Doug Henwood wrote: > michael wrote: > >Business Week describes GM becoming almost entirely dependent on its>finance unit. I recall seeing something similar about Ford.> Doug
A few years ago, Ford was making money on its finance division and breaking even on cars. But the finance division was almost exclusively devoted to financing the purchase of Ford vehicles. So, they were capturing a business formerly engaged in by bankers, and their finance business was dependent on what they manufactured (which undermines the usual postindustrial story).
Can you point me to the source, please. I remember you mentioning this before. Was it in LBO?
***** The New York Times December 15, 1996, Sunday, Late Edition - Final SECTION: Section 3; Page 1; Column 3; Money and Business/Financial Desk LENGTH: 2908 words HEADLINE: Will Ford Become The New Repo Man?; Financial Powerhouse Takes Aim at Bad Credit Risks BYLINE: By ROBYN MEREDITH DATELINE: DEARBORN, Mich.
BODY: HENRY FORD famously insisted that buyers could have any color of car they wanted, as long as it was black. But he was just as reluctant to offer them credit. Only in 1923, two decades after he began selling cars, did he begin to experiment, cautiously, with financing.
Ford customers could buy a $265 Model T on layaway, paying $5 a week for a year. Only then were they allowed to drive the shiny black car home. (Not until four years later did Mr. Ford give in to demands for more colors.)
Ford long ago overcame its founder's misgivings about making loans. With Americans now financing four-fifths of all new cars, the Ford Motor Company has earned more as a banker than as a car builder in five of the last six years. Its banking businesses had higher profits last year than all but two of the nation's commercial banks.
And while Ford's automotive divisions are struggling to hold up against stiff competition worldwide, a subsidiary, the Ford Motor Credit Company, has become the biggest auto financing company in the world. In the third quarter, Ford Credit earned $299 million, compared with a paltry $15 million for the company's worldwide automotive operations.
Now Ford Credit has an ambitious plan to extend its lending reach into an area that would have baffled Henry Ford: borrowers with proven records of not paying back their loans on time, a group collectively known as the subprime lending market.
The lure is the $100 billion that people with flawed credit ratings borrow each year to buy new and used cars, and the interest rates of 18 percent and higher that Ford will be able to charge on loans to its share of that market. That is the equivalent of paying for a car at credit-card rates.
Ford Credit's new business is risky on two counts. First, whether a company makes money depends on which loan applicants it decides to trust, and how far it trusts them before sending out the repo man to seize the collateral. Secondly, Ford's image could be damaged if the company is seen as profiting at the expense of the poor.
Consumer advocates already say a Ford consumer lending unit, the Associates, charges unfairly steep interest rates and fees. That unit's target market is similar to that of the new subprime auto-finance operation, named Fairlane Credit after Henry Ford's gracious Fair Lane estate here.
"Ford Motor Credit doesn't want to be seen charging 40 percent interest rates or repossessing cars," said Jordan Hymowitz, an auto services analyst at Montgomery Securities in San Francisco. "It is a potential public relations problem if the rates get too egregious."
But at a time when profits are down and default rates are up at Ford Credit, the cornerstone of Ford's financial businesses, its executives say they have studied the companies in the subprime lending market, are proceeding cautiously and are confident they can make good money.
Ford is also planning to move slowly to build its new business. "We aren't going to make any big, bad boo-boos" with Fairlane, William E. Odom, the chairman of Ford Credit, said.
But he said he expected Fairlane's returns to be more volatile than its parent's. Fairlane must be tough enough to compete with the dozens of scrappy, small companies that dominate subprime auto lending. But Fairlane will be walking a tightrope, particularly on the repossessions that come after people stop making car payments.
"If we pull the trigger too quickly on a repo, the customer is going to be upset with us and with the Ford Motor Company," Jerry Heimlicher, president of Fairlane, said.
Mr. Heimlicher said that Fairlane had not decided what interest rates it would charge, but that he expected them to be in a range of 18 to 22 percent, and perhaps higher. While other subprime lenders charge rates of 18 to 40 percent, where state laws permit, Mr. Heimlicher said Fairlane's rates "will never get into the range of 40 percent."
He added, "We are going to charge the fairest rates that we can charge, and still make a fair rate of profit."
Fairlane is planning to hold the line on rates because it hopes to build loyalty to Ford vehicles. One reason Ford Credit chose the name Fairlane is that executives want customers to think of it as "fair."
Mr. Odom said consumer groups should not fear that Fairlane will treat poor customers unfairly. "It is not inconsistent to go into the nonprime business and run the business on the high road," he said.
When deciding whether to approve loan applications, lenders look at two factors: borrowers' income, and their record of repaying other loans. They often charge higher interest rates to people they consider less likely to pay them back. FORD CREDIT now lends primarily to the most creditworthy borrowers, what the industry rates as A or B credit risks, though it makes some loans to people with very poor credit. As Fairlane starts up, Ford Credit will begin referring the loan applicants it rejects to Fairlane, to see if they qualify under its underwriting standards for higher-interest loans.
Ford Credit assigns A ratings to people who earn enough to meet their bills without strain and have almost never paid a bill late, Mr. Odom said. Borrowers with B credit have occasionally missed payments but later paid up, and lack financial reserves to cover emergencies; people with C credit are highly indebted and often late with bills, but always pay up eventually.
Borrowers with D credit typically have declared bankruptcy and have had property repossessed. They end up paying lots of late charges because they never pay on time. "They try to juggle, but they drop the ball when they juggle," Mr. Odom said. "The C can juggle pretty well."
Fairlane will focus on the lower end of the scale. "Fairlane will pick up where Ford Credit leaves off," Mr. Heimlicher said. "We would be going into the C and D and what would be an E, if there were an E."
Customers will feel the difference when they apply for a loan. While Ford Credit uses sophisticated computer models to approve loans within an hour, Fairlane may take days to check the assertions made on loan applications.
The more thorough process is intended to sort out people who have bad credit but will repay their loans from those who are unlikely to make payments. Fairlane's customers are likely to have bad credit because of a one-time crisis like a layoff or a divorce, Mr. Heimlicher said.
"Our main process is to determine the why -- why did the customer have the difficulty," he said. "These are not bums -- these are not always people who are going to have bad luck."
Once Fairlane approves a loan, it plans to keep in close contact with anyone who misses a payment. Mr. Heimlicher calls it "coaching": When borrowers fall behind, the company will not simply mail overdue notices but will call the debtors, weigh whether there are legitimate reasons for the late payments, and then try to coax them into promising, for example, to pay when the next paycheck arrives.
While most subprime lenders focus on used cars, Fairlane plans to lend 20 percent of its money toward new cars, particularly to first-time buyers like students who have had trouble paying off credit cards or college loans.
Fairlane, based in Colorado Springs, is still hiring managers. Ford's goal is for it to begin making loans in Colorado and nearby states by the end of March. Expansion is planned for later.
Ford intends to tiptoe into the new lending market. "I'm not looking for a home run in 1997," Mr. Odom said. "I'm looking for a solid organization at the turn of the century."
But executives at other subprime auto lenders say it isn't easy to make money. "Our job is to differentiate between bad things happening to good people, and just bad people," said Tommy A. Moore, chief executive of First Investors Financial Services Inc., a Houston-based company that writes subprime auto loans in 17 states. His company approves only one of every five applications.
Mr. Moore and other experts on subprime lending said that being choosy in approving loans was only part of the job. Even tougher, they said, is counseling people who are struggling to pay bills while still moving to repossess cars as soon as it is clear that a borrower will not be able to repay.
But subprime auto lending is a tough business. Since 1990, 24 auto-finance companies have sold stock to the public, according to SNL Securities of Charlottesville, Va. Since their initial offerings, shares of 11 of the companies have dropped by 15 percent or more.
Unless Fairlane fails, it is likely to dwarf its competitors within a few years, if it follows the lead of another new Ford Credit subsidiary, Primus Automotive Financial Services.
Ford Credit lends only to Ford customers and dealers, but Primus was set up to lend money at rival dealerships. Just six years old, Primus has $11.5 billion in assets. Though it is a relatively small piece of Ford Credit's business, Primus, if freestanding, would be the nation's 12th-largest finance company.
Fairlane won't get that big in its first five years but "it will have some recognizable-sized profits in three, four or five years," Mr. Odom said.
Analysts say that to make money, Ford will have to show some ruthlessness in repossessing cars. "This is a business where you measure your ability to collect your collateral in days or hours," said Maryann N. Keller, an auto analyst at Furman Selz, a New York investment banking and brokerage firm.
Otherwise, another creditor could seize the car, or the borrower could drive out of town with no forwarding address.
Yet the danger of ruthlessness is that it could attract the attention of consumer groups, some of which are already unhappy with the lending practices of the Associates, the Ford unit that makes home-equity and personal loans.
Ford Motor "owns some finance companies that target poor people with less than healthy loans," said Remar M. Sutton, president of the Consumer Task Force for Automotive Issues, a nonprofit group that works with consumer groups and state attorneys general on auto fraud investigations.
The auto lending practices of Ford Credit and its main rivals, the finance arms of the Chrysler and General Motors corporations, are already under Federal scrutiny. Last year the Justice Department began investigating whether the companies discriminated against minority groups. "There is an investigation and I can't make any comments about it," Mr. Odom said.
Fairlane Credit will be relying heavily on the ethics of used-car dealers -- many of whom stand to profit from the loans -- to make sure its customers are treated fairly.
The unscrupulous practices of some dealerships have led to trouble for people borrowing from other auto finance companies. "It is the people who don't have access to credit who are most at the mercy of these people: new- and used-car dealers," said Richard N. Feferman, a lawyer in Albuquerque, N.M., who specializes in consumer fraud issues.
WALL STREET, of course, cares about profits as well as lending practices. And profits of the Associates have been growing steadily. Like Ford Credit, it has watched its bad loans increase, to 2.16 percent of all loans in the third quarter, but it is growing so quickly that its profits have also increased, to $230 million in the third quarter, up 17 percent from a year earlier.
Analysts, however, are divided over whether Ford Credit itself, after years as the crown jewel of the world's second-largest industrial company, could be facing difficulties. The number of loans going bad has nearly doubled, and in the third quarter Ford Credit's usually stable profits fell 16.2 percent from a year earlier, to $299 million.
Most analysts say that in the long run, Ford Credit will dust itself off and continue to contribute mightily to the parent's bottom line. "I have no doubt about Ford Credit," Ms. Keller said. "With some bumps in the road, they will still do just fine."
But other analysts are more concerned. "There is a big question hanging over Ford Motor Credit right now," said Jack V. Kirnan, an analyst at Salomon Brothers. "It is certainly disconcerting to see the significant drop we saw in third-quarter net income."
Ford Credit's main competitors -- the finance subsidiaries of General Motors and Chrysler -- have been going gangbusters. The Chrysler Financial Corporation, which has $16.7 billion in assets, has set quarterly earnings records this year. In the third quarter, it earned $94 million. The General Motors Acceptance Corporation, which has $106.5 billion in assets, has set profit records for the last nine quarters, earning $307 million in the third quarter.
Counting overseas operations, Ford Credit has assets of $119 billion.
While Chrysler Financial and GMAC also make a small proportion of loans to car buyers with spotty credit, they have avoided getting into the business in a big way. "There is no free lunch," said James P. Holden, the Chrysler Corporation's executive vice president for sales and marketing. "Subprime paper is subprime for a reason."
Ford has decided to make the bet. While its banking businesses have not always been successful, no one is suggesting that Ford Credit will become a billion-dollar sinkhole like the First Nationwide Financial Corporation, a savings and loan institution that Ford sold in 1994 after nine years of ownership.
Ford's nearly bulletproof balance sheet allows it to borrow money at lower interest rates than many of its rivals can obtain, giving it more room to trim the rates it charges on car loans while staying profitable. Just last month, Standard & Poor's reaffirmed its A+ rating on Ford Credit's senior debt, the best debt rating by a wide margin among the auto financing arms of the Big Three auto makers.
The level of Ford Credit's profits is important because the unit is the mainstay of Ford's earnings. Last year, $2.1 billion of Ford's $4.1 billion in profit came from the banking side of the business, and Ford Credit earned $1.4 billion of that. Most of the rest came from the Associates.
Ford Credit's earnings have been down mostly because of rising losses from unpaid loans. In addition to a $58 million drop in third-quarter profits from a year earlier, profits in the second quarter fell $9 million short of the previous year's level. First-quarter profits were just $5 million ahead of last year's pace.
Other lenders have been stepping up their efforts to woo borrowers buying cars. Commercial banks have increasingly been willing to offer competitive rates on auto loans as a way to develop financial relationships with affluent borrowers, the customers the banks prefer.
"Those buyers are pretty well-heeled," Mr. Holden of Chrysler said. "They may need other financial services."
Ford officials dismiss these worries, arguing that the banks' interest will be fleeting. Mr. Odom said profits had temporarily slipped because of fierce competition from commercial banks, as five years of economic growth have helped banks to rebuild their balance sheets and begin lending aggressively again. Ford Credit's profits had also dropped during previous economic booms, he said, only to recover quickly.
BY any measure, Ford Credit customers are having a harder time paying back loans these days. Credit losses nearly doubled in the third quarter, said David N. McCammon, the Ford Motor Company's vice president for finance, at a mid-October briefing. He said losses might rise, but not to the level reached in 1989 at the peak of the last economic boom.
Ford's loan losses are usually worst when commercial banks are at their best, he said. Many other lenders are facing rising default rates as consumers pile on debt.
Ford Credit's loan losses jumped in the third quarter to 0.89 percent, from 0.48 percent a year earlier. Mr. Odom said the higher losses provided "a loud wake-up call, if you didn't already get it, but of course we already got it."
He said he had been scrutinizing credit losses since August 1995, and "I'm pretty well satisfied that the increases have flattened out."
Ford Credit executives rely on the company to contribute more than profits to the parent. Edsel B. Ford 2d, president of Ford Credit and the great-grandson of Henry Ford, said in a statement this month, "The potential to cement the relationship between Ford Credit and the customer is tremendous during the two to five years of financing repayment."
Still, competitors in the subprime auto-lending business said Ford was entering the risky market in a difficult period. At a time of record bankruptcy filings and high levels of credit card debt, "there is a lot of money being thrown at the consumer," said Mr. Moore of First Investors Financial Services. "From that standpoint, I guess they are picking a bad time."
Ford officials beg to differ. "Actually, it is an opportunity," said Mr. Heimlicher, the president of Fairlane Credit. "These are the times when people need help -- this is the right time to be stepping in."
Mr. Odom agrees. "It is a perfect time to start, while everybody else might be getting nervous," he said.
William H. Ryan, a senior specialty finance analyst at Smith Barney, said Ford's high credit rating and correspondingly low cost of borrowing would give it an advantage. But he cautioned that just as some Ford car designs flop, many subprime auto finance companies fail.
Fairlane Credit, he said, "could turn out to be an Edsel."
GRAPHIC: Photos: In 1923, Ford's easy-payment plan required $5 weekly payments, in advance of purchase. Financing the lease and purchase of cars is a lucrative business for Ford. The risks and rewards could rise as a new unit singles out borrowers with bad credit. (pg. 1)
Charts/Graphs: "An Auto Maker and a Banker" shows percentage change in stock prices of Ford and G.M. indexed against the S.&P. 500 from 1991 to 1996, financial indicators for Ford and net income of Ford from 1993 to 1996.
The Financial Services Group
Ford Motor Company had total revenue of $34 billion and net income of $686 million in the third quarter of this year. Nearly all of its profit, or $671 million, came from the financial services group. Here's a look at that group's components and how they did in the latest period.
Ford Motor Credit Company Net income $299 million The unit, with 14,800 employees and about $100 billion in total assets, is primarily an auto lender and leasing company serving both consumers and dealers. It has three significant subsidiaries:
Primus Automotive Financial Services Inc., with $11.5 billion in assets, finances autos at non-Ford dealerships.
The American Road Insurance Company, with $1.2 billion in assets, offers auto insurance to drivers and dealerships.
Fairlane Credit, scheduled to start next year, will lend at above-market rates to people who are considered high credit risks.
The Associates Corporation of North America Net income $186 million It is the second-biggest independent finance company in the United States, and is owned 80.7 percent by Ford. The remainder is publicly held. (Ford booked $186 million of the Associates' total $230 million in net income.) The company offers a wide range of consumer products -- home equity lines, credit cards and personal loans -- as well as commercial finance and insurance services.
USL Capital Net income $117 million Ford has been selling off this diversified commercial finance business piecemeal all year. Ford sold the last piece in the third quarter, resulting in a one-time gain of $76 million that brought the unit's net income to $117 million.
Hertz Net income $74 million The nation's biggest rental car company. (Although Ford owns the nonvoting preferred stock in Budget Rent A Car, it has reportedly run into antitrust problems in its bid to acquire all of Budget, which has not contributed in some time to Ford's profits.)
International businesses Net income $61 million Includes auto lending in Europe, Taiwan, Brazil and Argentina, managed by Ford Credit, with $19 billion in assets.
Interest payments and losses Net income -$66 million Mostly from debt payments related to its stake in The Associates and from other, smaller businesses within the Financial Services Group. (Sources: Bloomberg Financial Markets; Datastream; Ford Motor Company)(pg. 15)
"The Wheels of Finance" shows third quarter profits for Ford's automotive operations and its financial services and credit losses at Ford Credit from 1994 to 1996. (Sources: Ford Motor Company, Ford Credit)(pg. 1) *****
***** The New York Times January 6, 2002, Sunday, Late Edition - Final SECTION: Section 3; Page 1; Column 2; Money and Business/Financial Desk LENGTH: 2023 words HEADLINE: All That Easy Credit Haunts Detroit Now BYLINE: By DANNY HAKIM DATELINE: DETROIT
BODY: WHEN the North American International Auto Show, the Cannes Film Festival of the auto industry, opens here today, the Ford Motor Company will put on a display of its new vehicles. The company hopes to make its mark with a redesigned version of its Expedition S.U.V. and a station wagon from its Volvo unit that looks like it wants to be an S.U.V.
But the big news will come at the end of the week, after the show ends. That is when Ford is expected to announce a plan to return to profitability by reversing the company's declining quality, cutting costs and perhaps closing plants to ease overcapacity.
This year, even during a week when product has always been king, financial matters are front and center. Concerns are growing on Wall Street about the health of the multibillion-dollar credit operations of Ford and, to a lesser extent, General Motors.
In 2001, total auto sales stayed at a near-record level, especially after Sept. 11, largely because G.M. and Ford leaned heavily on their financing businesses to pump up sales. But that burst of interest-free financing deals was just the latest in a string of deal making that led to swelled portfolios of leases and car loans taken on by Ford Motor Credit and the General Motors Acceptance Corporation, known as G.M.A.C., in the last five years.
Unlike their foreign rivals, which have developed stables of models that buyers actually will pay more for, Ford and G.M. have relied more on incentives like low-interest loans and cheap leases to attract customers. The automakers have ponied up billions of dollars to their financing units to make up the difference on the below-market financing.
In good times, their credit businesses provided either a large part of their earnings or covered operating losses in the automaking business.
Now, with the economy slowing and unemployment rising, the question is whether the credit business will aggravate the effects of the recession instead of cushioning carmakers' bottom lines.
"More of these loans have been going bad, which is why Ford ran into trouble," said Stephen Girsky, an analyst at Morgan Stanley.
"The fact that G.M.A.C.'s loan losses are lower than Ford's, and the fact that their reserve ratios are higher, suggest they have more cushion," he added. "Does that mean it's not going to go bad at G.M.A.C.? No. I think G.M.A.C.'s earnings are going to go down this year. But I don't think it will be as bad as Ford."
Consider Ford Motor Credit. In the first nine months of 2001, it made nearly $1.2 billion, while Ford as a whole lost about $385 million.
G.M.A.C. is expected to have $1.2 billion in earnings in the first nine months of this year, down slightly from $1.3 billion in the first nine months of last year. That means G.M.A.C. is accounting for almost all of G.M.'s operating profits.
Many analysts worry about the potential for even more write-offs as the rate of bankruptcies rises during the recession, leading to more defaults, and as the value of vehicles coming off leases falls because the demand for used cars has flagged.
In the third quarter of last year, Ford Motor Credit's loan losses rose to 1.36 percent of its total loans and leases, up from 0.87 percent in the year-earlier quarter. G.M.A.C.'s loan losses were 0.69 percent in the third quarter, up from 0.6 percent. Both companies have recently bolstered their reserves for future losses, indicating that loan loss rates are continuing to rise.
On one level, the nation's two independent automakers are moving in opposite directions. Ford, previously Wall Street's consensus pick among the Big Three, is coming off a dreadful year that brought more disputes with Firestone and the ouster of its chief executive. The company is expected to report its first annual loss since 1992.
General Motors, whose market share has fallen to less than 30 percent today from 60 percent in 1960, actually gained a sliver of share last year, for the first time since 1988. Its share rose to 28.3 percent, a 0.03 percent increase over 2000, and G.M. will be the only one of the Big Three to record an annual profit.
BUT both G.M. and Ford continue to have problems competing with imports without resorting to heavy subsidies. Banks, in turn, have been fleeing the auto financing business because it is hard to compete with subsidized rates. As a result, Ford Motor Credit financed more than half of the vehicles Ford Motor sold last year, according to the company, up from 37.6 percent in 1996. G.M.A.C. financed more than 40 percent of G.M. sales, up from about 25 percent in 1995.
At G.M.A.C., 85 percent of loans made in 2000 had some subsidy. That compares with about 50 percent in 1996, according to a Morgan Stanley report.
While offering credit to more people has been shown to improve customer loyalty and increase opportunities for marketing to a captive audience, Wall Street analysts debate the extent of risk now inherent in the financing businesses.
Ford's and G.M.'s credit ratings were downgraded two notches last year by Standard & Poor's and Moody's, largely forcing the automakers out of commercial paper and into other, more expensive forms of funding, like turning pools of auto loans into securities. Credit spreads between their borrowing rates and their lending rates have narrowed greatly, further compressing how much they make by financing car purchases.
"They have been a drain this time around," Mr. Girsky said, referring to the credit businesses.
Both Ford and G.M. must set aside capital to shore up the balance sheets of the credit businesses as they make more loans. At the end of 2000, for example, G.M. contributed almost $2.5 billion of its capital to G.M.A.C.'s balance sheet.
"Ford Credit will probably need capital" soon, Mr. Girsky said.
"If you're growing your business, it's one thing to put capital in a company and get a return," he added. "If you're not growing, it's a different story."
Ford and G.M. both acknowledge the diminishing returns of their credit businesses in the contracting economy, but they say that no surprise write-offs are in store.
"Leasing has been a negative for us; I'm not trying to paint it as any kind of positive story," said Bill Muir, the chief financial officer of G.M.A.C. He quickly added that "we have adequately accounted for it and aren't facing any kind of a blowup over it."
Car loans are not the only problem. Leases have become less profitable, too.
Automakers like G.M. give themselves a cushion when valuing leased vehicles. In 1998, Mr. Muir said, G.M.A.C. could take a car returned at the end of a lease and sell it for an average of $1,000 more than what they had estimated when they calculated the lease terms. That gain fell to just $200 last year because many people who might have considered a used car chose instead to use no-interest loans to buy new cars.
Some analysts believe that there is a risk that carmakers could actually start losing money on each leased car. Ford Motor Credit is particularly at risk, they say, because of its more aggressive lending practices.
Another problem for the financing units is the rising number of bankruptcies and defaults.
"We are in a deteriorating economic environment and we are dealing, as all others in the industry are, with a very, very high level of bankruptcies of our customers," said Greg C. Smith, the president and chief operating officer of Ford Motor Credit.
Mr. Smith was installed last month after his predecessor, Donald Winkler, was ousted. Mr. Winkler's resignation came after Ford said it would need to pump several hundred million dollars into Ford Motor Credit because the financing unit had underestimated the amount it would need for reserves, resulting in a $900 million fourth-quarter loss for Ford Motor -- about five times greater than analysts had expected.
Mr. Smith said Ford had tightened its standards as the economy deteriorated, and would benefit from a rebound in the used-car market.
Some analysts said they were surprised that Ford appeared to be suffering more than G.M. "Traditionally, we've considered them as stronger, because they only had one business," said David Andrews, a credit analyst at UBS Warburg.
Ford Motor Credit sticks to auto lending, while G.M.A.C. is diversified into other businesses, like mortgages. In the past, analysts worried that these other businesses came with their own sets of risks that G.M. might not be prepared to handle, although last year mortgages actually cushioned G.M.'s losses on car loans. Some analysts worry that the outlook for mortgage lending and some of G.M.A.C.'s other businesses are still concerns this year.
"They're really pretty much in the same boat," said John Casesa, an analyst at Merrill Lynch. "They have the same set of problems, but Ford Credit's are more acute right now."
He pointed to the deteriorating credit ratings of the two companies.
"Both companies are seeing their borrowing costs increase; that's the main difficulty," he added. If the credit rating is cut enough, "the availability of credit diminishes."
All these issues underlie the fundamental problem for Ford and G.M.: their vehicles' overall lack of appeal has been such that they have not been able to compete with imports.
Last year, through November, incentive costs, including subsidized loans, rebates and warranties, rose to $2,291 a vehicle for the Big Three, compared with $1,146 for Asian automakers, according to the AutoData Corporation, a research firm in Woodcliff Lake, N.J. Despite that additional spending, G.M. managed to increase its market share just 0.03 percent last year, while Ford's share fell to 21.9 percent from 23 percent in 2000.
The costs of those incentives add up. In 2000, Ford Motor Credit reported pretax earnings of $2.97 billion. But that same year, Ford Motor spent $3.4 billion to make up for those cheap loans -- a huge expense that reflects more on the health of the auto business than the financing business.
Ford and G.M. are likely to see their market share shrink again this year, when overall sales are expected to fall sharply, analysts say. The companies have little room to maneuver further on pricing while their Japanese competitors benefit from a weaker yen, which declined by 14.6 percent against the dollar last year.
Last week, G.M. said it would change from interest-free financing to offering rebates of $2,002 a vehicle. The new wrinkle, meant to energize consumers again with a deal that seems different, will not lower incentive costs significantly. But at least it should lower the number of deals G.M.A.C. finances.
"We haven't been a drain on resources," Mr. Muir of G.M.A.C. said. "If you go over the past five years, G.M. has still gotten more cash dividends out of us than equity they have put into us."
Mr. Muir believes that as rebates are used and as sales decline, the amount of financing will slow and the need for capital will lessen.
"As the business cools off, we can still maintain our leverage and return a lot of capital to G.M.," he said.
Still, General Motors has other problems, principally rising health care costs and a potential multibillion-dollar deficit in its pension fund.
THE best way to fix these problems is to make vehicles that people will want to buy without any help. For Ford, it means striking the right balance between cost cutting and product planning, and getting the new products right.
G.M. has developed more momentum on the product side, but only very recently. Rick Wagoner, the chief executive of the company, appears to have re-energized G.M.'s design department by hiring Robert A. Lutz, the former president of Chrysler, last year.
Mr. Lutz, the champion of vehicles like the Jeep Grand Cherokee and the PT Cruiser, often compares Detroit to Hollywood. Companies spend a tremendous amount of money each year to develop a few new products, whether movies or car models. If people like enough of them, the production executives are heroes. If they don't, the executives are in trouble.
And that appears to be a fact that no amount of financing, ultimately, can make disappear.
GRAPHIC: Photos: American carmakers leaned heavily on financial incentives to help them battle a flood of hot-selling imports last year. (Bloomberg News)(pg. 1); Donald Winkler resigned as president of Ford's credit unit as loan losses grew. (Wieck); The chiefs of Ford Motor and General Motors, William Clay Ford Jr., top, and Rick Wagoner, must find ways other than subsidized loans to bring buyers into dealers' showrooms. (Agence France-Presse, top; Bloomberg News)(pg. 8)
Chart: "Troubling Trends" Subsidiaries of Ford and General Motors have been lending to more customers, but the value of the assets behind those loans has been falling.
Figures for 2001 are as of June
Graph shows share of retail vehicle sales and leases financed by automaker's credit subsidiary from 1995.
Graph shows the change in residual value of a sampling of vehicle types at the end of a two-year lease from 1996.
LUXURY CARS MINIVANS LUXURY SPORT UTILITIES
(Source: Morgan Stanley) (pg. 8) ***** -- Yoshie
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