvement in their gross margin, which has moved up from 8% to 17%, is also an extremely important factor in their profitability.

One would expect that Tesla has settled down and is beginning to ramp up their production of the Model S while continuing to lower its costs through managing its supply chain and reaching economies of scale. After all, management reaffirmed its guidance of a gross margin of 25% for Q4 2013. In the Outlook section of the letter, Tesla explains that it expects increases in operating, research and development (R&D), and selling general and administrative expenses (SG&A).

Some of these costs may naturally rise in proportion to sales volumes. However, as Tesla fights an uphill battle to expand their gross margin, it cannot lose sight of controlling its fixed costs. Total Operating Expenses currently amount to 18% of sales. Any increase to this amount threatens to eat up any profitability that Tesla might achieve through an increase in gross margin. From a profitability standpoint, the ideal situation would be one in which Tesla could achieve its margin of 25% on its vehicles, while simultaneously taking advantage of its increase in production to achieve economies of scale and decrease operating expenses.

The most interesting line item on Tesla’s quarterly income statement is “Other Income.” Upon examining the statement solely on an operations level, one would notice that Tesla has posted a loss from operations of -$5.5 million. How could Tesla post a net income, yet be posting a deficit through its operations? One need only take a look at the line item “Other Income”, for a better picture. Other Income has a balance of $17 million, $11 million of which is from the elimination of a common stock warrant liability to the Department of Energy, and the remainder is from favorable foreign currency exchange impacts. Both of these items are irregular, specifically the liability elimination, in the fact that they will not likely happen year to year, and are not generated through the company’s regular operations. The liability elimination is also a non-cash item. To get a real sense of how Tesla performed, Other Income can be removed from the income statement (see Figure 1). The result is a net loss of $5.7 million for the quarter. It’s clear that there is still much work to be done before Tesla is truly profitable based on its operations. These types of irregular items cannot be relied upon to achieve profitability every quarter.

Figure 1(in millions)

Perhaps a more relevant dataset is Tesla’s non-GAAP figures. The non-GAAP figures, which are intend to be used by management for internal purposes, can sometimes more accurately reflect a company’s performance on the interim, without being hindered by stringent accounting regulations. Figure 2 displays Tesla’s reconciliation of Net Income from GAAP to non-GAAP.

Figure 2 (in millions)

The non-GAAP measure of Net Income is slightly higher than the GAAP reporting, at approximately $15 million. Non-GAAP starts with the GAAP reported income of $11 million. Notice how almost $11 million is subtracted from net income in “Change in fair value of warrant liability.” This represents the Department of Energy liability elimination mentioned earlier. What Tesla is doing here is effectively removing this amount from its GAAP net income, not unlike the similar calculation done above. Tesla has management has realized that this liability is a large contributor to its profits, and has removed it to create a figure more representative of its operational profitability.

The next item is stock-based compensation expense. This amount was originally included in “Total cost of revenues.” For those of you who are unfamiliar with this concept, an article by Ian Gow, an assistant professor of accounting information and management at Northwestern’s Kellog School of Management, explains it as stock options that are granted to employees. Gow explains that recently accounting standards have required companies to disclose stock-based compensation expenses, as Tesla has done by including it in cost of revenue. The article continues to elaborate that stock-based compensation expense is an area for managers to manipulate accounting data in order for them to reach their targets or benchmarks. The accounting for this type of expense becomes increasingly tricky when considering that it is a non-cash expense. While it is harder for management to toy around with this expense due to revisions to GAAP, Tesla has elected to add this expense back to their net income in its non-GAAP reporting. This is not an attempt to discredit the integrity of Tesla’s management, rather to illustrate the importance that non-GAAP figure must be taken with a grain of salt.

Regardless, Tesla has made huge strides in its earnings. Just last quarter (Q4 2012) Tesla posted a net loss of almost $90 million. Accountants and analysts can debate the significance of line items for eternity, the larger point being that of an upward trend for Tesla. In Q2 it will be interesting to see is Tesla can build on its profitability, or fall back into the red without the help of irregular account balances.

Seeing delinquencies and credit losses going up while used car sales and lending standards deteriorate, rating agency Fitch warned today that “U.S. auto lenders will likely report further weakening in asset quality metrics this year.” Translated into English, lenders will become increasingly dependent on sub-prime loans and exposed to their perils.

Fitch saw average credit losses go up 16 basis points in the first quarter, delinquencies rose 67 basis points. Double-digit increases in auto leasing volumes may boost auto sales, but Fitch views this “with caution, particularly since used car values will likely return to more typical levels after recent rises.” Translated into English: Their residual value assumptions are based on fantasy, and there will be a rude awakening.

According to Fitch, “the expected weakening in asset quality for auto lenders is occurring after a period of record-low losses and delinquencies, and we believe the weakening of metrics will remain within historical norms, supporting ratings.” In plain English: Fitch won’t change the credit ratings of auto lenders just yet, but if this trend continues, they have been warned.

The subprime mega deal was reportedly helmed by Santander, a major Spanish bank that is also Chrysler’s lending partner. Recent developments have had many observers questioning whether Chrysler’s phenomenal sales boom in 2012 was in fact spurred on by subprime loans. Credit rating agency Experian said that nearly 30 percent of new car loans issued by Chrysler went to subprime buyers. Meanwhile, a Top 10 car list for subprime buyers compiled by one online lender showed that Chrysler products made up 40 percent of the list.

Meanwhile, ratings agency Fitch was rosy in its outlook of ABS products, noting that

Both losses and delinquencies declined across prime and subprime auto ABS even as used vehicle values softened and are expected to moderate further this year. Subprime 60+ day delinquencies fell to 3.02% in March from 3.65% in the prior month, dropping 17% both on a MOM (month over month) and YOY (year over year) basis. Subprime ANL (annualized net losses)  were 3% down in March to 5.36% from 5.53% in February. On a YOY basis, subprime ANL  were still 14% higher in last month versus March 2012.

Our usual grain of salt comes in the form of cautious practices on the part of Fitch. The agency has been more conservative than most in rating subprime ABS deals, to the point where Fitch has been excluded from rating deals that some observers have considered rather risky.

The retreating yen allowed Honda and Mazda to report bigger profits for the last quarter of their April to March fiscal year. Now the two are faced with a new problem, one that will also be shared by its Japanese peers: Higher costs of badly needed foreign investments.

“We are investing a huge amount, especially in new plants … the reality is that such costs related to growth are eating into our vehicle volume growth,” Honda Executive Vice President Tetsuo Iwamura told Reuters today.

The strong yen made exports expensive, but turned foreign investments into a bargain when they hit the books in Japan. In September 2012, the obscenely strong yen took a turn and  lost about 30 percent of its value compared to its highs.  Suddenly, exports make money, at the price of suddenly expensive investments.

Honda plans 700 billion yen of capital spending in the current financial year, and this money now buys 30 percent less bricks, mortar and assembly lines abroad.  Mazda wants to double capital expenditures to 130 billion yen. Honda and Nissan will announce results in two weeks, but will see themselves faced with the same conundrum.

Tough.

Ratings agencies and other players in the finance world are beginning to sound the alarm on auto backed securities.  Among the most troubling factors for some investors is the growth of smaller issuers who rely on pools of deep subprime loans. And ratings agencies who are being more conservative with their ratings are missing out on the action.

A report by Reuters highlights a recent ABS offering from Security National Automotive Acceptance Co (SNAAC), a smaller firm that focusing on loans to military personnel. This offering received a solid rating despite seemingly poor fundamentals.

According to the S&P, around 24% have ultra-low FICOs of between 500 and 550. And roughly 24% of the loans have loan-to-value ratios of 115% to 120% – meaning that the borrowers owe more than their vehicles are worth. Even so, S&P rated the deal AA, while rival DBRS gave it a full AAA rating.

Some players in the fixed income industry say that this kind of practice is far from an isolated incident. Ostensibly, a boom in subprime ABS has led to new players who are hungry for loans, regardless of quality

“The gap between the biggest players and the smaller issuers is just massive,” said John Kerschner, the head of securitized-product investing at Janus Capital Group. The smaller second-tier players go to deep, deep subprime – in the range of a 500 FICO score. That may not be the person you want to lend money to.”

Even more troubling is an assertion that ratings agencies Moody’s and Fitch, two well known companies in the bond ratings world have been deemed too cautious by a number of issuers, and thus have not been hired to rate their deals. Needless to say, this effectively stifles any outlooks that are less than rosy. John Bella, a top ABS official at Fitch, told Reuters

“We are generally more reluctant to reach AAA on subprime auto ABS for numerous reasons, among them the sector’s innately more volatile performance history, operational concerns and often heavy reliance on securitization as sole source of funding. Stiffer competition and deteriorating underwriting in recent months are amplifying our concerns.”

While the Reuters piece questions how investors may fare in the event of a burst ABS bubble, TTAC has long maintained that the real risk lies with new cars, the auto makers, and another possible systemic crisis. Auto manufacturers could interpret rising sales in an overly optimistic fashion, and start adding capacity as a result. But if the growth in sales is being driven by subprime lending, then it is inherently vulnerable to a slowing economy or an increase in unemployment. Either of those factors could be the trigger that causes subprime buyers to start defaulting. Used cars are less affected by this problem. They can simply be pumped through the system again and again, and the nature of subprime lending itself means that (if executed correctly) the high interest paid by everyone else can offset the losses brought on be delinquent debtors. If new car sales were to experience a significant contraction due to external forces like these, then auto makers could be left with a 2008-style scenario of idle plants, excess capacity and a glut of inventory, all of which are enormously costly to the OEMs.

8 years to pay off a car? A report by the Wall Street Journal claims that in Q4 of 2012, the average car loan stretched out to 65 months, or just over 5 years. Loan terms were being stretched out over increasingly longer terms too, with credit firm Experian reporting that nearly 1 in 5 car loans had terms between 73 and 84 months long, with some stretching for as long as 97 months.

So why stretch out loans for such a long period of time? Per the WSJ

“[the] 75-month loan illustrates two important trends rippling through the U.S. auto industry. Rising new-car prices and competition among lenders to attract borrowers is pushing loans to lengthier terms. In part, banks see the longer terms as a way to attract buyers, by keeping monthly payments under $500 a month.”

Among the culprits cited by the WSJ are increased credit, low delinquincy rates on car loans and, according to banks, minimal downside as far as auto lending goes.

Melinda Zabritski, director of automotive credit for Experian, said the greater availability of credit is helping the surge in new car sales. The percentage of subprime loans isn’t far below the record level of 2007, and the length of loans is growing, she said…With increased competition between the banks for business, offering loans longer than 72 months, or subprime loans is one way to compete for new borrowers. “Consumers tend to be monthly payment buyers. One way that lenders compete is to offer longer term loans,” Ms. Zabritski said.

Interestingly, Zabritski claims that buyers qualifying for the longer loans tend to be those with good credit scores buying more expensive vehicles. But what nobody answered is “where is all this credit coming from?” As per our last report on auto lending, the appetite for auto back securities is enormous, and Wall Street cannot get enough of them. Sub-prime loans in particular are a favorite. At this point, nobody, not even Zabritski, is denying that the expansion of credit for automobile buyers is driving new car sales. The question is, what happens when the music stops?

March was the 5th straight month of a SAAR above 15 million vehicles.  Industry analysts have explained the strength of the market in a number of ways. The need to replace older vehicles is one (new car sales were hit hard during the recession as consumers held on to their vehicles for longer. This also caused used car prices to skyrocket, something TTAC has been documenting), while others have cited increasing fleet demand, and the desire to replace vehicles damaged in Hurricane Sandy.

But one factor that is just starting to get attention outside of TTAC is sub-prime financing. Sub-prime lending, which involves giving high-interest loans to customers with poor credit scores, is driving the SAAR in a big way, by letting buyers with poor credit purchase new cars. In turn, the sub-prime bubble is being driven by Wall Street, whose clients cannot get enough of financial instruments backed by sub-prime auto loans.

On the surface, it seems unbelievable. Unemployment is at 7.7 percent, and even higher according to some pundits. Taxes are going up, wages are stagnant, the economy hasn’t really recovered according to many. And yet auto sales – for many people, the second biggest purchase they’ll ever make – are on a hot streak, rebounding back close to pre-recession levels.

Sub-prime loans, defined as a loan given to anyone with a credit score under 660, are now bigger than ever. In Q2 of 2012, new car sub-prime loans accounted for a quarter of of all loans, while 56 percent of used car loans went to sub-prime buyers.There’s even a new category called “deep subprime”, for auto loans issued to buyers with credit scores below 600. These loans account for nearly 11 percent of all car loans, despite the fact that a 600 credit score is considered abysmal.

A recent Reuters report detailed the usual routine of a sub-prime loan; a borrower with a poor credit rating is approved for a loan, often carrying an exorbitant interest rate hovering around 20 percent. In the Reuters story, the buyer agreed to finance a $10,000 2007 Suzuki at 21.5% interest using a shotgun (valued at $700) as his down payment. The buyer, stretched thin by various debts, including the car loan, ended up declaring bankruptcy. Another report by the Los Angeles Times outlined how unscrupulous used car dealers would issue sub-prime loans, knowing that their customers would default, wait for them to default, and then repossess the car and re-sell it, repeating this process over and over again.

In addition to the decreasing credit scores of car buyers (The Motley Fool reports that the sub-prime buyer’s average credit score dropped 9 points in 2012 compared to 2011), monthly payments have stayed static, due to 77 percent of loans lasting for longer than 5 years. This tactic allows buyers to manage the same monthly payment but borrow a greater amount, and thus able to afford a more expensive car without feeling more of a hit to their pocketbook.

Extending loans to unqualified buyers wantonly would seem like a poor business practice on the surface, but the demand for sub-prime loans isn’t just coming from consumers. Wall Street is also playing an enormous part in the practice. According to the New York Times, growth in securities backed by auto loans has been enormous. In 2008, investors bought $2.17 billion in auto loan securities. In 2011, that figure exploded to $11.7 billion.

The rationale behind the massive growth in auto loan securities can be linked to the Federal Reserve’s policy of Quantitative Easing. QE, which involves buying bonds and Treasury Secuities en masse, has injected liquidity into the market and kept interest rates artificially low. This has allowed banks to charge near-record low interest rates on all car loans, while also reducing yields on traditionally safer investments like bonds. Sub-prime car loans, packaged and sold into securities, are seen as riskier, albeit with the potential for greater return. And with hedge funds and institutional clients looking for a greater return on their money, auto loan securities have become the instrument of choice for a number of entities – even Google is investing in these instruments, after being frustrated by low returns elsewhere.

And just like the 2008 mortgage crisis, these sub-prime auto loans are being packaged and sold as AAA rated bonds. As the Los Angeles Times reports, the number of loans packaged and sold as a securities is in the tens of thousands. The thinking goes that even if some of the loans are delinquent, there are plenty more that will make the security safe. And like sub-prime mortgages, the securitized auto loans are being divided up into tranches, with demand for the riskiest tranches being strongest.

Unfortunately for American consumers, the biggest players in sub-prime auto financing have significant ties to domestic auto makers. A report by Reuters names Santander, which is Chrysler’s auto financing outlet, and GM Financial as the two largest sub-prime auto lenders in the United States. Santander alone accounted for 53 percent of all sub-prime financing – and Santander’s expertise in the field was apparently one reason that Chrysler decided to partner with the Spanish bank.

While both Chrysler and GM use Ally Financial for their prime loans (which are issued to qualified buyers), GM has its own seperate sub-prime arm, known as GM Financial. In Q1 2012, some 93 percent of GM Financial’s loans were to sub-prime buyers, up from 87 percent in Q4 2010. During that same period, loans to the least qualified buyers – those with FICO scores under 540, were up 79 percent. GM Financial’s delinquent loans also rose by some $200 million in 2012, to $933 million – higher than Ford Toyota and Honda’s combined delinquencies.

The situation in auto-loan securities has eerie shades of the 2008 mortgage crisis across the board: the eager distribution of not just sub-prime loans, but “deep sub-prime” loans to borrowers with the worst credit ratings. The securitization of auto loans and the hunger for the riskiest tranches of these securities. And the “AAA” rating of even the most egregiously crappy securities.

In light of these factors, it’s worth reflecting on how much of an influence sub-prime auto loan securitization is having on the lofty heights being reached by the new car market. The last time America experienced the bursting of an asset bubble, auto makers were stuck with excess capacity and significant overcapacity. Combined with a sudden contraction in consumer credit, these factors nearly brought America’s auto makers to their knees.

The current situation is not directly comparable to the mortgage crisis of 2008, but bares too many parallels for us to ignore. It would be the ultimate irony if another systemic crisis occurred, due to securitizied auto loans. They very instruments used to by auto makers to help spur sales growth will have ended up crippling them yet again.

A weak yen and a slew of new models has Mazda within sight of profitability. With Mazda heavily dependent on exports, the yen’s 16 percent decrease in value relative to the U.S. dollar could not have come at a better time for Mazda, as it readies a whole slate of new products for sale.

According to Bloomberg, Mazda is on track to turn a profit for the first time in nearly 5 years. Aside from the yen, an onslaught of new product and increased demand has helped Mazda revive its fortunes. The new Mazda6 will be followed by the Mazda3, a critical car for the Japanese auto maker. The two models account for half of all Mazda’s sales. Following these two will be the next generation Mazda5, which will incorporate SkyActiv technology and be produced for Nissan as the Lafeasta minivan for the Japanese market. A new MX-5 jointly developed with Alfa Romeo may be derailed by a possible sale of Alfa Romeo, but a plan to build a new subcompact for Toyota is still underway. Mazda plans to introduce a total of 8 new models incorporating SkyActiv technology by 2016.

The Toyota deal resulted in Mazda expanding capacity at its new Mexican plant from 140,000 annual units to 230,000. Despite the favorable exchange rate, Mazda will remain greatly exposed to the yen’s fluctuations as long as the majority of its cars are built in Japan and subsequently exported. The Mexican plant is a positive step towards localizing production, and should insulate Mazda from currency shocks in the crucial North American market.

Anyone looking for an anecdote illustrating the QE-fueled madness that is subprime auto lending, take a look at this Reuters report on what constitutes a down payment in the subprime world.

And still, though Nelson’s credit history was an unhappy one, local car dealer Maloy Chrysler Dodge Jeep had no problem arranging a $10,294 loan from Wall Street-backed subprime lender Exeter Finance Corp so Nelson and his wife could buy a charcoal gray 2007 Suzuki Grand Vitara.

All the Nelsons had to do was cover the $1,000 down payment. For most of that amount, Maloy accepted Jeffrey’s 12-gauge Mossberg & Sons shotgun, valued at about $700 online.

Sub-prime auto loans were up 18 percent in 2012, thanks to a bubble created by the Fed’s quantitative-easing program. As QE has driven up inflation and kept interest rates low, global investors are looking at riskier investment vehicles that offer better potential returns. Bonds backed by subprime car loans are one of those vehicles that everyone from hedge funds to institutional investors have gravitated towards. In 2012, $18.5 billion in subprime backed securities were sold, up from $11.75 billion in 2011.

With subprime lenders expecting 1 in 4 creditors to default on their loans, interest rates can easily top 20 percent, and dealers can easily repossess and sell the same car over and over again while reaping enormous profits. Meanwhile, the process appears to be fueling yet another credit-driven asset bubble similar to the mortgage crisis that torpedoed everything in the previous decade.

Despite a focus on used cars in the Reuters report, many of the players in the used car field, such as Santander, GM Financial and Ally Financial are tied in with the new car side as well. Santander is Chrysler’s financing unit of choice, while GM has GM Financial as a separate subprime financing arm, in addition to Ally. Delinquencies are slowly creeping upwards as well. GM alone claims that 8.5 percent of its auto contracts are delinquent  higher than Ford, Toyota and Honda combined.

News of yet another month with a SAAR of over 15 million is an encouraging sign for the auto industry, but in light of reports such as this one, one can’t help but wonder how much of the market is being driven by subprime lending, and whether this level of auto sales will be sustainable. Adding additional capacity to meet demand that is fueled by a lending bubble could be disastrous if we witness a 2008-style deflation in auto sales thanks to a subprime contraction.

Just ahead of their Q1 2013 earnings called, Tesla announced that they were profitable in the first quarter of the year, with deliveries exceeding their own targets. In addition, Tesla has also decided to discontinue the base trim of the Model S due to a lack of demand.

Tesla reported 4,750 deliveries of the Model S, up from their own estimate of 4,500 units, which, according to the company, helped them turn a profit this quarter. Crucially, Tesla claims that profitability is achieved even using GAAP principles, since non-GAAP accounting is more easily manipulated to reflect positive results.

The 40 kWh car, which started at just under $60,000, apparently had a take rate of just 4 percent, leading to Tesla’s decision to axe it. Instead, customers who ordered the base model will get a 60kWh model electronically limited to only use 40kWh of energy. Buyers can have this reversed by Tesla if they wish, and future owners will be able to perform the procedure as well. 60 kWh cars will also be Supercharger ready across the board.

Given that Tesla’s customer base is made up of extremely wealthy EV enthusiasts who are looking to the Model S as either a) a status symbol b) a third car or c) an outright toy, the death of the 40 kWh model makes sense. Few would realistically want a base Model S whether because of status signalling or the reduced performance (in terms of both acceleration and range). Customers interested in the Model S are much more likely to gravitate to the 60 kWh model or the full-bore 85 kWh version, in the same way that the S63 AMG is the best way to use the Mercedes S-Class as an expression of one’s wealthy.

The higher profit margins on the more expensive models are also beneficial to Elon Musk’s vision of a profitable auto maker. Despite his grandiose vision of himself as a 21st century version of Henry Ford, there is little margin in producing mainstream cars. Better to let Tesla continue to market to the very wealthy while slowly allowing their product to become more accessible, rather than an ill-timed push into the mainstream.

The 30 year run of Suzuki auto sales in the United States is one step closer to coming to an end, as a California bankruptcy court approved Suzuki’s restructuring plans.

Suzuki Motor of America will be the new entity responsible for selling motorcycles and powersports equipment once Suzuki sells off its remaining new car inventory. Meanwhile, Suzuki sales outlets will continue to honor warranties and provide parts and service for the company’s automobiles.

A report by Automotive News scribe and Suzuki expert Ryan Beene highlights a bleak picture for Suzuki; sales fell from over 100,000 units in 2007 to a paltry 25,357 units in 2012 – about as many Camrys as Toyota sells in a month. An unfavorable exchange rate and contraction in the sub-prime auto market ultimately spelled doom for the auto maker in America.

Fans of the brand hoping for a return look to be out of luck as well. Chairman Osamu Suzuki ruled out a future return to America, stating

“Taking into account the issue of the exchange rates and the fact that we have no future outlook for making large vehicles, I think re-entry would be extremely hopeless.”

As for the status of Suzuki’s inventory – if you want an SX4 or Kizashi, you better act fast. A Suzuky spokesman was unable to tell Beene how many cars were left in America, while cars.com listed just 1376 Suzuki cars nationwide.

Tesla Motors Inc. released its Fourth Quarter & Full Year 2012 Shareholder letter on Wednesday. While the letter provides a very positive outlook for Tesla’s future, there are some questions looming in the background once we dig deeper into Tesla’s balance sheet.

Despite supply chain issues, Tesla has apparently achieved their stated goal of producing 400 cars per week at their Fremont, California factory. Tesla hopes to capitalize on its new found production ability, an annualized rate of 20 000 units per year, to take the Model S into Europe and Asia. However, there is still no indication whether Tesla will be reporting their sales figures in the United States like other auto makers do.

When viewed in isolation, Q4 has undeniably been one of the most successful sales periods for Tesla. 74% of Tesla’s overall revenues were recognized in Q4 alone, and reported sales growth from Q3 to Q4 was over 500%. But Tesla’s broader financial health isn’t nearly as rosy. The firm’s Q4 loss is reported at almost $90 million or $0.79 on a per share basis. Tesla’s net loss this year is almost $400 million, or $3.69 per share. Despite the fact that Tesla has slowly been improving its operating margin, which currently is at 8%, Tesla has not been able to carve enough contribution out of its sales to help cover its staggering Research and Sales expenses.

These costs combined make up 103% of Tesla’s overall revenues. Despite the fact that Tesla estimates a 15% reduction in its R&D costs for 2013, it is still fighting an uphill battle. Expansion into Europe and Asia will also require more retail and marketing resources, which will only further add to Tesla’s profitability woes.

At this time, Tesla remains highly leveraged, with a debt to equity ratio of 3.62. With some $450 million in long term debt sitting on its books (and nearly $1 billion in total liabilities), and no earnings to repay it with, Tesla’s future stability is questionable. While it does have approximately $200 million cash on hand, between a negative cash conversion cycle of 46 days and interest payments on the debt, not to mention negative free cash flow of over $500 million, one can only wonder how long until the well runs dry. Despite Tesla’s stated “cash flow positive” status in Q1 2013, this is using non-GAAP figures.

Hope still remains for the zero emissions car manufacturer as it looks to achieve economies of scale and reduce its fixed costs through improved production efficiencies. The projected increase in volume will also help towards the bottom line.

N.B: GAAP Figures used

Graeme Kreindler is an HBA Candidate at the Richard Ivey School of Business at The University of Western Ontario. 

As a journalist, if you ask an OEM rep about any given car’s redesign or next generation, you’ll undoubtedly be met with a terse “we don’t comment on future product plans”. But if you’re an analyst? Different story.

Yesterday, Morgan Stanley was kind enough to send TTAC a copy of their US Auto Product Guidebook. This 88 page presentation is packed with all kinds of charts, graphs and qualitative information designed to help educate investors about car companies and the product they sell. If you’re a TTAC industry nerd, this is like getting a copy of EVO magazine’s Car of the Year issue.

Within the Guidebook, there was plenty of information on GM’s upcoming product offerings – stuff that’s usually speculation and conjecture in the autoblogosphere and the buff books. But we have reason to believe that Morgan Stanley’s chart is accurate. This is the bank that rolled out New GM’s IPO, and counts Opel head Steve Girsky and GM CFO Dan Ammann (who advised GM on its 2009 restructuring)  as alumni.

Among the products listed in the report:

Buick: A Verano hatchback is apparently due this year

Cadillac: A redesigned SRX is due in 2014 and a Fleetwood – possibly the Ciel/S-Class fighter – will bow in 2015

Chevrolet: For 2013, the Orlando will apparently debut, though we’ve seen no movement on this so far. A “small SUV”, possibly the Trax, is set for 2014, while the Volt CUV is back on for 2015.

GMC: Tumbleweeds

After approving a $1.6 billion loan guarantee for PSA’s captive finance arm, the European Commission demanded a restructuring plan for all of PSA within six months.

Reuters quotes an EU spokesman as telling the French government

“We expect France to notify to us of a restructuring plan, not just for the banking arm but for the whole PSA group, because this aid also benefits the whole group,”

Government aid for Banque PSA was first proposed back in October, as it became difficult for the finance unit to borrow money due to the overall weakness of PSA itself. A bailout of Banque PSA was also seen as more palatable than providing aid to the car making unit.

Details of any potential restructuring are unclear, but the EU wants to make sure that PSA’s business will remain viable without any further state aid. Either way, PSA will be under the gun even further, as attempts to cut jobs have already raised the ire of France’s powerful labor unions and the current left-wing government.

Lacking the same profit sources as its French rival Renault (like low cost cars and exposure to healthy markets), PSA has been in the toilet financially, bleeding as much as 200 million euros per month. Even the new 208, France’s best-selling car last month, hasn’t been enough to help stem the tide.

The S-Class Mercedes has been the default choice for the global taste-and-wealth set for a very long time, probably since the demise of the Elwood Engel Continental. The 7-Series BMW, by contrast, has always been a slightly embarrassing purchase, the choice of the man cut out from the classy club by birth, ignorance, or a slightly unseemly insistence on driving dynamics. BMW is the striver’s brand, launched into the spotlight by a man who was sort of the Nadia Comaneci of sweaty social climbing. Mercedes is the real thing. Hasn’t it ever been thus?

German investors, on the other hand, seem to like the Roundel.

An article published by Bloomberg late last week seems to suggest that the bloom is off the Daimler-Benz rose, and a large part of that is due to the infamous Dr. Z:

BMW’s market capitalization has surged to 45 billion euros ($58.8 billion), versus 42.2 billion for Daimler. Subtract a reasonable price for Daimler’s truck business — the world’s biggest — and the value investors assign to Mercedes stands at about 25 billion euros.

“The market is saying that the prospects for Mercedes are much worse than for BMW,” said Hans-Peter Wodniok, an analyst with Fairesearch in Kronberg, Germany. “The market’s always right. In terms of innovation, BMW is the leader.”

“The market’s confidence in Daimler management is pretty much at rock bottom,” said Max Warburton, a Bernstein analyst in Singapore. “Investors have little or no confidence that current management will be able to do what is necessary to close the gap to BMW.”

One would think that the time to have lost confidence in Daimler management would have been a decade ago, when the product was iffy at best and even the mighty S-Class was often seen driving around with a dead COMAND screen and a droopy air suspension. Sometimes perception lags reality. Not to worry, though: investors may be bearish on the three-pointed star but there’s redemption ahead.

the potential of the Mercedes brand in China is “ overwhelming,” said Yale Zhang, managing director of consultancy Automotive Foresight in Shanghai. “Every consumer understands the value of Mercedes and the logo.

While the S-Class no doubt reigns supreme in China as elsewhere, the relatively lackluster star quality of the C-Class probably has customers there wondering if they really wouldn’t rather have a Buick.

Suzuki’s death rattle continues unabated as the company’s American distribution arm will receive $100 million in financing, half of which is earmarked to purchase inventory from parent company Suzuki Motor Corp.

While the funds are partially meant to help Suzuki wind down its U.S. operations, half of it will go towards buying more cars, as a Suzuki press release explains below

In response to continued consumer demand, dealer interest has remained high in continuing to order and receive shipments of Suzuki automobiles as long as they remain available, ASMC intends to use a portion of the DIP funds to purchase and ship 2,500 additional cars from Japan to the continental U.S., which have been manufactured since ASMC announced its restructuring. Earlier this week, the Company released its November 2012 sales numbers, reporting that it sold more than 2200 units last month, an increase of 22% compared to the same period last year.

If you really must have a Kizashi, you’ve got one last chance to do so.

In the end, the money that towns across America gave General Motors did not matter… G.M. walked away and, thanks to a federal bailout, is once again profitable. The towns have not been so fortunate, having spent scarce funds in exchange for thousands of jobs that no longer exist.

Timing is everything. The exhaustively researched and rather bleak article regarding the predatory impact of major corporations on small, relatively powerless local governments that appeared in the New York Times on Saturday certainly doesn’t fit in with the what’s-good-for-General-Motors-is-good-for-the-country-and-everything’s-great mantra chanted by much of the press prior to the Presidential election. Let’s not be cynical; perhaps this is a brave example of speaking truth to power, the American paper of record demanding more accountability and more fairness from a corporation which is still largely owned by the United States Government.

Regardless, this piece (brought to our attention by Editor Emeritus Ed Niedermeyer) is worth reading with attention. From its taxpayer-funded greenfield factories in Tennessee to Ypsilanti’s surely doomed lawsuit against it, the specter of the General twists and twirls throughout the entire narrative. It’s written from a point of view that is classic NYT: business should be under the thumb of all governmental entities, from city council to Star Chamber, and those businesses should be held completely liable for any negative effect on their hosting communities, even if said negative effect is a result of unforeseeable circumstances. There’s a unique sort of mindset expressed in counting tax deferments as equal to lost income — that’s a lot like buying a set of work boots to get a job and then complaining that your boss just took the cost of those boots out of your pocket. It’s also somewhat disturbing to see the Times suggest, even obliquely, that collusion between governments to reduce tax incentives might be desirable.

Those minor quibbles aside, however, the article makes a solid point. A lot of communities spent a lot of money on General Motors, only to see their investments discarded and destroyed by a national government which absolved the debts, gave the UAW a seat made of investors’ bones on the board and told the city councils of the Midwest and elsewhere to go pound sand. Big government and big business hand in hand, crushing the opposition. There used to be a word for that, you know.

The government of Ontario is calling on the Canadian government to sell off its shares in GM, obtained as part of a bailout package for the automaker in 2009.

Canada’s $13.7 billion bailout package resulted in the government of Ontario and the Canadian federal government holding roughly 9 percent of GM’s common stock. But Dwight Duncan, Ontario’s finance minister, wants to see those shares sold. Duncan told The Globe and Mail 

“There are certain restrictions on how many we can move at once and so on, but the sooner we’re out of the stock the better…I just don’t think governments should be buying and holding stocks in private-sector companies.”

The shares are worth an estimated $3.5 billion, money that is sorely needed by both governments to pay down their deficits. But selling the shares at their current price would mean a significant loss for taxpayers. GM’s shares currently list for around $26 a share, but that would have to rise to more than double for taxpayers to break even on the bailout.

Canada last sold shares during the November, 2010 IPO, when it pocketed $424 million. The $3.5 billion made this time around would help the federal government balance its books prior to an upcoming election rumored for 2015, but would mean a multi-billion dollar loss with respect to the bailout funds and GM’s shares.

Bailed-out GM agreed to pay about $4.2 billion for the European and Latin American operations of likewise bailed-out Ally Financial, formerly known as GMAC.

Ally, 74 percent owned by the U.S. government, did put the international operations up for sale to raise money for the repayment of bailout funds. The money now comes from GM.

The deal is expected to add $300 million to $400 million to GM Financial’s annual earnings before taxes.

Aston Martin’s Kuwaiti owners are apparently looking to unload their majority stake in the English sports car maker, but proceedings have been slow to due Investment Dar Co.’s desire to recoup their $800 million purchase price.

While Investment Dar denies looking to sell Aston Martin, Bloomberg reports that the company is hurting for cash after failing to make a payment on an Islamic bond. In addition to Mahindra, Toyota is rumored to be exploring the possibility of buying Aston.

Toyota Motor Corp., Asia’s largest carmaker, hired an auditor to conduct a one-week study on buying a stake in Aston Martin, according to a person familiar with the matter. The analysis, which was preliminary and carried out less than two months ago, hasn’t advanced to a full-blown evaluation, the person said. Shino Yamada, a Tokyo-based spokeswoman at Toyota, declined to comment.

Even with Aston Matin’s advances in modular architectures, it’s tough to be an independent auto maker when economies of scale are so crucial when developing a new car profitably. And without a lucrative branding and merchandising operation like Ferrari (not to mention a parent in the form of Fiat), being absorbed by a larger auto maker is all but a given for Aston Martin.

Tesla recorded a third-quarter loss of $110.8 million, versus a $65.1 million loss in the third-quarter of 2011.

While anaylsts had expected lower losses (in the 90 cent/share range, versus $1.05/share recorded by Tesla), revenues exceeded projections as well, with $50 million booked in this quarter, versus projections of $48 million.

Production of the Model S has been coming online slowly but surely. Reuters reports that

The company said in a letter to shareholders posted on its website that weekly Model S production had risen to 100 cars by the end of the quarter and was now up to 200. By December, it will be making 400 cars per week, Tesla said.

While we’re still waiting on a proper review of the Model S, our initial impressions were much better than Tesla’s results this quarter.

GM delivered its October surprise by posting what Reuters calls “a surprisingly strong profit.” In a bit of a hail Mary pass, GM said it is targeting a return to break-even levels in Europe by mid-decade.

GM’s third-quarter net income fell to $1.48 billion from $1.74 billion a year earlier. Excluding one-time items, GM earned 93 cents a share, surprising analysts who expected only 60 cents.

In Europe, GM expects a full-year operating loss of $1.5 billion to $1.8 billion, depending on what restructuring costs will be in the fourth quarter. GM hopes for slightly better European results in 2013, and to reach break-even there by mid-decade. Hope springs eternal, especially in  the week before the elections.

Shaking off a $468 million loss in Europe, Ford reports better-than-expected profits for the third quarter.

Driving profits are higher vehicle prices and lower costs in North America. According to Reuters, Ford reported an operating profit of $2.2 billion for the quarter, up from $1.9 billion a year earlier.

It was the best third quarter ever for the automaker. In North America, Ford made $2.3 billion. Ford expects to lose at least $3 billion in Europe over the next two years.