General Motors—and maybe the U.S. Treasury, hoping for a payback—has been celebrating the company’s first-quarter earnings report, which put out news of a solid $865 million in earnings on global sales of $31.5 billion. This was GM’s first quarterly profit since 2007 and may signal real progress if not a turnaround.
Where did the money come from? Paul Eisenstein says it’s owing to a lot of cost-cutting and trimming of management, a strong presence in China, and buyer acceptance of its new models, like the Chevy Equinox and Buick LaCrosse. But it will take a few more good quarters until the word “turnaround” will apply.
There’s talk about a stock offering (IPO), which may come later this year and help to repay the billions spent on the GM bailout. But there are plenty of hurdles the company will need to clear before that happens.
A big obstacle is the buyer financing problem. GM needs to increase sales to less-credit-worthy buyers in order to keep pace with its competitors. Honda, for instance, relies on so-called subprime buyers for 20 percent of its sales; GM gets 1 percent from this group.
The company’s financing arm is now called Ally Financial (formerly GMAC), of which Chrysler is part owner. The conflict of interest is palpable and ridiculous. Chrysler today announced a new agreement with Santander Bank to finance loans to subrime credit buyers, which comprise some 22 percent of Chrysler customers. GM has talked about buying back control of Ally or starting its own financing company.
The issue is important, because while very few dealers finance car sales, nearly all will arrange financing (about 70 percent, says one source, covering 11.5 million vehicles this year). Dealers, said a NADA spokesman, are paid about 1.5 percent of the loan amount for this service.
Heavy-duty politics enters the picture with an amendment to the Wall Street reform bill heading toward resolution today. Sen. Sam Brownback (R., Kans.) wants to exempt dealers from the proposed regulations, which the Obama administration strongly supports.
Lenders, said Obama, ought to be subject to the same standards as any local bank that provides loans. The Senate holds a cloture vote this afternoon that could see a vote scheduled on Brownback’s amendment.
So the dealers are fighting, arguing that it’s a restraint that would stifle their financing business. How much do they actually make from arranging car loans? Good question: Try getting your dealer to give you an answer.
Some think it would be a good idea to completely rewrite the laws governing auto financing (and dealer assistance in that financing). What do you think?