Credit crunch hits dealers
BY JOHN MELLOR AND MARTON PETTENDY | 28th Oct 2008
Dealers face the prospect of having no cars to sell if the departing finance giants GMAC and GE Money as well as the car companies affected cannot organise funding.
The stunning news has emerged in the same week the federal government is expected to reveal its new $2 billion-plus automotive manufacturing industry blueprint for the next decade, which is expected to implement many of the Bracks review recommendations revealed in July, including a reduction in new-car import tariffs from 10 to five per cent in 2010.
But the acutely accelerated credit squeeze faced by car dealers, who rely on finance companies to fund the cars they are holding for sale and forms a significant part of Australia’s retail car inventory, has far greater implications in terms of job losses throughout the nation’s 3600 retail outlets.
Big two lenders pull out
General Motors Acceptance Corporation (GMAC), which was established in 1926 as a wholly owned subsidiary of GM, announced last Wednesday (October 22) that GMAC Financial Services will cease operations in Australia and New Zealand from December 31.Spelling the end of 185 jobs for Australia’s oldest vehicle financier, the move follows the loss of more than $3 billion in net losses globally so far this year, which has forced GMAC to shed non-core operations in a declining global economy.
Two days later on October 24, a second major US-based finance company in GE Money also announced it will no longer offer automotive, home and small business loans because they offer a relatively low return on investment, making about 335 employees redundant over the next year, including about 136 in Victoria.
GE Money has $1.4 billion invested in motor dealer financing, including capital works funding, or about 17 per cent of Australia’s wholesale car finance business.
It owns more than 40,000 new and used cars as part of its automotive financing business, which covers more than 200 new car dealerships in Australia and about 60 used car dealers. Clients include many of the nation’s biggest dealers for Holden, Ford, Toyota, Mazda and Audi.
GMAC has about half the market share of GE Money, but between then GMAC and GE hold about 50 per cent of the consumer finance market – and more than half of the vehicles stocked by dealers in their floor plans. Australia’s total car finance industry is believed to be worth between $25 and $30 billion.
Rescue plans take shape
The NSW Motor Traders Association told GoAuto it would meet with GMAC, GE Money and at least one major unnamed bank yesterday (October 28) in a bid to secure alternative financing arrangements for its members, which include 470 new-car dealers and about 800 used-car dealers in NSW, in which about a third of all new cars are sold in Australia.“With GMAC and GE pulling out of the market there’s a big black hole there that needs to be filled very quickly,” said David Smith, senior manager divisional services for NSW MTA.
“We’ve got a two-pronged problem here. One, you’ve got consumer finance, but also of significance importance to dealers themselves, GMAC and GE provided finance for more than half of all dealer stock and floor plan arrangements. Some of them have millions of dollars in stock that was financed through GMAC and GE and that’s the only way the industry can survive.
“So if the dealers can’t get credit to finance their stock holdings where they require it, then that’s a significant problem for them.
“Some of them a very good businesses, with many employees, good credit ratings and no problems whatsoever, but they could well find themselves in difficulty getting finance. We’re concerned because a good business might go over simply because they can’t get the credit they need for their day-to-day operations.
“We’re confident something will be resolved but anything can change.” Mr Smith said he believed some existing automotive finance lenders, including Esanda, St George and Capital Finance, currently had full books after reducing their capital pools, making car finance more expensive and more difficult to obtain even before last week’s announcements by GMAC and GE Money.
“Let’s just say what we’re doing comes to fruition. With the reduced competition in the marketplace combined with the cost of money at the moment, yes they will be paying higher rates – there is no doubt about it.” GoAuto understands automotive industry consultancies have urged their clients to get their financial documents in order, and to shed their current vehicle stocks as quickly as possible, slashing their profit margins and creating bargains for customers.
Asked if he expected smaller car retailers to close as a result, Mr Smith said: “Most definitely, and their only fault might be that they don’t have the financials that are acceptable in the current climate to lend them money.
“Some may be in very good financial shape - they might just have incomplete financials (records), they might be a new business, they might have a higher gearing, the security they might have to put up might not going to be as good as the next dealer’s.
“They are going to find it hard, because while I don’t think we’re quite at the credit rationing stage, in effect that’s happening already because if you’ve got any risk then it is harder to get finance.” He said an alternative financing deal would not be forthcoming immediately and that some higher-risk dealers may be excluded, but was confident a deal would be concluded.
“There are a lot of details to be worked out in terms of that business understanding dealer business. So to expect a deal tomorrow would be premature, but I’m confident. I couldn’t comment on what deal might come out of it, but some higher-risk dealers may be cut out of it.
“If this doesn’t go through – and remember we might get a deal that is unacceptable to the industry – there are certainly other places we can approach because this is a big industry and it is worth someone’s while to put a process in place,” said Mr Smith.
Less competition, greater opportunity
New Esanda managing director Moray McDonald told The Australian newspaper this week his company “is well placed to take advantage of the opportunities that are opening up to selectively grow our business.” The acting general manager of St George car finance, Bob Dwyer, told GoAuto the pull-out provided opportunities but financiers might be limited in how quickly they could fill the funding gap.“As part of business as usual we have our growth strategies and growth objectives but obviously the opportunities that are around with so many dealers needing funding at the moment far exceed normal growth.” He said that existing St George customers needing funding for other dealerships in their portfolios would be considered on a case-by-case basis.
“At present we are seeking direction from the bank on the level of appetite there is for take-up on the dealerships that need a home for their funding,” he said.
He added that St George would need to completely review its capacity to service a sudden increase in customers with computer system and people.
GE Automotive Finance managing director Greg O’Callaghan said his company would assist his clients to find alternative finance, but makes no guarantees.
“We are unquestionably helping our clients to find alternative finance. We are in meetings with other financiers trying to find a soft landing,” he told GoAuto.
“However that is no guarantee (that all dealers will get coverage). There are three dealer types. The very strong financially, the very weak financially and in the middle is the grey zone who fit somewhere in between.
“So the very weak are going to be a challenge in any market let alone this market. But we are working on that. It is going to be difficult for dealers and we are going to try and help them as best we can within reason.”
The auction option
Mr O’Callaghan said that termination notices will be sent giving dealers 60 day to clear wholesale stock funded by GE.Asked what would happen to vehicle still unsold at the end of the 60 days, Mr O’Callaghan said: “We have not worked that out at this stage.
Asked if GE would reclaim the cars and sell them at auction, Mr O’Callaghan said this was not a course action GE would like to undertake but warned dealers that it was “a serious option”.
“This is not something that sits in the operations manual. We will have to work that one through, but it will be very clear that everyone will have 60 days to terminate their facilities. That means they have 60 days to get another financier.” Ironically, Nissan Financial Services Australia started operating on October 1, this year, 10 years to the day after it relinquished its business to GE. Executive director George Leondis told GoAuto his company’s focus was Nissan’s dealer network, only a small proportion which was financed by GE Money.
Mr Leondis said that funding secured some time ago by Nissan Finance was “pretty much locked in” based on projected growth before the pullout of the finance giants.
“We are dealing now with a very different set of circumstances in that there is only a limited amount of money to underpin our projected strategy. We have a strong balance sheet but we don’t have an unlimited balance sheet.
“Right now it is very hard to see how things will pan out for everyone because we will not have enough (funding) to cover everyone.
“And it is not just us. Nobody has enough for everyone. Our competitors, while I am not going to comment on their behalf, would also not have enough to transition the complete GE portfolio quickly.” Mr Leondis said the prospect of GE selling its remaining cars through the auction system after 60 days was “unthinkable”.
“I cannot imagine that taking place otherwise GE becomes the biggest new and used car dealer in the southern hemisphere.
“I think GE would need to be more flexible on this because the alternative is unthinkable. I cannot image them taking positions like that where they would call back (the unsold cars at the end of 60 days),” he said.
Some industry analysts told GoAuto they believed GMAC and GE would not flood the auction market with new vehicles because of the significantly reduced revenue that would generate (quite apart from the reduction in new-car residual values that would result). They said that if that situation occurred car companies would have no option but to supply new vehicles on consignment until sold.
GMAC like GE is organizing meetings with other financiers for securing dealer wholesale finance.
GMAC local management is saying they see their role now as finding alternative financing for their dealers both as a way of maximizing the amount of money GMAC can take home and because they want to have a future in the industry and don’t want to be seen to be burning dealers they might want to be dealing with in the future.
Who is affected?
GoAuto understands GMAC finances the floor stock of 88 of Holden’s 265 dealers, but Holden spokesman Jonathan Rose stressed the company would work with its dealers to assist them in obtaining alternative finance arrangements.“GMAC is an independent business that operates separately from Holden and this was a GMAC decision. This announcement does not impact core Holden business such as our manufacturing operations,” he told GoAuto.
“A large majority of Holden dealerships are not impacted by this announcement and those that have been affected as independent businesses will be investigating new finance arrangements.
“The dealers that are impacted by the decision are independent businesses, so as independent businesses they will be investigating those new finance arrangements over this coming period.
“We can’t comment on the business of our dealers. Certainly Holden works closely with its dealers, but at the same time those dealers are independent businesses and make the decisions that meet their business requirements.
“The approach to managing GMAC’s decision will be worked through over the coming months will be worked through on a dealer by dealer basis. Certainly Holden is in regular touch with its network of dealers. It will be an ongoing process.
“We have an undertaking from GMAC that it will work with each dealer during their transition to new financial providers,” said Mr Rose.
Of Toyota Australia’s 210 dealers and 277 retail outlets only 10 are financed by GMAC and GE Money, with 80 per cent financed by the AAA-rated Toyota Finance.
A company spokesman said that while Toyota Finance funded dealers of other franchises, its charter is to support Toyota and its dealers to grow sales and that it would not take the opportunity to finance affected GMAC/GE clients.
Ford Australia spokeswoman Sinead McAlary said the motor financing shake-up would have little direct impact on the company's dealers because none of them are financed by GMAC, although some are financed by GE Money. Many Australian Ford dealers are financed by the company’s own Ford Credit finance arm, whose US parent company is also struggling.
US investment consortium and Chrysler owner Cerberus Capital Management LP acquired 51 per cent of GMAC from GM in 2006 and former GM-affiliated brands Subaru and Suzuki still have many Australian dealers financed by GMAC.
Subaru Australia said about a third of its 108 retailers are financed by GMAC under an agreement that was due to terminate on April 16, 2009. However, managing director Nick Senior told GoAuto Subaru was negotiating with GMAC for an earlier transition to another financier.
“We're in negotiation with other finance houses and are confident of finding alternative providers. Our book is extremely attractive and while we are talking to several other providers, we've also been contacted by other interested parties in the last 48 hours,” said Mr Senior on Monday.
About 15 per cent of Suzuki dealers in Australia were funded by GMAC, but Suzuki Australia general manager Tony Devers said some had already found new finance.
“The industry is going through massive change and it's just too early to call what the outcome will be. Across all franchises, there will be some dealers who may not be able to attract a finance supplier, but it's too early to say who or how many,” Mr Devers told GoAuto.
“In the long run there will be significant changes relating to capital loans, used cars and consumer finance, but it's too early to predict the exact structure of the revised business.
“It is fair to say that demand will exceed supply in regards to finance.
“As with all situations, there are opportunities, and we are confident Suzuki can take advantage with the right product at the right time, such as with the Alto in the second quarter of 2009.
“Overall, we are in a very strong position to weather the storm, with sales up seven per cent year on year, against the market which is up less than 0.5 per cent.” Perth-based Automotive Holdings Group Ltd (AHG) has moved to assure its shareholders that it is working to replace GMAC within its network of existing finance providers.
“AHG has been working towards replacing its GMAC facilities from within its existing network of finance providers as part of a review of its floor plan funding arrangements,” said AHG in a statement. “It expects to complete its new funding arrangements well before GMAC's withdrawal date.”
Don’t panic, says FCAI
Federal Chamber of Automotive Industries (FCAI) chief executive Andrew McKellar said it was monitoring the ongoing automotive financial crisis, but called for calm in the industry.“We need to work through that with a sense or urgency but in a deliberate and systematic fashion and I don’t think anybody should be pressing the panic button,” he told GoAuto.
“I think we should work through the issue systematically and ensure that we are able to inform the market and government about precisely what is going on out there on the ground.
“We are looking at the situation and obviously talking to our members about what is occurring out there in the marketplace.
“Our concern is to ensure that there’s a good understanding as to what exactly is occurring and to ensure that the industry is coordinated in the position that it puts to government as the situation develops to ensure that any dislocation that occurs is minimised, that whatever workarounds need to be implemented to ensure there is stability in the marketplace that’s achieved.
“So at this stage we’re not seeking to play the situation up. We’re working with our members to develop a better understanding as to what is unfolding in the marketplace but it’s clear these circumstances are fundamentally being driven by events that are occurring at a global level, but equally we’re concerned to ensure that whatever domestic policy responses are being implemented, that they are not exacerbating the current tightness in terms of liquidity in the market.
“I’m sure that in many case the brands are working with their dealers and implementing plans to address the situation. I am aware of a number of instances where that is already occurring,” said Mr McKellar.
Asked if he expected finance costs to rise as a result of GMAC and GE’s pull-out, Mr McKellar said: “It would be premature to speculate on what the full affects could be.
“This is clearly an unusual situation, one that has been precipitated by significant dislocation that’s occurring at a global level and that is having and impact on the market here domestically.
“The question would be whether or not there are now new players who may emerge, who may see an opportunity to step into the marketplace. That is hard to know and obviously there are some efforts to encourage that possibility, but really I think at this stage it’s entirely premature to speculate what the longer term impacts might be.”
Even tougher times
THE new finance crisis, in addition to recent job cuts at both local manufacturing and supply levels in Australia, remains insignificant relative to the upheaval in the US automotive industry, but one senior car company executive, who did not wish to be named, told GoAuto he believed the credit squeeze had hit the automotive industry at precisely the worst time.“In a month that has already brought a sharp downturn in sales, when we need all dealers totally focussed on selling cars, a large number have to take their eyes of the sales ball and maintain their finances. It is yet another blow to an industry that is already struggling “The situation is further exacerbated by the fact that a number of car manufacturers have also been forcing additional stock on their dealers. A lot of dealers have a lot of stock at the moment, which has escalated the need to get new finance for their floor plans, which are already fully overloaded.
“Going on in the background is the whole currency situation, which restricts car-makers in terms of their ability to trade out of it and comes on top of a serious lack of consumer confidence in the economy, slowing sales, slowing car servicing as the economy slows and now finance problems making it difficult for dealers to continue trading.
“The ongoing shift to imported cars means more people than ever work in the new car retail industry – much more than in the manufacturing industry.”
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