By on May 13, 2010

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 GM

At this point, the indications aren’t good. Ally Financial CEO Michael Carpenter said in a statement yesterday that
Ally Financial Inc. (Ally) is committed to supporting the auto industry with competitive financing products and services to enable vehicle manufacturers and auto dealers to achieve their goals of selling and leasing vehicles.

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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13 Comments on “GM And Chrysler Racing Towards Captive Finance?...”

  • avatar

    “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”

    That works until Toyota starts offering 0-5% financing and GM has to respond. With captive, when they sell at below market rates, a NPV transfer for lost interest revenue must also be made to the financing division, for Ford and Toyota, this is just an IC offsetting transaction, for GM and ChryCo it actually represents an expense (on top of incentives).

    • 0 avatar

      Whether it is an on the books transfer or a cash expense, subsidized financing is a real expense to any car manufacturer. Putting the cost on the books of a subsidiary is just papering over losses.

      Having to pay an independent bank to subsidize financing on the free market is a guard against delusional financing. Since the car companies have been declared too big to fail, companies that have taken subsidies from any Government, federal, state, local, or foreign, should be permanently prevented from captive finance.

  • avatar
    Rusted Source

    There’s a flurry of Ally ads on every day on the news channel I watch, in particular this one

    Interesting catch line from this commercial?
    “Even kids know it’s wrong to take other people’s stuff.”

    Of course, that is when referring to “stuff” you’re not talking about taxpayer dollars – then it’s okay.

  • avatar

    Recall that GM only sold GMAC to raise cash, and the Chrysler Financial got stripped out of the old Chrysler by Cerberus, who bought GMAC. Somewhere along the line (I don’t recall if it was pre or post Cerberus) GMAC got aggressively into mortgages and itself needed a bailout, but the auto lending business has been steady and profitable.

    I think that both Chrysler and GM are at a disadvantage without in-house lending units. And if GM buys Ally, Chrysler is at a REAL disadvantage, having its main source of financing under a competitor’s control.

    But what does GM propose to use to buy Ally? Oh right – more of MY money.

  • avatar

    Why would anyone finance a car through GMAC or any other auto-financing corporation, when they can go join a credit union and get a lower interest rate? disclaimer, I have never financed a car.

    • 0 avatar
      John Horner

      For highly credit worthy borrowers it is often cheaper to finance with the captive finance unit. For less credit worthy buyers, the credit unions often don’t want their business.

      I’m a credit union fan, but they are not always the best deal for new car purchasers. Sometimes they are, especially when outside financing lets the borrow take full advantage of big rebates (when offered). But, as with so many things, it all depends …

  • avatar

    Banks borrow from the Fed at just over 0%.

    They take that borrowed money and buy Treasuries at 3%.

    Do you get it now?

  • avatar

    GM needs a captive finance arm in order to take the North American part of their recovery to the next level, and I expect that they’ll have one before they do their IPO. Ford has one, and it’s both a profit center and a way to reduce the cost of (and increase the flexibility of) incentives. Likewise Toyota and the other heavyweights.

    But GM doesn’t necessarily need to buy GMAC back. Getting into a squabble with Chrysler/Ally/the feds probably isn’t worth the trouble. The GMAC trademark reverts to GM in a few years; they can start a new lending operation and call it something else in the meantime.

  • avatar

    If GM gets in financial trouble again after it buys Ally, it can divest of Ally, then the govt can rescue Ally with Pension Protection and Tarp funds.
    Then GM can acquire Ally again.
    Sounds like a wise and fiscally prudent way to run a corporate-govt crony operation.

  • avatar
    John Horner

    “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.”

    Ah, spoken from the Gospel of Wall Street and the MBAs. The theory of ever increasing specialization actually doesn’t work very well in practice. The Theory of Specialization says that Google should be sticking to search engines, Apple should have stuck with computers, Oracle should still be a database company and IBM should have stuck to making hardware and software rather than building a massive business services empire.

    The WSJ’s blogger is a simple minded person, like so many of his ilk are. Simple minded people take small theoretical examples and then attempt to build all encompassing economic rules from them. A few more examples are the Rational Man hypothesis and the theory of natural, National Comparative Advantage. Alas, you cannot be an effective manager if you try to take a simple minded theory and apply it to all situations.

    Every significant competitor to GM and Chrysler has an in-house finance arm. You don’t see any of them in a hurry to turn that over to Ally, do you? Speaking of which, of course Ally thinks it is a bad idea for GM and/or Chrysler to reconstitute their own in-house finance operations. Duh, what else is Ally going to say?

    • 0 avatar

      Very well said. Many companies do well when expanding businesses to offer different products and services.

      Honda makes cars, jets, lawn equipment, and boat engines. And they have a financing arm.

      Toyota has many different companies under one umbrella as well. And they have a financing arm.

      I guess these guys should only stick to cars as well.

  • avatar
    Rusted Source

    Does Fiat have captive financing as well? That might solve the conundrum for Chrysler.

    There have been some good responses about the importance of captive financing that have opened my eyes, but I’m still bothered by the fact that GMAC rushed to be reclassified as a bank to get the bailout and restore themselves to healthy operation. I don’t think it’s fair for GM to be able to assume control of this ‘healthy’ company unless we start talking straight about GMAC as part of the total bailout money that GM received (most people seem to keep the two bailouts separate).

    Further to that, if they are a bank they will need to surrender that title and stop marketing to the general public. As per John’s response, I’m sure they’d rather stay a bank now that they’ve tasted life on the other side of the fence.

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