What ever happened to the Ford "cracking down on" ADMs?

[dfwford]

This is simply not true. Let's clear it up before people start believing it. I remember many years in the past where automakers earned more from financing than actually building and selling cars. For Ford, 2020 was such a year. Even in 2021, when Ford made more in the "Automotive" segment, there is no way you can call $4.7B a "relatively tiny portion of the company." It's not *that* hard to read an annual report.
https://s201.q4cdn.com/693218008/files/doc_financials/2021/ar/Ford-2021-Annual-Report.pdf

For a company that brings in $158 billion in revenue per year and has nearly 200K workers, a subsidiary with only $10 Billion in revenue and ~5,000 employees is definitely a tiny part of it.

Granted, Ford Credit has been an extremely profitable operation for how small it is, and given the circus that is Ford's manufacturing/R&D operations right now (with all the failed launches / recalls and the supply chain pressures in part because of their abysmal relations with suppliers), you are correct that any little bit which helps to keep the broader company from as deep in the red as possible helps.

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[bloominguez]

For a company that brings in $158 billion in revenue per year and has nearly 200K workers, a subsidiary with only $10 Billion in revenue and ~5,000 employees is definitely a tiny part of it.

Granted, Ford Credit has been an extremely profitable operation for how small it is, and given the circus that is Ford's manufacturing/R&D operations right now (with all the failed launches / recalls and the supply chain pressures in part because oft heir abysmal relations with suppliers), you are correct that any little bit which helps to keep the broader company from as deep in the red as possible helps.

Except we weren't talking about the number of employees, were we? The discussion at hand was about how people are financing vehicles, and whether banks and other lenders (Ford!) will get burned.

Ford and the banks will likely regret the terms they are giving on the (mostly) depreciating assets. House of cards for sure. Good time to be out of the car market as a buyer.

You seemed to assert that this would be no big deal, that the revenue from Ford Credit was "a relatively tiny portion of the company."

To clarify the bolded, Ford already has their money from the dealer (who is their customer) once a car leaves the plant.

They do make *SOME* revenue off their financing arm (Ford Credit), but it's a relatively tiny portion of the company.

Maybe so, maybe the *revenue* from Ford Credit is small, but the PROFIT from Ford Credit is hugely important to Ford, as their financial statements show. Not just Ford, by the way. There's a reason automakers try to push you to their in-house financing divisions.

Back to the original point. If I didn't state it clearly, I'm agreeing with Stangomydreams, above. I believe that Ford and other lenders could get burned if they're too generous with financing. This is a big part of Ford, from a profitability point of view. I don't think it's correct to minimize the potential impact by saying Ford Credit is a small part of the company.

 

[dfwford]

I will say, however, Ford Credit may have been profitable up until this point, but with interest rates / delinqunecies rising (plus the possibility that we could be headed into a severe recession), its good fortunes might be coming to an end. It already saw a significant drop in profit from 2021 to 2022.

 

[shogun32]

There's a reason automakers try to push you to their in-house financing divisions.

And when the finance division blows up it can take the entire company with it. As has happened several times previously. Vendor lending is typically the loosest and most irresponsible lending option out there. Eg. Ford just put all Mustangs at 0/60 whereas any other lender with a modicum of common sense is writing >5% terms.

Part of why GM failed and needed a bailout was directly attributable to their finance division, since renamed Ally. I'm sure there's all kinds of rotten paper written in 2020-22 that's going to bite Ford badly. If the economy does a repeat of 2008, there's a crap ton of Prime paper that is going to go bang. Indeed it's already been happening - 90 day late and repo of Prime are double what they should be and the downturn has barely started.

 

[dfwford]

Back to the original point. If I didn't state it clearly, I'm agreeing with Stangomydreams, above. I believe that Ford and other lenders could get burned if they're too generous with financing. This is a big part of Ford, from a profitability point of view. I don't think it's correct to minimize the potential impact by saying Ford Credit is a small part of the company.

I guess it's my point that wasn't clear.

I read the comment "Ford and the banks will likely regret the terms they are giving on the (mostly) depreciating assets." as if it were implying that Ford as a whole would be hard hit by high interest rates, which seemed alarmist to me. Ford Credit for sure would be impacted, and maybe even Ford to the extent that demand for their cars would go down. But Ford itself doesn't set the terms and they will still be making plenty of money in other ways (unless of course the entire Auto Industry collapses and SAAR hits rock bottom ala. 2008).

Further to the point, Ford could easily sell off Ford Credit (and likely for a tidy sum) with minimal operational impact to the broader company, and also use the proceeds to shore up parts of the company that aren't as profitable. GM did exactly this in 2006 with GMAC.

 

[bloominguez]

I guess it's my point that wasn't clear.

I read the comment "Ford and the banks will likely regret the terms they are giving on the (mostly) depreciating assets." as if it were implying that Ford as a whole would be hard hit by high interest rates, which seemed alarmist to me. Ford Credit for sure would be impacted, and maybe even Ford to the extent that demand for their cars would go down. But Ford itself doesn't set the terms and they will still be making plenty of money in other ways (unless of course the entire Auto Industry collapses and SAAR hits rock bottom ala. 2008).

Further to the point, Ford could easily sell off Ford Credit (and likely for a tidy sum) with minimal operational impact to the broader company, and also use the proceeds to shore up parts of the company that aren't as profitable. GM did exactly this in 2006 with GMAC.

Ah, I see now where you and I fundamentally disagree. Count me in the alarmist camp, I suppose. Either way, I'm enjoying the discussion.

I don't think Ford continues to exist without Ford Credit. They can't afford to build vehicles (and, importantly, develop the next generation of vehicles) without that profit. The two parts of the company only work together.

Building vehicles only works because it allows Ford to also capture profit financing many of those vehicles. Ford Credit works because it has a preferred seat at the table, it's always an option when buying a Ford. Ford can offer credit selectively to help the manufacturing business. When times are slow, Ford can drive demand to some degree, keep certain plants running, by using Ford Credit to offer aggressive credit. Right now, when vehicles are more scarce than I've seen in my lifetime, should not be one of those times.

You say GM sold off GMAC in 2006. My response: When did GM go bankrupt? Was it before or after they sold off GMAC?

 

[dfwford]

Ah, I see now where you and I fundamentally disagree. Count me in the alarmist camp, I suppose. Either way, I'm enjoying the discussion.

I don't think Ford continues to exist without Ford Credit. They can't afford to build vehicles (and, importantly, develop the next generation of vehicles) without that profit. The two parts of the company only work together.

Building vehicles only works because it allows Ford to also capture profit financing many of those vehicles. Ford Credit works because it has a preferred seat at the table, it's always an option when buying a Ford. Ford can offer credit selectively to help the manufacturing business. When times are slow, Ford can drive demand to some degree, keep certain plants running, by using Ford Credit to offer aggressive credit. Right now, when vehicles are more scarce than I've seen in my lifetime, should not be one of those times.

You say GM sold off GMAC in 2006. My response: When did GM go bankrupt? Was it before or after they sold off GMAC?

GM did go bankrupt in 2009 after selling off GMAC but as stated, it was with circumstances that were exceptional.

If we're staring down the barrel of another 2008 Auto Industry collapse, then I think you would be onto something about Ford's future. It's too soon to make that call though. Despite high interest rates, auto sales still remain healthy. Also, Ford and other OEMs are benefiting from sellling higher margin vehicles than they did in the run up to 2008, more fuel efficient vehicles, and oil prices aren't too outrageous (they were pushing $150/barrel before the bottom fell out in 2008).

Ford does needs to get its quality problems and customer/supplier relations under control sooner than later though. GM has, and they're benefitting greatly from it as their last earnings report showed.

 

[bloominguez]

GM did go bankrupt in 2009 after selling off GMAC but as stated, it was with circumstances that were exceptional.

If we're staring down the barrel of another 2008 Auto Industry collapse, then I think you would be onto something about Ford's future. It's too soon to make that call though. Despite high interest rates, auto sales still remain healthy. Also, Ford and other OEMs are benefiting from sellling higher margin vehicles than they did in the run up to 2008, more fuel efficient vehicles, and oil prices aren't too outrageous (they were pushing $150/barrel before the bottom fell out in 2008).

Ford does needs to get its quality problems and customer/supplier relations under control sooner than later though. GM has, and they're benefitting greatly from it as their last earnings report showed.

I'm in no position to know how 2008/2009 would have played out for GM in different circumstances. But I do know that sometimes cash flow issues drive bankruptcies, even if the underlying business is sound, and without GMAC I think GM was more vulnerable. I don't think it's a coincidence that GM went bankrupt after selling GMAC.

This is a decent summary, I think:
https://abcnews.go.com/Business/story?id=7722148
See items #2 and #4 in that article, particularly the end of #4, which discusses the flexibility I mentioned in my previous post.

Getting back to where we started: I think Ford Credit is a HUGE part of Ford. You cannot dismiss its performance as just a small part of Ford that wouldn't have an impact. If they lend irresponsibly or, worst case, sell off that division, Ford would make itself vulnerable. I have no idea if something like the 2008 collapse is coming, but leadership has to be ready for everything, including exceptional circumstances.

 

[Towerism]

Don't think ADM is going away. Dealers are highly incentivized to make sure that the customer who ordered a vehicle is the same customer that buys it though. There are penalties such as losing allocations if the dealer sells the vehicle to a different customer.

That said, some dealers are definitely worse than others when it comes to ADM. My dealership is asking for $7K over sticker in order to secure a dark horse allocation. That's a much easier pill to swallow than some dealers asking for $15K over sticker... some even as much as $30K or more over sticker.

 

[dfwford]

I'm in no position to know how 2008/2009 would have played out for GM in different circumstances. But I do know that sometimes cash flow issues drive bankruptcies, even if the underlying business is sound, and without GMAC I think GM was more vulnerable. I don't think it's a coincidence that GM went bankrupt after selling GMAC.

This is a decent summary, I think:
https://abcnews.go.com/Business/story?id=7722148
See items #2 and #4 in that article, particularly the end of #4, which discusses the flexibility I mentioned in my previous post.

Getting back to where we started: I think Ford Credit is a HUGE part of Ford. You cannot dismiss its performance as just a small part of Ford that wouldn't have an impact. If they lend irresponsibly or, worst case, sell off that division, Ford would make itself vulnerable. I have no idea if something like the 2008 collapse is coming, but leadership has to be ready for everything, including exceptional circumstances.

We'll definitely have to agree to disagree.

Ultimately, Ford is a car company and not a loan company. If it's at the point where your life and death is dependent on less than 10% of the total revenue you bring in from lending subprime car loans because over 90% of the money you're bringing in from actually selling cars is going down the drain (because your organization is so dysfunctional), you've already failed as an automaker.

I'd like to think Ford isn't that bad off.

 

[bloominguez]

We'll definitely have to agree to disagree.

Ultimately, Ford is a car company and not a loan company. If it's at the point where your life and death is dependent on less than 10% of the total revenue you bring in from lending subprime car loans because over 90% of the money you're bringing in from actually selling cars is going down the drain (because your organization is so dysfunctional), you've already failed as an automaker.

I'd like to think Ford isn't that bad off.

Absolutely, and that's fine. I think it's more accurate to say that Ford is *both* a car company and a finance company. I don't think it would work as one or the other. Ford is dependent on that finance division (and the finance division is dependent on Ford, the manufacturing part, as well). If that means they are dysfunctional, well, maybe that's the case.

I took a look at some annual reports. The automotive profit is *usually* higher than the financing profit, so I'd agree that Ford is more a manufacturing company than a financing company. But Financing profit is a very significant part of Ford's profits. The profit from building cars is far more volatile (much more likely to have losses, and thus more vulnerable in down times). Which means that the financing arm helps to provide cash flow when needed AND gives Ford the flexibility to move certain cars when they deem necessary. See the article about GM I linked to earlier.

 

[dfwford]

Absolutely, and that's fine. I think it's more accurate to say that Ford is *both* a car company and a finance company. I don't think it would work as one or the other. Ford is dependent on that finance division (and the finance division is dependent on Ford, the manufacturing part, as well). If that means they are dysfunctional, well, maybe that's the case.

I took a look at some annual reports. The automotive profit is *usually* higher than the financing profit, so I'd agree that Ford is more a manufacturing company than a financing company. But Financing profit is a very significant part of Ford's profits. The profit from building cars is far more volatile (much more likely to have losses, and thus more vulnerable in down times). Which means that the financing arm helps to provide cash flow when needed AND gives Ford the flexibility to move certain cars when they deem necessary. See the article about GM I linked to earlier.

I don't think there's any question about Ford being dysfunctional.

*They've had several botched product launches (F-150 Lightning, Maverick, Bronco, etc.),

*The recalls keep flooding in (they had almost twice as many as the automaker 2nd in line)

*Worker morale is in the toilet if you read employee forums/boards

*They've had a revolving door of CEO the past 5 years

*Suppliers don't want to deal with them (they're ranked lowest in surveys for vendor relationships)

And it's unfortunate, beacuse they arguably have the most impressive product lineup of any automaker (with an obvious exception for Sedans). They wouldn't be so reliant on financing for cash flow if they were a well-run and reputable car manufacturer in the first place

 

[okfoz]

The problem is Ford needs dealers to sell their cars. If ford stepped in and punished dealers charging ADM, then they would not be selling cars. Ford is leaving cash on the table, and I think they are not sure how to handle it.

 

[shogun32]

If ford stepped in and punished dealers charging ADM, then they would not be selling cars.

there are 3000 dealers. that's about 2500 too many.

Whack everyone who charged over say 3% of MSRP in ADM and zero their allocations for that model for the year. They can become used car dealers instead. Oh you BET YUR ASS the dealer group(s) will sue. It'll take them 6 months minimum to slow-walk that. Even if they manage to get an injuction Ford's shipping department can keep losing the Bill of Lading or forget to book the haulers and rail cars needed to get product to the shelves.

The dealers with clean noses get to sell cars hand over fist to customers and black-flagged dealers alike, at no more than MSRP obviously less they incur Mother's wrath. The black-flagged dealers still get product to sell but their margins vanish since they had to pay another dealer and also the transport.

Or simpler would be Ford nukes all holdback and advertising and any other backend 'refunds' to the black-flagged dealers so their profit margin collapses to almost nothing since they have to work within the 4.5% difference between the invoice price and MSRP. Oh they could try to hike 'doc fees' but good luck with that when Johnny Clean Nose down the street has a much lower 'doc fee'.

There are all kinds of ways to put an end to this. Ford simply doesn't want to.

 

[Q6543]

It was pointed out earlier I believe…

the dealers ARE the customer.
Not the people that they sell to.

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