Detroit Uses Aid to "Open-Up" Auto Lending: Not Necessarily Good for GM

| About: General Motors (GM)

A recent Bloomberg article discussed how GM and Chrysler have been using government aid to "open-up lending" and mitigate the slide in automotive sales:

(From Bloomberg): "April 6 (Bloomberg) -- U.S. sales are “starting to open up” as $7.5 billion in aid to the lending arms of General Motors Corp. and Chrysler LLC eases a loan logjam for buyers that helped drag the industry to its worst slump since 1981.

The automakers’ sales declined less than analysts expected in March after GM affiliate GMAC LLC received $6 billion from the U.S. Treasury in December, allowing it to loosen lending standards, and Chrysler Financial Corp. got $1.5 billion in January to foster borrowing for retail transactions.

Tight credit had combined with low consumer confidence to slash new-vehicle purchases. While it’s too soon to expect a robust recovery, dealers and others say, the federal support is helping stabilize the industry.

“It’s starting to open up,” said Alan Helfman, vice president of River Oaks Chrysler Jeep in Houston, who estimates he lost a quarter of his November and December sales to rejected loan requests. “We’re starting to be able to sell more cars. It’s not like it used to be yet, but it’s getting better.”

U.S. auto sales tumbled 37 percent in March as record incentive spending and the availability of credit to higher-risk buyers helped mitigate the effect of the highest unemployment since 1983 and consumer confidence near a 42-year low…

...Late in March, GMAC began lending again to buyers with credit scores of less than 621, after stopping in October.

Helfman, the Houston dealer, said about 25 percent of buyers had loans rejected last month, a decline from roughly 40 percent in the fourth quarter of 2008. The usual rate is about 10 percent to 15 percent, he said.

‘Perfect Paperwork’

“You still have to have perfect paperwork: All the facts had better match up,” he said. “At least they’re lending.”

Auto sales last month ran at an annualized rate of 9.86 million, an improvement from the 9.1 million rate in February that was the worst since December 1981. The March total also beat the 8.8 million estimate of 8 analysts surveyed by Bloomberg. U.S. sales were 13.2 million in 2008 after averaging about 16 million this decade."

A couple of things about this:

Halting the Slide: turning in abysmal results that are slightly better than the analysts expectations does not a positive trend make, anecdotal evidence aside it's far too early to call this a positive trend just yet. Especially when it's quite likely that the economy will continue to worsen through the end of the year, especially with respect to unemployment.

Lending: I have to admit that I cringed when I read the passage about GMAC ending its prior moratorium on lending to consumers with FICO scores below 621, call me crazy increasing your loan originations to those with bad credit (especially in a weakening economy) sounds like a recipe for future disaster. This is especially true when you factor in GM's new "payment protection plan", which will cover the loans of people who lose their jobs for a period of nine months. Just think about it: lending to people with FICO scores below 621 (let alone 650 or 675) + a worsening employment situation = GM taking it on the chin with this one.

If you're going to cover people's payments if they lose their jobs you need to start lending to higher quality customers, not lower.

Overall while this is undoubtedly good news for the dealers, I'm not sure that it's truly good news for GM in turns of contributing to the company's turnaround. Just think about it: GM was losing money per car sold during the credit boom when sales volumes were much higher, and the company wasn't offering the same level of incentives. How do you think GM's profit potential per car looks now, in the era of greater sales incentives, low interest rate financing, payment protection and the new program that protects your car's resale value? The company isn't exactly giving cars away right now, but it's getting closer and closer by the minute.

While the company's various cost cutting initiatives will mitigate the financial impact of the above, the fact remains that no company ever turned things around by selling their products/services for a loss. Detroit needs to understand that it's better to sell fewer cars for a profit, than a greater number of cars for a loss. "Making it up with volume" isn't going to work in an environment where volume is rapidly decreasing.

You can read more here.

Sources: "U.S. Sales 'Open Up' on Aid to GM, Chrysler Loan Arms" -- Jeff Green, April 06, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

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Tagged: , Auto Manufacturers - Major
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