GM And Chrysler Racing Towards Captive Finance?
News that GM is considering a number of options for a return to captive finance, has lit a fire under Chrysler CEO Sergio Marchionne, who tells the Detroit News that
One of the things that we do not wish under any circumstance is to have an uncompetitive relationship vis-À-vis GMThat would certainly be the case if GM bought up its recently-bailed-out former captive finance arm, GMAC (now known as Ally Financial). Chrysler relies on GMAC for leasing and loans just as much as GM does at the moment, so an Ally buyout would create major long-term problems. But even if GM created a new finance arm, Chrysler doesn’t seem to think that it will be able to survive without forming its own in-house finance department. Which would then compete with GM and Ally, to say nothing of the industry’s other finance competitors. But is the rush to captive finance going to be good for anyone?
As a bank holding company, we have been able to consistently and cost-effectively provide financing to approximately 6,000 dealers and millions of consumers, which has led us to be the largest financing provider for both General Motors and Chrysler.
Today, we are better positioned to offer more stable funding through a variety of economic climates and to be more competitive from improved funding costs related to an increased level of deposit funding from our commercial bank and an improving business model.
The WSJ interprets this statement as Carpenter
signaling an independent stance following word that General Motors Co. might get back into auto lending.
After all, GM is only interested in Ally’s auto finance business, which is a far more consistent performer that the bank holding company’s long-troubled residential mortgage lending division. Besides, returning to the bosom of GM would force Ally to leave a lot of auto finance business on the table, not the least of which is Chrysler’s business. Marchionne warns that
We need to transition to a permanent, stable solution for Chrysler going forward. Once they tell me that GMAC is going to go back into General Motors, we need to have the time, the space to find an alternative solution to the long-term future of Chrysler.
As the WSJ’s Heard On The Street Blog puts it,
Ally’s separation has given it lower financing costs and freedom to serve other car makers, not just GM. “The value of Ally’s franchise is maximized by being separate,” says Adam Steer of CreditSights.
In theory, GM should be able to focus on its core business of making vehicles and make a good return on investment. Ally, focused on providing financing, should be able to do the same.
In other words, GM buying up Ally’s auto business would be good for GM and it’s profit and IPO chances, but it would be bad for Ally, and bad for Chrysler… both of which are still partially owned by the government. Moreover, buying Ally would also land another $16.3b in government debt on GM’s lap, giving critics of “Government Motors” even more populist ammunition. But then, if GM doesn’t buy Ally’s auto finance business but starts its own captive lender instead, it will have to compete with the company that already finances 87 percent of the vehicles on GM’s dealers’ lots. And Chrysler will have to start its own finance company. And then Ally won’t have enough business and its $16b+ bailout will have been wasted. Unless, of course, there’s a way to finesse the situation… because GM and Chrysler seem dead set on returning to captive finance.
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