By John D. Stoll
Once upon a time, many ribbed General Motors Co. for being a
loan maker that happened to build cars. When times got tough, the
company dropped its mortgage and auto finance business and the
jokes ended.
Nearly a decade later, an ambitious plan to stage a comeback as
a lender has serious implications for the company's broader
financial targets. The four-year-old GM Financial--a fully-owned
subsidiary formed through the $3.5 billion acquisition of
Texas-based subprime auto lender AmeriCredit Corp.--has lofty
expansion plans this year, and executives expect to start raking in
bigger profits by 2016, just in time to help GM Chief Executive
Mary Barra apply those earnings to her margin goals.
GM reports earnings on Wednesday, and Chief Financial Officer
Chuck Stevens will likely reiterate a lackluster profit outlook for
GM Financial this year. Last month, he told investors GM Financial
is in "growth mode" and expansion-related costs mean earnings will
be "flattish" against 2014.
Known as a captive lending arm, GM Financial is poised to
finance a substantially bigger portion of GM vehicles in 2015, a
period of sales growth.
However, GM Financial still needs to invest in systems and hire
more people, and this will weigh on near-term earnings.
GM Financial made $684 million before interest and taxes through
September, on par with 2013. GM Financial's profit represents 17%
of GM's entire operating profit through three quarters, while Ford
Credit makes up 27% of Ford Motor Co.'s mix.
For the time being, the credit arm likely has negligible
opportunity to turbocharge GM shares, which have been stuck in
neutral during Ms. Barra's tenure.
But Mr. Stevens has said GM Financial should deliver bigger
returns in "2016 and beyond." In order to get there, the unit needs
a higher mix of unsecured debt and to stay aggressive in ripping
business from Ally Financial, the successor company to the GMAC
lending arm controlled by GM until 2006.
Ally has for several years provided a disproportionate mix of
the loans and leases for GM's global car and truck sales. But, as
GM Financial expanded lending to new international markets and
became more capable of lending to a wider swath of buyers,
originations are shifting from Ally to GM's in-house lender.
In a January interview with Automotive News, a trade
publication, GM Financial COO Kyle Birch said the unit in November
and December wrote more leases for GM than Ally on a percentage
basis for the first time.
On Tuesday, GM Financial will tighten its grip on GM's U.S.
leasing business, which represents a substantial portion of total
sales.
Lease deals on Buick and GMC vehicles, priced below market due
to subsidies given by GM, will be exclusively offered through GM
Financial, leaving Ally and others out in the cold.
Analysts generally applaud GM Financial's growth plan. The
industry has long seen captive finance arms as strategic assets,
helping fund dealers as they stock inventories, and shoppers
looking for deals. The hefty profit these units can reap helps
offset weakness in automotive operations that can crop up all over
the globe.
Ally Chief Executive Michael Carpenter, however, said GM's plan
to invest big in GM Financial is risky.
"These captives all have very high cost of capital," Mr.
Carpenter said in an interview last week. "They don't have the
leverage available to the bank."
When it comes to selling vehicles, Mr. Carpenter said "a
well-managed set of relationships between the OEM [original
equipment manager] and independent financiers is likely to sell
more vehicles." He suggested the race to build GM Financial may
show too much focus on earnings, too little focus on use of
capital.
Julie Steinberg contributed to this article. The Week Ahead
looks at coming corporate events.
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