The publication of Ford and GM‘s 2005 accounts has once again demonstrated how crucial captive financing is to carmakers’ survival. Without Ford Credit, Ford would have posted nearly $4 billion in losses instead of $2 billion in net profits. Similarly, without GMAC, GM would have lost more than $11 billion instead of $8.6 billion.

All of which makes GM’s current attempt to sell off its majority stake in GMAC.1 All the more surprising, this shock decision is a reflection of the American automobile groups’ very poor stock market performance, and more specifically of the downgrading of the debt they have mainly accumulated in their financial subsidiaries’ names. Standard & Poor’s has assigned a BB rating to debt that was first issued by Ford and GM and later by Ford Credit and GMA,2 giving it something akin to junk bond status. Because of the very high costs that captive finance companies are being asked to pay to access the financial resources they need to refinance their outstanding loans, this development has undermined their competitiveness. What analysts have deduced from this is that captive finance companies need to dissociate themselves from their carmaker parents and offer majority stakes to banks, the only institutions capable of improving their debt ratings.

If this were to happen, as appears likely at GM at least, we will be witnessing a major shift in the automobile industry. Not only are the aforementioned financial subsidiaries sources of profits, but since the 1920s they have also comprised key constituents of carmakers’ market power.3 By turning its back on this business, GM is depriving itself not only of the support that a captive finance company can offer the Group’s car sales activities but also of the means to control its dealers, a role that GM is not given under American law but which it assumes when acting as the dealers’ banker. Preferring S&P to Chandler, Wagoner also means forgetting Sloan, who from the very outset had realised how crucial this lever can be in activating the “invisible hand”.

_______________
1. According to The Wall Street Journal dated 16/02/06, a group led by the hedge fund Cerberus Capital Management and a Citigroup subsidiary have taken the inside lane in negotiations concerning the acquisition of a controlling stake in General Motors Acceptance Corp (GMAC). The sums evoked range from $10 to 15 billion.
2. Re: GMAC, see The Financial Times dated 24/10/05. For Ford, see La Tribune dated 24/01/06.
3. On this subject, see an excellent paper by S. Clarke, called “Closing the deal: GM’s marketing dilemma and its franchised dealers, 1921-1941”, Business History, special issue The emergence of modern marketing, volume 45, I, January 2003, pages 60-79.