US and UK carmakers seek help for captives as turbulence spreads

Carmakers on both sides of the Atlantic
have beseeched their respective governments for financial aid –
both for their manufacturing and for their finance operations. In
the US, General Motors, once the world’s largest manufacturing
business, together with Ford and Chrysler, is going cap in hand to
Congress for a bailout to prevent bankruptcy, while in the UK, a
consortium of carmakers coordinated by the Society of Motor
Manufacturers and Traders (SMMT) is asking the government for cheap
loans to help finance the consumer lending carried out by their
captive finance arms.

The US car manufacturers are seeking additional lobbying power
by asking their franchised dealers and dealers’ employees to
contact their congressional and senate members to voice support for
extra funding. This represents some $25bn (£14.7bn) in loans that
would be added to the $25bn already approved by the US Congress a
few weeks ago.

Many industry observers believe that, without more cash,
America’s carmakers could go under, which would lead to hundreds of
thousands of job losses. However, the lobbying by Detroit’s
manufacturers – and their related finance units – to ensure that
they receive a bailout along the lines of that given to the US’s
banks has caused controversy, with politicians and commentators
voicing worries that financial help extended to Detroit would be
good money thrown after bad.

Lobbying steps up

The significance of the US carmakers’ move was not lost upon the
UK’s SMMT and the Retail Motor Industry Federation (RMIF), which on
November 19 jointly called for “urgent action” from the UK
government in the form of an automotive industry support package,
to include “allowing vehicle manufacturers’ finance companies
access to funding available to banks through the special liquidity
arrangements [which] would help them to support customers and their
franchise networks.”

In a letter to chancellor Alistair Darling and Lord Mandelson,
secretary of state for business, the SMMT and RMIF urged the
government to use the pre-Budget report to scrap the planned
increase in vehicle excise duty (VED) and the First Year Rate from
2010/2011 which they claimed would “send a strong signal to buyers”
and “help to improve residual values”.

The associations’ wishlist for the government included an
increase in capital allowances for fleet buyers to stimulate
immediate demand in the commercial vehicle market, and the shelving
of plans to reform business car capital allowances, as well as
removing the expensive car restriction.

BVRLA “disappointed”

However, the RMIF/SMMT’s letter prompted John Lewis,
director-general of the British Vehicle Rental and Leasing
Association (BVRLA) to say he was “surprised that the SMMT and RMIF
would call for these measures without discussing the issues with
some of their largest end users” – namely BVRLA members, who
account for over 44 per cent of new car registrations each year.
The BVRLA said that VED increases are “a vital government tool in
incentivising motorists to buy and use cleaner, more fuel efficient
vehicles” – although it conceded that “the scale of the increases
on some higher-emission cars are overly punitive on people who have
already made a purchasing decision.”

Meanwhile, on capital allowances, the BVRLA said: “Most
companies will struggle to make a profit this year, so enabling
them to offset more of the cost of their vehicles against their
corporation tax bill is not going to be much of an incentive in the
short term. What firms need is better access to reasonably-priced
vehicle funding from all sources, not just manufacturers’ finance
companies.”

As alternative stimuli to demand, the BVRLA suggested
temporarily reducing fuel duty or VAT on fuel, and a financial
incentive to scrap older cars.

A European crisis

In response to the current crisis new car registrations in
Europe fell by 14.5 per cent in October 2008 – mirroring the
performance of UK sales by being the sixth consecutive month that
volumes have fallen.

Figures supplied by the European manufacturers’ body, ACEA,
reveal that year-to-date figures are also down by 5.4 per cent.
There were some 1.1m European new car registrations in October,
bringing the 10-month total for the year to 12.8m vehicles.

European leaders returning from the G20 meeting in Washington at
the weekend were faced with immediate calls from the auto industry
for individual company and factory bailouts, help for finance
captives and breaks for consumers so they can start buying cars
again.

The lobbying led to a planned meeting in Germany between
government ministers and heads of General Motors Europe, and its
German arm Opel, as their parent seeks to avoid bankruptcy. Opel,
which employs some 26,000 people in Germany, wants the German
government to guarantee loans from banks.

As Motor Finance went to press German politicians were adopting
a hard line with the manufacturers with Chancellor Angela Merkel
and Finance Minister Peer Steinbrück ruling out a bailout for the
auto industry as a whole – for what Steinbrück described as “crisis
freeloaders”.

Captives in new bailout plan

Volkswagen is reported to be seeking guarantees from the German
state for its captive subsidiary VW Financial Services. The aim is
for the government to co-sign the company’s bonds to enable the
captive to re-finance itself at more affordable rates of
interest.

The manufacturer currently re-finances around 30 per cent of its
business by issuing corporate bonds. Another 18 per cent comes from
bank deposits while a further 14 per cent reportedly stems from
asset-backed securities.

BMW’s management is reportedly undecided on whether to make use
of state guarantees for its finance captive although Peter
Pollhammer, deputy head of the German association for consumer
lending (which represents manufacturers’ finance captives) and head
of Toyota Motor Corporation’s German banking unit stressed that the
government should extend its rescue package to “those financial
institutions holding banking licences to those that lease
vehicles”.

No temporary bandage

Meanwhile, for General Motors, teetering on the brink of
bankruptcy, the choices are stark. If extra funding is made
available industry observers expect the US government to demand
significant changes including amendments to labour agreements,
reduction of dealer outlets, axing of several brands,
re-negotiating supplier contracts and possibly new leadership at
General Motors Corporation.

It has happened before – in the 1980s Chrysler was re-structured
out of bankruptcy. However, if the US government makes a financial
commitment to Detroit, it will be coupled with a plan consisting of
many complex parts. It, and its European counterparts, will want to
put their money into carmakers that will survive long term – not
just to provide a six-month bandage. And the same applies to the
captives.

Brian Rogerson