Automotive News - September 15, 2008 - (Page 50)

General Motors Story 13 /100 Pivot Point: Auto loans expand the market GMAC highlights Financing pioneer put more people in new cars GMAC created a new source of profits for GM and its dealers Donna Harris he creation of General Motors Acceptance Corp. in 1919 was nearly as revolutionary as the invention of the automobile itself. GMAC was the first finance company run by an automaker. Before GM established its captive, banks had lent consumers money for large purchases such as houses. But in his book My Years with General Motors, former GM Chairman Alfred Sloan said lenders initially considered automobiles luxury items. Bankers “thought of the automobile as a sport and a pleasure, and not as the greatest revolution in transportation since the railway,” Sloan wrote. Lenders thought extending credit for such an extravagant purchase was risky, he added. As a result, most buyers paid cash for automobiles. But that practice placed severe constraints on the size of GM’s potential market. In 1919, the cheapest car in GM’s lineup was the Chevrolet 490 roadster, at $715. At the same time, according to U.S. Census data, the average American had an annual income of $605. Even as demand for automobiles grew, automakers still required dealers to pay cash on delivery for their inventory. Without access to credit for dealers and consumers, the industry would have sputtered. “Dealers needed a finance company to floorplan their inventory,” said Bill Lovejoy, 68, a retired GMAC and GM executive. “That was the single most important part. After floorplan, they needed retail financing for vehicles.” One of GMAC’s earliest innovations was its “time payment plan.” The captive approved and bought finance contracts from GM dealers. “In the worst of the Depression, the rate of loss never reached 1 percent of volume — a remarkable indication of the safety of the system and the integrity of the purchasers,” Sloan wrote. © GM Corp. T 1919: GM created GMAC; opened branches in Detroit, New York, Chicago, San Francisco and Toronto. 1958: GMAC financed 40 millionth vehicle. 1985: GMAC financed 100 millionth vehicle, reached $1 billion in annual earnings, entered mortgage business. 2000: SmartAuction formed to sell off-lease vehicles online. 2001: Earnings reached $1.8 billion. GMAC has provided more than $1 trillion of financing for 150 million cars and trucks worldwide. 2002: GMAC operated in 41 global markets. 2003: Net income surged to $2.9 billion. SmartAuction sales exceeded 1 million vehicles. 2006: GM sold 51% controlling interest in GMAC to investor group led by Cerberus Capital Management. 2007: GMAC lost $2.3 billion, though auto unit reported net income of $1.1 billion. 2008: GMAC closed 75% of its North American auto finance field offices. group of investors led by Cerberus Capital Management, the new owner of Chrysler LLC. “I think the acquisition was good for GM and GMAC,” said former GMAC Chairman Robert O’Connell, 70, who is now a financial consultant. “Hopefully, it will prove good for Cerberus over time.” Last year, GMAC’s North American auto finance unit earned $1.1 billion. But GMAC lost $2.3 billion overall, largely because of exposure in the subprime mortgage business. Losses continued into 2008 as new-vehicle sales plunged. Leasing hurt, too. Gasoline prices skyrocketed, hastening depreciation of trucks. Those vehicles came off lease worth far less than the company had predicted. These leases cost GMAC $716 million in the second quarter. As a result, GMAC introduced across-the-board increases in the floorplan interest it charged dealers, tightened credit for subprime vehicle buyers and dramatically shrunk its lease business in North America. Still, O’Connell expressed confidence that GMAC’s financial problems are temporary. He said: “In five years, it will have recovered and will be a full-fledged profitable contributor to GM.” A GMAC ad: Why wait to save enough for a car when you can buy “on time”? The pioneer Independent auto finance companies preceded GMAC. In his book The Car Culture, James Flink wrote: “The manufacturers of moderately priced cars, under pressure from their dealers, by 1915 came to see installment selling as an alternative to Henry Ford’s strategy of progressively lowering the price of the Model T.” But GM was the first automaker to provide direct financing to dealers and consumers. GMAC had no captive competition for 40 years. Ford Motor Credit Co. was established in 1959; Chrysler Credit Corp. followed five years later. In the meantime, GMAC’s financial muscle and creativity gave GM dealers an edge over the competition. Bill Wolf, president of Wolf Chevrolet in Belvidere, Ill., began selling cars at his family’s dealership in 1954. His grandfather started the business in 1924. “GMAC was innovative,” Wolf said. “It developed the GMAC Farm Plan, a minimum payment plan with a balloon payment at the end. We sold a lot of vehicles on that plan. Leasing probably evolved from that. And a bank wouldn’t do it.” With the launch of other captives, “banks became more competitive,” Wolf said. GMAC met that competition with new marketing tactics. In the 1970s, Lovejoy said, GMAC pioneered nonrecourse finance contracts. Under tradi50 September 15, 2008 tional finance contracts, the dealer had to repossess the car and buy back the contract if the borrower defaulted. Nonrecourse contracts shifted that liability to GMAC, making it safer and easier for dealers to finance vehicles. In the 1980s, GMAC introduced its Smart Lease program. It provided leases, typically of 48 months or less. Because lease customers did not have to buy the vehicle when the lease expired, leasing became a more attractive option. The GM captive also launched a wholesale incentive program that rewarded dealers who financed vehicle inventory through GMAC. The program provided a better wholesale interest rate on the retail finance contracts that participating dealers made with consumers. More significant was GMAC’s development of a scoring system that rated consumer credit nationally, Lovejoy said. Before the system, he said, “We had offered customers one average interest rate. We would lose the people with the best credit. The dealer often lost the sale of the vehicle because the customer would go to a bank or credit union that would refer him to another dealer.” With the credit scoring system, Lovejoy said, “We could differentiate the rates. It gave us an edge.” research firm Experian. But Toyota Financial Services is closing in fast. Last year Toyota Financial passed Ford Credit Co. to become the No. 2 auto lender. In 2006, GM sold 51 percent of GMAC to a Multimillion-dollar scam rocked GMAC Still on top GMAC still has the highest market share of any U.S. retail auto lender, based on 2007 data from AutoCount, a business unit of the credit cquaintances of John McNamara called him a “great guy.” The Long Island Buick-Pontiac-GMC dealer was known as a philanthropist. But in September 1992, McNamara admitted bilking General Motors Acceptance Corp. out of about $443 million in a Ponzi scheme. He borrowed about $6 billion from GMAC over 11 years. A federal judge sentenced McNamara to five years in prison in 1996. “McNamara actually had good credit. He paid his bills on time for years. But he paid them by increasing the amount of float time,” said Bill Lovejoy, who was GMAC president when the operations staff discovered the fraud in late 1991. McNamara exported vehicles to the Middle East, which made it more difficult to keep track of his inventory, Lovejoy said. The inventory wasn’t confined to his dealership; some of the vehicles could be at the port or in transit overseas. McNamara used new loans to pay off older debt. To this day, the McNamara scam is a tough topic for former GMAC executives. “It’s embarrassing,” said Robert O’Connell, who was appointed GMAC chairman in 1992, after McNamara was caught in a lie. GMAC improved its system for monitoring dealer inventory and for rating dealer credit, O’Connell said. Lovejoy and other executives lost their jobs after McNamara’s swindle was made public. Ironically, GMAC made more than $1.4 billion in 1991 in spite of taking a hefty write-down for McNamara’s theft. “GMAC hit all its financial targets that year,” Lovejoy said. “But GMAC lost good people. It was tragic.” — Donna Harris AUTOMOTIVE NEWS

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