The Truth About Cars » High Finance The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Tue, 29 Jul 2014 21:42:50 +0000 en-US hourly 1 The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars no The Truth About Cars (The Truth About Cars) 2006-2009 The Truth About Cars The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars » High Finance Outstanding Subprime Loan Balances Hit 8-Year Highs Fri, 25 Jul 2014 14:24:55 +0000 445x350x20subprime-blog480-445x350.png.pagespeed.ic.uIhvuYIPjL

Buried in a feel good story about auto loans comes the news that subprime auto loans are at levels that we haven’t seen in nearly a decade.

Citing data from Equifax, Automotive News reports

The credit bureau also noted originations and total outstanding balances for subprime auto loans — defined as loans to customers with credit scores of 640 or below — also hit recent highs.

Equifax said subprime originations were 2.6 million units year to date through April, representing 32 percent of all auto loan originations. The total outstanding balance of subprime auto loans was $46.2 billion — the highest in eight years, the credit bureau said.

Don’t expect that 32 percent figure to let up any time soon. The glut of credit available for auto financing - driven by securitized auto loans sold as investment grade instruments – is going to keep the auto financing business alive and kicking for the foreseeable future.

But don’t worry, guys. This time, it’s different.

]]> 103 The New York Times Shines A Light On Subprime Mon, 21 Jul 2014 13:20:41 +0000 20subprime-blog480

The issue of subprime car loans, specifically loans with exorbitant interest rates for used cars, has filtered into the New York Times, with the paper’s Dealbook section running an investigation into the practice.

The NYT article serves as a primer on the subprime auto loan crisis, though it focuses on used cars, and the unscrupulous practices of dealers who charge interest rates as high as 25 percent for used cars, which are frequently repossessed and then re-sold, enabling dealers to make vast profits many times over on the same car.

The Times also found evidence of hardball sales tactics and fraudulent loan documents, with some salesmen facing criminal charges related to their heavy-handed sales tactics and fraudulent loan applications. The article also focuses on the securitization of these loans, and Wall Street’s hunger for them thanks to the higher yields that they pay

Investors, seeking a higher return when interest rates are low, recently flocked to buy a bond issue from Prestige Financial Services of Utah. Orders to invest in the $390 million debt deal were four times greater than the amount of available securities.

What is backing many of these securities? Auto loans made to people who have been in bankruptcy.

An affiliate of the Larry H. Miller Group of Companies, Prestige specializes in making the loans to people in bankruptcy, packaging them into securities and then selling them to investors.

The average interest rate on loans bundled into Prestige’s latest offering, for example, is 18.6 percent, up slightly from a similar offering rolled out a year earlier. Since 2009, total auto loan securitizations have surged 150 percent, to $17.6 billion last year, though some estimates have put the total volume even higher. To meet that rising demand, Wall Street snatches up more and more loans to package into the complex investments.

Much like mortgages, subprime auto loans go through Wall Street’s securitization machine: Once lenders make the loans, they pool thousands of them into bonds that are sold in slices to investors like mutual funds, pensions and hedge funds. The slices that include loans to the riskiest borrowers offer the highest returns.

Rating agencies, which assess the quality of the bonds, are helping fuel the boom. They are giving many of these securities top ratings, which clears the way for major investors, from pension funds to employee retirement accounts, to buy the bonds.

None of this is news for anybody that has been following the topic on TTAC, nor does the NYT article cover the risks related to subprime lending in the new car market. But the Times does advance the argument that the lending practices of certain banks could pose a systemic risk if the subprime auto loan market faces a major downturn.

While losses from soured car loans would be far less than those on subprime mortgages, the red ink could still deal a blow to the banks not long after they recovered from the housing bust. Losses from auto loans might also cause the banks to further retrench from making other loans vital to the economic recovery, like those to small business and would-be homeowners.

If those losses materialize, they could pummel a wide range of investors, from pension funds to insurance companies to mutual funds held by Americans preparing for retirement. For the huge baby-boomer generation, including many whose savings were sapped by the 2008 crisis and the ensuing recession, any losses from the auto loan securities could deal them another setback.

After outlining the deteriorating underwriting standards and outright fraud used to get unworthy buyers into overpriced cars with usurious loan terms, NYT article closes by noting that in Q1 2014, repossessions were up 78 percent year over year. While the NYT points the finger at ratings agencies for being complicit in fueling the subprime bubble, at least one agency has taken notice.

As it stands now, the average vehicle loan term is 66 months, according to credit rating agency Experian, with loan terms of 73 to 84 months make up nearly a quarter of loans originated in Q1 of this year. The average amount financed for a new vehicle loan and the average loan payment also hit new highs in that same period. All of this suggests that Americans are financing vehicles with ever higher transaction pricing and stretching out the payments to unprecedented lengths, all in the name of a lower, more manageable monthly payment with little regard to how affordable the actual vehicle is. But as well all know, it’s different this time.

]]> 69 Loan Terms, Monthly Payments Hit Record Highs In 2014 Mon, 02 Jun 2014 17:05:57 +0000 MK-CC261A_CarAd_G_20130408211241

The easy-credit train keeps on rolling in the auto world, with credit rating agency Experian reporting new records in key auto finance metrics.

Loan terms for new vehicles stretched to 66 months in Q1 2014, up from 65 months a year earlier. Loan terms for used cars grew up 61 months on average, up from 60 months one year prior. The average monthly payment for a new car was up to $474 per month, a 3.3 percent increase year over year, while used car payments ticked up 1.1 percent. The actual amount financed was up to $27,612 for a new car, up 3.6 percent, while for used cars, the amount was $17,927, a 2.3 percent increased.

Experian’s Melinda Zabritski was candid about the cause of the record debt that Americans are now taking on, stating

“As the cost of purchasing a new vehicle continues to rise, consumers clearly are stretching the loan term to help lower monthly payments, keeping them at a manageable level,”

Remember, you heard it here first.

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GM Seeks Aid From NASA, Issues New Ignition-Related Recall Fri, 11 Apr 2014 09:00:47 +0000 gm-headquarters-logo-opt

Autoblog reports 2.19 million of the same vehicles under the current General Motors ignition recall are under a new ignition-related recall, as well. The new recall warns of a problem where the key can be removed without the switch moved to the “off” position. According to GM, the automaker is aware of “several hundred” complaints and at least one roll-away accident resulting in injury, and is instructing affected consumers to place their vehicles in park or, in manuals, engage the emergency brake before removing the key from the ignition until repairs are made.

Regarding the original recall, The Detroit News reports has called upon NASA’s Engineering & Safety Center to review whether or not the 2.6 million affected Chevrolets, Pontiacs and Saturns are safe to drive with just the ignition key in position. The agency, which has performed similar reviews in the past, will look over the work performed by the automaker in the latter’s effort to make the affected vehicles safe to drive, as well as review its overall approach to safety concerns.

On the financial front, Automotive News says GM will take a $1.3 billion charge in Q1 2014 for the original recall, 40 percent greater than the $750 million charge originally estimated at the end of last month. The charge — which includes repair costs and loaners for affected owners — comes on the heels of a $400 million charge tied to currency challenges in Venezuela, the total sum of which threatens to knock out most if not all of the automaker’s Q1 2014 earnings set to be announced toward of end of this month.

Meanwhile, The Detroit News reports Michael Carpenter, the CEO of former GM financial arm Ally Financial, says his company will complete its exit from government ownership by Election Day of this year:

The U.S. Treasury is quite happy today. My own view is they will definitely be out before the election and we are close to having Treasury and U.S. government ownership in the rearview mirror.

By the end of trading Thursday, Ally’s IPO netted taxpayers $17.7 billion with a profit of $500 million on the $17.2 billion bailout of the consumer finance company, while the Treasury currently holds 17 percent of its remaining shares after selling 95 million for $25 per share at the opening bell; share price fell 4.4 percent to $23.50 at the closing bell.

In lawsuit news, Automotive News reports GM settled with the families of two Saturn Ion drivers who lost their lives in 2004 when their respective cars’ airbags failed to deploy. The two fatalities were identified by the publication as the earliest of 13 linked to the out-of-spec ignition switch at the root of the current recall crisis. In addition, while one case was settled out-of-court in September of 2007, the second case drew its settlement terms after the automaker filed for bankruptcy in June of 2009, placing the plaintiffs and their lawyer with other unsecured creditors.

The Detroit News reports Cadillac and Buick are at the top of their respective lists for dealer service satisfaction as determined by the J.D. Power & Associates U.S. Customer Service Index Study. Cadillac’s dominance over the luxury brand category comes as former No. 1 Lexus — who held the top spot for five consecutive years — falls to third behind Audi, while Buick leads Volkswagen, GMC, Mini and Chevrolet in the mass-market brand category.

Finally, Autoblog reports the last of eight Corvettes swallowed by the sinkhole that formed inside the National Corvette Museum in Bowling Green, Ky. back in February has been recovered. The 2001 Corvette Mallett Hammer Z06 will need extensive work performed to bring it back to its original state, but not before it joins its brethren in a new exhibit entitled “Great 8″ beginning next week. The exhibit will last until the museum’s 20th anniversary in late August, at which point GM will begin restoration work on the eight Corvettes.

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Record Auto Loans Taken As Interest Rates Drop Fri, 06 Dec 2013 13:00:14 +0000 01-cadillac-dealership1

Though the calendar is about to change to 2014, it appears to be 2007 all over again in dealer lots and showrooms nationwide as a record number of auto loans with low interest rates were signed during the third quarter of 2013.

According to Experian, the average amount taken out for a new car loan this quarter was $26,719, the highest amount financed since the start of the Great Recession in 2008. As a bonus, each loan for a new car holds an interest rate average of 4.27 percent; used car loans, on the other hand, hold an average rate of 8.63 percent.

Reasons for the record loan amounts include the rising cost in new cars overall due to buyers adding extra content and features that best suit their needs and wants, as well as interest in luxury vehicles, whose sales have gone up 11 percent this year due to leasing programs feeding fuel to the fire.

In exchange for taking out huge loans, consumers are opting to stretch out their notes for as long as possible to keep payments low; the average payment in the third quarter of 2013 is $458. Around 40 percent opt to pay off their loan for 65 months, while 19 percent choose to spend anywhere from 73 to 84 months doing the same.

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General Motors to Divest Remaining Ownership of Ally Financial Thu, 05 Dec 2013 12:53:39 +0000 Renaissance Center

Ally Financial, the bank holding company formerly known as GMAC, is still a major part of the United States federal government investment portfolio in the five years since it was bailed out at the start of the Great Recession. Yet, it may be able to soon divest its ownership in part due to General Motors selling their remaining shares.

GM announced Wednesday that they would sell off their remaining 132,000 shares — or 8.5 percent of the total shares available — of the finance company through a private placement. The action would clear the way for Ally to begin final preparations for their long-awaited IPO to the investing public. In turn, the federal government could sell part if not all of their ownership, currently holding at 64 percent.

When the IPO will be offered is still unknown, though both GM and Ally are hoping rising interest in the latter by investors will light the path toward complete freedom from government ownership. In the meantime, GM will net $900 million from the private placement.

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Mainstream Press Finally Worried About Cheap Car Loans Mon, 14 Oct 2013 16:00:41 +0000 Subprime-Auto-Lenders

Months after TTAC started to relentlessly bleat about the glut of money flowing into the auto loan sector, the mainstream media is finally taking notice. Automotive News is finally expressing some worry over the factors that we’ve been discussing for some time: car loan terms are getting longer (to help keep payments low), subprime lending is increasing and an expected rise in interest rates could put an end to the new car market’s exuberant performance.


This phenomenon is being primarily driven by low-interest rates, which allow consumers to finance vehicles cheaply, even as transaction prices creep upwards. Meanwhile, financial institutions are happy to provide the loans, particularly to those with poor credit, since they can be securitized and sold off to fixed income clients looking to get decent yields in the same low-interest environment.

The topic of auto financing has been rather divisive, to say the least, and we at TTAC remain bearish on the outcome, though the likelihood of any systemic risk seems to be diminished as OEMs choose to expand existing factories rather than build new ones. But we’re hardly alone anymore.

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Leasing Accounts For A Quarter Of New Vehicle Sales As Payments, Residuals Stay Low Wed, 25 Sep 2013 16:29:36 +0000 7d4a7430404638720165ab399f429b03

While the engine behind the exceptional growth in new car sales is a hotly debated topic, leasing is proving to be an undeniable catalyst behind this year’s impressive new car sales numbers. Through June of this year, leasing accounted for 25.7 percent of new car sales, versus 22.2 percent in 2012.  A decade ago, that number stood at just 17.5 percent.

Leasing saw a big jump in 2010, up to 21.3 percent of new car transactions, a nearly 5 percent rise compared to the prior year. Since 2010, leasing has been on a steady rise. One possible factor for this was that GM and Chrysler resumed leasing in late 2009, with the full effects of this becoming clear in 2010.

On the manufacturer side, OEMs are beginning to peg residuals at a higher number so that lower lease payments are made available for consumers. One TTAC source told us that a European luxury brand has spent close to ten figures buying down residuals to offer coveted “$299/month” lease payments on a popular model. An article in Automotive News explored this practice in the mainstream segment as well

Toyota is one of the risk-takers. It introduced the redesigned 2014 Corolla with low lease payments and residual values that are higher than those of the previous model. Toyota is betting the 2014 Corolla will be worth 63 percent of the sticker price three years from now compared with 53 percent for the 2013 model.

There is risk for the auto makers who go with a high residual. If the vehicle turns out to be worth less than the residual used by the automaker, it could cost the OEM money. But by pegging the residual value higher, customers can borrow less money (since they borrow the difference between the vehicle’s cost and its expected value after the lease term), allowing for lower payments. Keeping the monthly payment low has been a crucial element of auto financing in the post recession era.

Average transaction prices for new vehicles have topped $31,000 while the prosperity of Americans has not seen proportionate increases. Census data shows that the average income for a family has fallen 8 percent since 2007, with no growth occurring in 2012. Understandably, many consumers are put in a financially precarious position when it comes to paying for a new vehicle. Used car prices have also risen to the point where buying a second-hand vehicle is no longer as attractive as it once was. In response, vehicle loan terms have gotten longer, so that consumers can keep their monthly payments manageable despite having to finance increasingly expensive vehicles. The average term for a new vehicle loan in Q2 of 2013 was 65 months. On the other hand, subprime delinquencies have remained on a downward trend and commercial banks are looking to get in on the action as securitized loans are one of the few products providing yields in an era of ZIRP.

An expansion in consumer credit has been one of the underlying themes in the growth of new car sales and auto financing in recent years, but the spike in leasing, and the emphasis on keeping payments low is worth keeping an eye on, if only as an indicator of a larger macroeconomic trend. Cars are getting more expensive and increasingly out of reach for many. But as long as there’s a way to keep it “affordable”, even if it means leasing, not buying, or incredibly long loan terms, then new car sales can keep soaring to record heights.

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A Look Back At The History Of Auto Financing Thu, 27 Jun 2013 15:03:34 +0000 car-loans-large

Over at Autobytel, Juan Barnett (better known as DC AutoGeek) takes a look at the history of auto financing, originally intended as a way for the common man to be able to afford an automobile some 90 years ago. The most striking thing is how attitudes have changed so dramatically over time.

Initially, bankers were calling for a ban on financing of personal automobiles, fearing that it would lead to financial imprudence. How times have changed.

In a 2008 letter to the Security and Exchange Commission, a collection of automotive finance companies argued against a proposed federal rule that would have made 60 months the maximum term for an automotive loan. The group said “[that the] 72 month term has become the industry standard,” and that it was critical to the American economy to allow banks to determine independently the risk as it relates to automotive loans.  They argued that any mandated term limit would cripple the automotive industry. They were probably right.

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Auto Loan Delinquencies, Reposessions Up In Q1 2013 Thu, 16 May 2013 12:30:31 +0000 20130515_auto1_0

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!

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GM Financial Double Crosses Their Ally Mon, 13 May 2013 12:30:26 +0000 GM-Establishes-GM-Financial-1024x539. Photo courtesy GM Authority.

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”.


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Analysis: Tesla Q1 2013 Results Thu, 09 May 2013 20:29:29 +0000 Tesla-Model-S. Photo courtesy

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.

All figures taken from Tesla’s SEC Filing

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

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Fitch, Moody’s, Stand Alone As Subprime ABS Skeptics Thu, 25 Apr 2013 19:21:05 +0000

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.

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Subprime Madness: Shotguns Now Accepted As Car Loan Down Payments Wed, 03 Apr 2013 15:36:07 +0000

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.

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Analysis: The Clock Is Ticking For GM’s Oshawa Plant Fri, 08 Mar 2013 13:30:58 +0000

Upon receipt of a multi-billion dollar loan from the Canadian government, General Motors signed a “Vitality Commitment”, essentially a covenant in the loan agreement between GM and Canada’s government, which guaranteed that a certain amount of GM’s North American production would remain in Canada. That number is widely reported as being 16 percent, while page F-69 of GM’s IPO filings outlines that the covenant is valid until GM repays its loan commitments or until December 31, 2016, whichever comes later.

While Oshawa has widely regarded as one of GM’s best plants in terms of producing high-quality vehicles, the future of GM’s Oshawa plant is looking increasingly bleak.

The first post-bailout blow to Oshawa was the announcement that production of the next-generation Chevrolet Impala and Cadillac XTS would be split between Oshawa (its traditional home) and GM’s Hamtramck plant, which also builds the Chevrolet Volt and Malibu. Oshawa has long been the domain of the W-Body Impala and the announcement that GM would close the “Consolidated Line” that builds the Impala and GM’s Theta crossovers (the Chevrolet Equinox and GMC Terrain, both hot sellers) was a blow to Canadian manufacturing and the Canadian Auto Workers union.

The CAW managed to keep the Consolidated Line open until 2014 as part of their 2012 contract negotiations with the CAW. But the contract, which expires in late 2016, will coincide with the “drop dead” date for GM’s Canadian Vitality Commitment. What happens between now and 2016 is anyone’s guess, but it’s possible to draw some conclusions based on events that have transpired.

In early 2013, GM announced that production of the next-generation Chevrolet Camaro would shift to its Lansing, Michigan plant in 2015. The main reason behind the move is GM’s desire to consolidate production of vehicles built on its rear-drive Alpha platform to one location.  However, the move means an estimated 100,000 units of production will be taken off the “Flex Line”, where the Camaro, Impala, XTS, Theta crossovers and the Buick Regal are built – it’s entirely possible that the Flex Line could see a reduction from three shifts to two once the Camaro is gone.

The remaining product is hardly Oshawa’s saving grace. The Theta vehicles are mostly built at GM’s CAMI facility in Ingersoll, Ontario, as well as in Spring Hill, Tennessee (which handles overflow production, much like Oshawa). Like GM’s Michigan plants, wages at Spring Hill are significant lower than in Ontario. Spring Hill has the benefit of being a re-opened plant, able to pay new hires $15.78 an hour, or about half of the going CAW rate of $34 an hour. The Regal is a dud in the marketplace (selling a paltry 24,616 units in 2012), having been cannibalized by the Michigan-built Buick Verano, and it’s unclear if it will be replaced in Buick’s lineup at all, though Morgan Stanley’s Auto Product Guidebook, considered an authoritative source on GM’s future product, suggests a 2015 redesign. That leaves the Impala and the Cadillac XTS as the sole remaining product with any long-term viability at Oshawa, and even then, it’s feasible that GM could decide to shift production to Hamtramck, which likely has excess capacity due to its immense size and slow sales of both the Chevrolt Volt and Malibu.

Industry observers know that unused capacity costs auto makers a lot of money, and Oshawa is particularly vulnerable to this phenomenon as well. With its enormous size and the massive amounts of money poured into it by GM, under-utilization of the Oshawa plant would be an enormous financial drain on GM. In addition, higher labor costs in Canada and a (currently) unfavorable exchange rate would merely add to the pain. At that point, closing Oshawa would be something GM would have to consider – if it isn’t already on their minds. In this scenario, Hamtramck would get the remaining Impala/XTS production, allowing GM to boast of “bringing jobs home”, while production of the Theta vehicles would be largely unaffected, with CAMI and Spring Hill available to produce them. The Regal, which is built on the global Epsilon II platform, could also be shifted elsewhere, to GM’s Fairfax, Kansas plant or even Hamtramck.

Without the loan agreement and the Vitality Covenant being made public, it’s difficult to gauge the consequences of an Oshawa shutdown. The timing of the agreement and the CAW contract expiration dates suggests that the plant’s closure is a very real possibility. On the other hand, two factors stand in the way of such a theory. One is the enormous negative PR that GM would face if the Oshawa plant closed. Oshawa is the historic home of not just General Motors, but Canada’s auto manufacturing industry, stretching back over a century. While Canada is a small market, it’s entirely possible that sales of GM cars would suffer in the event of an Oshawa shutdown. Needless to say, the community itself would be negatively affected in a massive way.

Second is the currently rosy outlook for the U.S. and Canadian new car market. With a SAAR of 15.3 million units currently forecast for 2013, observers seem to be bullish on the medium-term prospects of new car sales, and GM is making a big push itself. The Impala and Theta crossovers are some of GM’s best sellers, with Theta selling over 316,000 units in 2012 combined and the Impala moving 169,351 units, despite a relatively antiquated design.

Of course, this is all predicated on increasing levels of sub-prime financing for vehicle sales in the United States, as well as and high prices for used cars, factors which many have chosen to omit from their own assessments. These are potential “wildcards” that could derail an auto industry rebound, and are made all the more prescient by news that Ally Financial, a government backed bank that was once GM’ finance arm, has failed a “stress test”. While Ally is GM’s lender of choice for GM’s customers with solid credit scores, GM’s own sub-prime lending arm, GM Financial, has also come under fire for its lending and auto loan securitization practices.

Despite the gloomy outlook, Oshawa does have one saving grace; the Flex Line is among the world’s most modern facilities for auto production, able to build practically any car or truck with minimal interruptions (hence its name). GM could conceivably decide to bring in new product to built at the plant to make up the shortfall, if it really wanted to. But so far, Oshawa’s future seems to hinge on the Impala, which is not a situation that inspires confidence.

** N.B:  GM committed $675 million over the four year term to “Canadian manufacturing”. Rather than specify Oshawa, it’s possible that the money could go to CAMI, their St. Catharines, Ontario engine plant, or their other facilities. Currently, GM and the CAW workers at CAMI are negotiating their contract, largely due to the possibility that GM would move Theta production to Mexico or Spring Hill. CAMI has always been treated as a separate entity from Oshawa, with lower wages and benefits (more in line with Spring Hill), and is a modern factory built in partnership with Suzuki. Workers at CAMI are said to be aiming for a “pattern agreement” similar to what Oshawa workers received, but the terms will be unknown until negotiations have wrapped up.



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Suzuki Death Watch 6: It’s Official, Suzuki Is No More Tue, 06 Nov 2012 00:33:26 +0000 Click here to view the embedded video.

(NSFW language)

Months ago, we began our Suzuki Death Watch, and today, we hear the executioner’s song. Suzuki’s North American distribution arm filed for bankruptcy, and will end automotive sales in the United States. Slow sales, an unfavorable exchange rate and a limited lineup of vehicles can all be blamed for the demise of a company that was ignored all too often. Luckily, Suzuki’s motorcycle and powersports business remain intact. We’ll have more tomorrow.



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GM Wants A Big Revolver For Less Mon, 22 Oct 2012 18:02:31 +0000

GM wants to double its $5 billion revolving credit line. However, the junk credit rated company does not want to pay junk credit interest for it. “We think we can get it priced as if we’re investment grade, which is kind of one of our goals going into 2013, to achieve investment grade,” GM CEO Dan Akerson told Bloomberg yesterday in Sao Paulo.

GM is rated Ba1 by Moody’s and BB+ at Standard & Poor’s, both junk bond ratings, but pretty good ones. Borrowing costs for high-yield, high-risk companies are at the lowest level in decades, and stood at 6.84 percent as of Oct. 18, says Bloomberg. GM wants to pay less.

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Companies! Cheap! For You, Special Price: GM’s Hong Kong Dealings Mon, 22 Oct 2012 13:14:06 +0000

Hong Kong, and I speak from experience, is a great place to incorporate, to save taxes, and to throw a cloak of secrecy over financial operations which otherwise would be out in the open. In the case of GM, it is also a great place to save their Korean behinds. In December 2009, GM sold a 1% stake in its Shanghai-GM (SGM) joint venture to the Hong Kong part of its Chinese partner SAIC for the paltry sum of $85m. GM also put its India business into a Hong Kong based joint venture (HKJV). GM provided the India business, SAIC provided cash. As it turned out later, unearthed in Ed Niedermeyer’s seminal oeuvre about the mystery golden share, SAIC also underwrote a $400 million loan. In its darkest hour at the end of 2009, GM was kept afloat by the Chinese. Now, history seems to repeat itself in some convoluted way.

Also at the same time in 2009, the Korean Development Bank was trying to gain control of GM-Daewoo. That company, GM’s main source of low-cost, fuel-efficient car development, was in urgent need of cash which GM did not have. GM-DAT was kept in the GM fold after a $413m cash injection into its Korean subsidiary, only weeks before the Hong Kong deal. The money came from China via Hong Kong.

Three years later, GM is sitting on a taxpayer-enhanced $33 billion cash pile, and it seems to be time and opportune to use some to unwind some Asian positions. Again, the hub is Hong Kong. Last week, it became known that GM buys back most of the shares in is (Hong Kong held) India business for the again paltry sum of $125 million, leaving partner SAIC with a token 7 percent. On paper, this was a great deal. When GM put its India business into the HKJV, the business was, according to SEC filings, valued at $200 million. Now, most of it is coming back for $125 million. Not that SAIC would receive that money. GM did a capital raise, SAIC elected not to match it, and was diluted to 7 percent. It is surprising that SAIC would let control slip so easily. India is the world’s next growth market, with a capacity rivaling that of China. The Chinese car industry was effectively locked out of India, SAIC snuck in on GM’s coat tails. And now we are supposed to believe that SAIC walked away from that prize, after it had put in anywhere between $300 and $500 million in cash? Highly un-Chinese.

Be it $200 million or $125 million, the amounts are awfully low for Indian car plants with a capacity of more than 300,000 units per year. As a comparison: Tesla, a company that had nothing more than big ideas and a few prototypes of EVs of dubious value, could raise $226 million at the IPO. As another comparison: BMW budgets $260 million for a pocket-sized 30,000 unit plant in Brazil that does nothing more than assembling kits from Germany. These Indian numbers simply do not compute.

Remember Korea? As if on cue, Korea pops up after some strange Hong Kong transactions are settled. Over the weekend, Reuters reported that GM made an “informal offer” to the Korea Development Bank to buy back the 17 percent the bank holds in GM Korea. GM currently owns 77 percent. A price was not released.

How does this all fit together? We have no idea. However, we are sure it does.

And remember the famous golden share? In April, it was announced that GM would get the 1 percent share in its Chinese joint venture back, for a huge price: GM and SAIC established a sales company, SGMS. SAIC received a 51 percent majority control of the sales company. So far the theory. The reality, filed in the most recent 10-Q to the SEC, looks different. In the document, GM is listed as a 49 percent owner of SGMS. And it is still listed as a 49 percent owner of Shanghai General Motors (SGM). According to the SEC filing, SAIC has 51% both in the new sales company and the old joint venture.

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With Junk Status Looming, PSA’s Finance Arm May Be Its Savior Fri, 19 Oct 2012 14:46:15 +0000

How does the French government save an ailing car maker that employs thousands of people without actually bailing out the auto maker? By baling out their finance unit, of course!

Banque PSA Finance, the credit arm of PSA, could see its loans become costlier if PSA’s debt is downgraded to “junk” status, a move that would hurt its ability to provide credit to dealers and consumers. With PSA locked in an ongoing, Europe-wide price war, it’s a debilitating position to be in. To make matters worse, BPF’s credit rating is tied to PSA’s, despite being on more solid financial footing. Finance arms are evaluated seperately by firms like Moody’s, but they are not allowed to be graded more than two notches higher than their parent company.

Automotive News Europe illustrates the severity of BPF’s situation relative to PSA’s auto making division.

As things stand, ‘BPF can refinance on the markets at around 4 percent, whereas Volkswagen is at 1-2 percent,’ said analyst Florent Couvreur of CM-CIC. ‘This is fueling VW’s sales offensive because it can offer loans at half the price,’ he added.

A multi-billion dollar rescue package, backed by major banks like BNP Paribas and Societe Generale includes a 1.5 billion euro credit line, government guaranteed funds worth 4 billion euro and 4 billion euro worth of postponed debt repayments.

PSA’s situation is dire. They are said to lose 350 euro on each car produced. 10,000 jobs and an assembly plant are on the chopping block. While the cuts are necessary to maintain the company’s financial integrity, France’s industry minister has pressed PSA to reduce the cuts, and demanded concessions in exchange for government assistance. In light of those realities, a bailout of PSA itself would be political poision. But a bailout of its financial arm…

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GM Reports $1b Q1 Profit, Still Seeking “Competitive Levels Of Profitability” Thu, 03 May 2012 19:01:42 +0000

Once upon a time, GM’s North American operations spewed red ink across the firm’s balance sheet, with the whole mess kept afloat by relatively strong overseas operations. Now GM makes most of its money at home while its international divisions limp along. No, really: in its just-released Q1 financial report, GM reveals that some $1.7b of its $2.2b global EBIT came from its once-troubled home markets. What a difference a bailout makes!

GM CEO Dan Akerson sums up the situation with refreshing candor, noting

New products are starting to make a difference in South America, but Europe remains a work in progress. We’ll continue to work on both revenue and cost opportunities until we have brought GM to competitive levels of profitability. [emphasis added]

That GM is not yet experiencing the kind of hot streak one might expect from a global titan that’s been stripped of debt and loaded with government cash is self-evident. Like its share price, GM’s performance in the last quarter has been merely adequate. A billion dollars in profit is always a good thing, but around the world GM is still underperforming the market. In fact, The General lost .3% global market share. in Q1 2012, the third straight quarter of such declines, and GM’s share of the world market is now a full point lower than it was in Q2 of last year.

Even in the US market that now provides the lion’s share of its profit, GM is losing ground to the competition. North American market share has also fallen for the last three quarters, now standing at 16.4%, some 2.4% lower than Q2 2011. US dealer inventories jumped dramatically in the quarter as well, from 583,000 to 713,000. All this in the face of above-average incentives (as a % of average transaction price) and subprime financing (8.2% compared to an industry average of 6%). In light of these developments, GM’s ability to earn the majority of its profits in North America speaks to its bailout-streamlined cost structure. Still, there’s no denying that things are not headed in the right direction.

GM Europe continues to be the source of the most serious bad news, although its $300m loss is half of the Q4 2011 number. Still, restructuring and plant shutdowns will cost GM a pretty penny at some point in the not-to-distant future, and until that bitter medicine is administered, GME can only try to control its losses. GM South America turned the corner into profitability, yielding a $100m gain on its lowest production volume in over a year (albeit with steady market share).

But GM’s opaque “International Operations,” which include Korea, Australia and the crown jewel of China show some of the most troubling signs of malaise. With costs rising faster than volume and pricing gains could make up for, GMIO’s EBIT declined by $100m compared to Q1 2011. With the Chinese market cooling off, GMIO is also losing market share at a steady .1% per quarter for the last three quarters. Given how crucial China is to GM’s global future, this is not a promising development.

This is not a return to “Deathwatch” territory by a long shot, as GM still has $31.5b of government cash and equivalents on hand, and $37.3b of available liquidity. But the premise that GM simply needed a bailout in order to soar to global dominance is certainly wearing thin. And with the government waiting for an uptick in GM’s stock price to sell its stock at a politically-palatable price, mediocre results like this will allow the stigma of government ownership to linger.

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Lotus Investors: Sell! Sell! Sell! Tue, 27 Dec 2011 16:53:02 +0000

Lotus is one of those brands that every auto enthusiast loved to lionize, despite (or possibly because of) the fact that it hasn’t made a profit for its owner, Proton, in 15 years. But now things are changing. Lotus itself is in the midst of a makeover, seeking to transition from niche sports- and track-car company to a Ferrari and Porsche-rivaling aspirational brand. Meanwhile, back in Malaysia, its owner, Proton, is undergoing a few changes itself. Having been founded as a state-backed business, Proton may soon be privatized, reports Bloomberg. And as a result, Protons private investors could push for a quick divestment of the firm’s Lotus holdings. One such investor, Gan Eng Peng of HwangDBS Investment Management, tells Bloomberg

It will make sense for them to sell it. Proton and Lotus are not a good fit. They are in different market segments, both in terms of geography and product.

Chinese automaker SAIC and Genii Capital have been rumored as possible buyers, although Proton denies all rumors that Lotus is for sale. The problem is that Lotus won’t be worth much until 2014, the brand’s earliest projected break-even date. And even then, Bloomberg’s analysis shows that Lotus’s highest possible value then still wouldn’t be enough to return Proton to profitability, in light of increased competition in its home market of Malaysia. But in the meantime, Proton has no (useful) synergies with Lotus, and as the automaker emerges from the warm embrace of government ownership into the harsh light of the global market, it seems that selling off Lotus may be unavoidable.

Which leads to an interesting question: which automaker seems most likely to buy up Lotus? My money is on VW, who might buy the brand for no other reason than to kill off Alfa, after Fiat refused to sell. Of course, then it might create branding challenges with Porsche, but Alfa would have done so anyway. Another possible buyer: Toyota, which supplied Lotus with engines for years. In any case, we can probably count GM out of the picture, after their abortive relationship with the British brand.

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Opel Turns 150, Commences Cutting Wed, 21 Dec 2011 15:03:58 +0000

Ever since Steve Girsky an his “merry band of hatchet men” touched down in Rüsselsheim, Bertel has been warning that GM’s European division was about to embark on a serious cutting binge. But our worst fears, namely that Opel could go away entirely, have yet to be realized. Instead it seems that self-destructive mutilation will be attempted first, in order to stem the gushing red ink at Opel where at least €1b in losses are expected next year. Automotive News Europe [sub] reports that the first round of cuts will hit Opel’s Internationalen Technischen Entwicklungszentrum (ITEZ, “International Technical Development Center), as an IG Metall union document foresees some 1,420 product development position cuts (from a staff of some 6,000).

Opel’s spokesfolks insist that the union’s numbers are “factually wrong and excessively high,” but only, in the words of ANE, because they “include people who are not on Opel’s payroll – like employees of service providers and supplier employees.” Furthermore, the automaker has not offered an alternative number for the expected cuts, and given the close cooperation between unions and OEMs in Germany, not to mention the detail of the IG Metall leak (200 employees will be offered severance payments when 550 positions are transferred to the manufacturing engineering department from product engineering), it’s tough not to conclude that the number is fairly close to GM’s actual plans.

And the cuts aren’t limited to workers: a battery-powered version of Opel’s forthcoming “Junior”/”Allegra” city car, as well as a long-rumored Insignia-based Coupe are said to be on the chopping block as well… so let go of any plans to wait for a reborn Buick Riviera. Oh, and don’t hold out any hope for the “production potential” Opel recently touted for its strange, low-cost RAK e Concept. Meanwhile, here are the other measures that Opel admits are coming down the pike:

• Stronger concentration on the carmaker’s core development mission and a reduction in project coordination tasks

• Increased use of modules and construction kits. “For example, we still have too many steering and seating systems. We have to improve significantly here,” the spokesman said.

• Deeper and earlier integration of suppliers. “There are no plans to put a stranglehold on our suppliers — we need to increasingly rely on suppliers’ innovative strengths,” the spokesman said.

In short, it seems that in order to save Opel, GM has to kill off much of what made Opel so valuable to it, namely its ability to develop premium global vehicles for the parent company. Instead it seems Opel will be forced to concentrate on selling into a brutal European market that seems set to contract as the Euro crisis drags on. Perhaps there is some truth to the rumors that Chevrolet will slowly replace Opel after all.

After all, cutting engineer positions is certainly the low-hanging fruit in Opel’s restructuring, but GM will likely have to go after assembly capacity (likely at Bochum and Port Ellesmere) in order to address the overcapacity issues that are at the heart of its (and many European automakers’) woes. That could create problems though, as this latest union leak confirms that Opel’s labor councils are prepared to fight. Opel’s outgoing union leader Klaus Franz has gone so far as to ask GM to sell Opel to its Chinese partner SAIC, a move widely considered a sign that Franz was trying to move back in touch with an increasingly militant union rank-and-file in the face of his own legal problems. While Franz portrays himself as the victim of a media smear campaign and threatens legal action against the Frankfurter Allgemeine Zeitung, his union appears prepared to fight the seemingly inevitable production cuts. And all this as Opel celebrates its 150th birthday.

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Our Daily Saab: A New Administrator, A New Deal, Same Old, Same Old Thu, 15 Dec 2011 23:37:25 +0000

After enduring a rocky relationship with Saab’s management, Guy Lofalk is officially out as court-appointed administrator for the ailing Swedish brand. But although Saab boss Victor Muller had long hoped for Lofalk’s ouster, the news wasn’t all good for his slow-motion “rescue,” as Lofalk’s first replacement had to step down before he even began his duties. Reuters calls the abortive administratorship of Lars-Henrik Andersson  Saab’s “latest embarrassment,”  but TTELA reports that Andersson’s “defection [was] not based on a pessimistic assessment of Saab.” On the other hand, at least one of Andersson’s colleagues thinks he dropped out because Saab is “screwed.”

In any case Soderqvist seems to be the last remaining Saabtimist in Sweden, insisting he believes in the new plan to save the zombie brand, and he will serve as long as he continues to have faith… so what’s the new plan anyway?

JustAuto reports that

European supplier body CLEPA estimates up to EUR700m (US$910m) could be made available for beleaguered Saab to restart production, if plans by Chinese manufacturer Youngman and an unnamed Chinese investor bear fruit.

“That means [they - Youngman] will provide EUR200m and a financial investor will provide EUR500m – that will be enough to restart and give Saab a chance,” said [CLEPA CEO Lars] Holmqvist. “Youngman has already spent a lot of money, if nothing else to protect the investment they have already made.”

And where, pray tell, does this faith come from, that a Chinese bus manufacturer and an unnamed “financial investor” is ready to drop nearly a billion dollars on the auto industry’s most notoriously undead brand?

The CLEPA boss also revealed this week’s mood had swung from one of gloom to hope following his receipt of a bank statement indicating Chinese manufacturer Youngman had paid Saab EUR3.4m, believed to have covered overdue Swedish government taxes.

The supplier chief also detailed how Muller had been urged to declare bankruptcy in a bid to avoid any personal liabilities, but had resisted, a move Holmqvist endorsed.

“We have been up and down listening to Victor Muller,” he said. “On Friday I was quite pessimistic and on Friday night he [Muller] sent a copy of the statement slip that the money had been sent by Youngman.

“Then, on Monday, he was pressed by people around him to file for bankruptcy. They were afraid they would be personally responsible for debts. But he refused and he was right because the money arrived and he got a respite again. Another rabbit hopped up from the hat – I knew what was going on, but I did not think it was going to be in time.”

Where to start with this? How about the fact that €3.4m is hardly an indication that almost a billion bucks is forthcoming.. especially given the difficulties of transfering money from China? Or what about the fact that the transfer in question was for a transaction that Lofalk considered “a new obligation” (forbidden during reorganization), an accusation that was met with a claim that it was part of an earlier deal and intended for salaries, not taxes? The unknown identity of the “investors” willing to drop €500m on Saab? The fact that these investors, not Youngman, will control the brand (in order to keep GM happy)? The fact that US dealerships aren’t selling the cars they have, making a production restart largely pointless? In any case Holmqvist admits that his group stands to lose “a lot of money” if Saab goes bankrupt and is willing to back any plan (reality, it seems, notwithstanding).

The 16th was supposed to be the day that decided Saab’s fate, but the brand has been given another weekend to get the mysterious Chinese money into its accounts. A hearing is now scheduled for Monday, at which point cash (likely upwards of $60m) must be on-hand. An optimistic new administrator, and desperately credulous suppliers mean nothing if November and December salaries aren’t paid by then and the tax man is left wanting. Muller and his rotating cast of supporting characters are good at buying a week here and a weekend there, but that can’t go on forever. And the real tragedy is that all these delays have only made it more likely that Saab will die on the week before Christmas.


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Our Daily Saab: Banking On A Chinese Bank, Not Bank Of China Mon, 05 Dec 2011 09:18:09 +0000

Rumors that the Bank of China would be taking a role in the “rescue” of Saab turn out to have been something of a miscommunication. Saab explains the situation as it currently exists.

Swedish Automobile N.V. (Swan) announces it is in discussion with Zhejiang Youngman Lotus Automobile Co. Ltd. (Youngman) and a bank in China about an equity interest in Swan. The discussions include a short term solution to enable Saab Automobile to pay the November wages and continue reorganization. The outcome of the discussions is still uncertain. Any possible transaction would be subject to the approval of the relevant stakeholders. [emphasis added]

As always, you can read about the proposed new structure (which has PangDa out of the picture) and why it will solve all of Saab’s problems over at But far more interesting is the English-language interview with Victor Muller, found here (skip ahead to the 38:40 mark), in which Muller explains that GM can block any deal in which an automaker takes a 20% or larger stake in Saab, and that he is essentially Vladimir Antonov’s front man. After all, trying to understand Muller is far more compelling than this latest deal, which can be approved by GM (because it keeps automakers below 20% ownership), but won’t actually solve Saab’s basic problems (for precisely the same reason).

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Our Daily Saab: Muller Losing Faith, Antonov Going Down Wed, 30 Nov 2011 19:09:42 +0000

A TTAC tipster sent us a Teknikens Värld  interview with Saab’s long-suffering would-be rescuer, Victor Muller, in which the eternal Saabtimist seems ready to admit defeat. In essence, he admits that GM is unlikely to ever approve a plan involving Chinese firms, that the Chinese firms are throwing “money into a black hole” and that all the previous plans are off the table. Of course, Muller does seem to think that some kind of rescue may yet be possible, but he admits

If I doze off Saab would disappear in an instant

If Muller is losing faith, and doesn’t even have a hairbrained scenario to hype, it seems that the end may well be near. But then, the whole rescue of Saab is beginning to be eclipsed by questions about Muller’s erstwhile partner, Vladimir Antonov, who was recently bailed out of British jail, where he was being held on charges of embezzlement and document forgery. But first, to the Muller interview…

The following is an interview titled “Muller Does Not Believe In Th Chinese”:

Victor Muller doubts that GM will ever accept a Chinese Saab business. According to him, Youngman, Pang Da and Guy Lofalk sabotaged the whole business when they went from the original plan. It says Muller in an exclusive interview with the Teknikens Värld.

On the way home from Britain hits Teknikens Värld Erik Gustafsson, an unusually outspoken Victor Muller. The gate at Heathrow Airport, the plane to Stockholm, he says frank about Saab’s situation.

- This is how it goes when you put his partner in the back, says Muller continues:

- The deal was long time and the arrangement with a Chinese shareholding of 54 per cent was approved. Then began administrator Guy Lofalk run government affairs, to persuade the Chinese to a 100-percent ownership stake and GM slammed on the brakes.

Late yesterday evening, Swedish time, had GM in Detroit, a further meeting on Saab’s future, but Victor Muller strongly doubt one acceptance.

- I understand GM fully, it is clear that they do not want to jeopardize its market in China. But right now I understand the other side is not why the Chinese continue to pump money into the company. As the situation is, it just means to put money into a black hole, without getting anything back. The relationship with GM is so damaged that they (Youngman and Pang Da) can not even go back to the original plan.

While he acknowledges that the situation is tough, he means that there is a solution. He can not tell you how it looks, but he promises to fight till the end.

- If I doze off Saab would disappear in an instant

Muller may still be fighting for Saab’s future, but as prosecutors unwind the Vladimir Antonov situation, Muller could soon be forced out of the process. After all, Muller is said to have a personal debt to Antonov of upwards of €100m, and it seems highly likely that Antonov was using Muller to launder funds embezzled from his Baltic banks. Antonov ‘s sports business has been placed into bankruptcy, and he has stepped down as Chairman of the British soccer team Portsmouth, reports ESPN. And Latvian officials seem to be clear on the Saab connection as well, as the Moscow Times reports

Latvian officials on Wednesday said about 100 million lats ($200 million) was stripped out of Latvyas Kraybank to fund Antonov’s investment projects, including the ill-fated Saab bid.

And the investigation is ongoing, as BBC reports that

[Lithuanian prosecutors] said they were investigating everything that might have links to criminal offences.

They added they would be taking “all the necessary steps” to freeze assets belonging to Mr Antonov and Mr Baranauskas.

It seems inevitable that this investigation will eventually catch up to Muller, at which point he’ll have to plead ignorance of Antonov’s alleged crimes. And even if Muller does escape prosecution, his ability to organize a deal to save Saab will be fundamentally compromised by his association with Antonov. And as Muller himself says,

If I doze off Saab would disappear in an instant

The countdown continues…

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