As industry analysts, execs and observers well know, automakers have had long love affairs with auto-financing, For the industry's largest players on what have been for far too long 'sliver margins' from their core activity of vehicle production, auto-financing has provided improved margins that some have factored into their operational NPV & IRR calculations.
Hence over the last 20 years VM's have build-up large internal or closely allied finance houses that enable them to both improve the bottom line through deal value efficiencies and enable easier signing-up of buyers. But whilst most have understandably entered the domain, the last year has seen individual automakers adopt differing strategic attitudes to managing a consequence of the credit-crunch – namely the downward spiral of used car values and the 'gap-effect' between theoretical book-valuations and real-world market prices. Given the relative rapidity of the 'residuals fall-out' each automaker is having to best guide its own financial fortunes, and that means best managing the need for sizable provisions set against book-to-market paper losses.
Ironically given the never-ending tides of woeful news from Detroit, the US 'Big 3' may be better placed in this market melt-down than its oft considered better placed European premium players. Two of the three previously part-sold or fully spun-out their interests in what were in-house finance arms. GM sold 51% of GMAC (inc Nuvell & ResCap) to an investment consortium led by the private equity house Cerberus in November 2006. Cerberus also took Chrysler Finance off the accounts of the newly created Chrysler Motor LLC, effectively separating car production and auto-financing interests), which was the fundamental basis to allow Robert Nardelli to announce Chrysler's effective resignation from the auto-leasing business. We assume that he critically does not wish to expose the semi-fragile automaker to the vagaries of Chrysler Financial and critically allow it to maintain credit-worthiness buoyancy for ongoing re-financing of its own. (Chrysler Financial was last week able to secure only $25bn of a desired $30bn credit facility) And as for the 3rd of the trio, Ford, its Ford Motor Credit division (inc PRIMUS & unlike GMAC concerned only with auto-related loans) has staid within the FMC domain and accounts-base.
Unsurprisingly trucks and SUVs have been heavily hit by the devaluation trend and the undermining of the leasing business model, perhaps most notable with Chrysler's high profile in this arena has been a factor in Nardelli's decision, but the greatest proponent of the lease system has undoubtedly been the premium sector automakers that so critically relied upon the rising economic tide of the last 7 years or so to sell to small and medium sized business owners, select corporate fleet and of course the credit reliant aspirant private buyer. Hence we've seen BMW vocalise their earnings hit and provision building to a value of -$1.1bn whilst Audi and Daimler are yet to declare any paper losses as of yet. They appear to be endeavouring to contain the situation, at least for now, perhaps preferring to take their heavy hits later as similar European market problems emerge or smooth-out the provision requirement over a greater timescale to lessen the obvious quarterly, half-year and full year earnings. There is even the possibly that it will try and perceptively negate the lost investor confidence of write-downs by balancing the books with new capital inflows. As it stands it seems BMW are being more transparent than its German peers, possibly because with greater volumes the condition is comparatively harder to handle and mask.
Although given their size Detroit's 3 operate far higher lease and loan agreement volumes than the European upscale peers, their deal-mix of internally financed deals vs external financing is comparatively lower, so from that perspective it lessens the comparative impact upon their need to set aside provision. Since more of their cars go out onto the open market, as opposed to being held by factory-owned or associated dealers the effect of the major car valuations slide should be paradoxically less than the closely held and managed premium Germans, and of course Lexus. - Infiniti and Acura less so.
However, as with any situation there are multiple perspectives, and a fortunate one for the Germans, if less so for the Japanese, is that the weak Dollar vs strong Euro FX rate means that the provision building which will be billed in Euros is less painful than if the two currencies were trading at a greater historic equilibrium level. Of course that plus will be of little consolation given the level of 'dealer corralled' used exposure the German's and Lexus actually have.
Recent WSJ, FT and other reports have highlighted the German corporations aim to reduce US volume so as to align to new car market demand and to undoubtedly help prop-up the pricing of used cars and so lessen the potential amounts of damaging future write-downs.
And of course, even Toyota has been affected by the slow-down in consumer demand, whilst a beneficiary of many consumer's flight from risk, their Toyota and high-margin Lexus models have taken a battering in a weary US, resulting in a 28% slump in fiscal 1st quarter profits. Even so the earnings were better than expected mainly thanks to the extra-ordinary accounting item gained from interest-rate swap contract. However, even so we suspect the charge against used car values smallest of the industry; a consequence we feel of that run to safety by buyers. The company's intended production cuts will we feel provide buoyancy to their US used car sales as buyers fear/avoid buying new and instead look for quality near-new products. That in turn will help Toyota stay ahead of the pack as economic gloom continues to bite and possibly worsens.
As we view the situation today, the accompanying graphic (top right of this page) represents only a momentary, quickly compiled 'snap-shot' of expectation of individual automakers' write-down & provision-building approaches and tactics. Each according to one of 3 'shareholder expectation plays'
It is laid out as a 3x3 table illustrating the timing of each VM's write-down absorption vs the level of comparative 'hit'. The timing is labeled as “Early Absorption” (Q208-Q209), “Deferred Absorption” (Q408-Q409) and “Ideally Avoided Absorption”. Thus this overview tries to read between the lines of VM actions, and the way it is managing its US used car pool so as to best manage investor relations, whether that be with open early-days transparency to manage expectations (for perhaps an early latter day earnings come-back) or by deferring the hit and riding the present-day's 'on or above par' share price, or possibly trying to massage and manage its way out of the problem.
[NB These are only initial perceptions, not a fully analysed prognosis]
