IfCredit were the same company now as a year ago, it would be focusing — maybe even fixating — on heavy growth, largely by aggressively lending out more money.
That has its pitfalls, especially if too many of those borrowers are credit risks.Credit learned that as its earning fell from $1.5 billion to $839 million last year. That's when the recession took hold and marginal borrowers started defaulting in large numbers.
It's a lesson that's sparked a new and more conservative direction under the eight-month leadership of President and COO Greg C. Smith.
The Ford Motor Co. subsidiary's old focus was to bulk up into a global automotive finance superpower, says Smith, a former engineer and a 29-year Ford veteran.
The new focus is to maximize profits on relatively flat revenue levels, not to turbo-charge growth through more subprime loans, home mortgages and stepped-up financing of used-cars.
“This year we're focusing on where we are with profits versus sheer growth,” says Smith.
Before, Ford Credit predicted managed receivables would hit $245 billion by 2006. Smith says that's been readjusted to $210 billion. That's only about $2 billion more than 2001 receivables.
Ford Credit has joined its parent company in a back-to-basics movement launched in January to restore Ford's profitability.
Ford Credit's role in that movement is to broker smarter loans, collect them more efficiently and operate more effectively as a business unit, says Smith.
“Ours is a risk business,” he says, adding that people in that line of work must ask themselves, “What is the risk of a loan being paid back and what's the effect on us?”
Smith's predecessor, Donald Winkler, lost his job in December after Ford Credit began posting serious losses. Winkler, a Jacques Nasser appointee with a flamboyant management style (he used to hand out fake money with his picture on the bills) resigned shortly after Nasser left as Ford's CEO.
Those losses came after Ford Credit aggressively tried to increase business, largely by relaxing its lending standards, floating more loans and getting into questionable new ventures. Defaults and repossessions followed.
Ford Credit's loss-to-receivables ratio went from 0.54% in 1994 to an uncomfortable high of 1.31% in 2001.
Repossession rates went from 1.92% in the second quarter of 2000 to 2.80% in the first quarter of this year. The average loss per unit peaked at $7,211 in late 2001, dropping to $6,600 in 2002's first quarter.
The goal now is to better differentiate creditworthy applicants from non-creditworthy types. Sounds simple. But there are a lot of imponderables.
“It's not an on-off switch,” says Smith.
However it is a more conservative approval process with proprietary scoring models developed from a database of 23 million accepted and rejected loan applications.
Those scoring models help determine loan terms — through six pricing tiers — as well as likelihood of repayment.
“It's a very detailed process done by Ph.d-types whom we call ‘the rocket scientists,’” says Smith.
New-vehicle financing is a huge industry with total retail volume of $260 billion.
Ford Credit leads the “captives” with 20% of that business, followed by GMAC with 14%,Financial with 7% and Financial Services with 5%. Banks and financial companies have a 27% share, credit unions 17%.
Smith says Ford Credit is the leader because of its “deeper penetration of Ford business.” That includes financing customer car loans and dealer floor plan inventory purchases.
Floor plan receivables total $70 billion industry-wide. Ford Credit's cut of that is 27% (83.5% of Ford and Lincoln Mercury dealers), followed by GMAC with 20% (71.5% of GM dealers) andFinance with 10% (69% of Chrysler wholesale).
Auto makers' financing subsidiaries and independent financial institutions do business differently. That's evident in the way they deal with vehicles coming off lease.
For example, banks are more likely to try to get the customer to re-lease the vehicle or purchase it outright. That's especially true when the actual value of a vehicle coming off lease is significantly less than the residual value forecasted at the beginning of the lease.
But the captives' goal is to get off-lease customers back to dealerships for new vehicles, according to Smith.
“Our slant is to get the customer to get a new vehicle, not re-lease or buy the vehicle that's coming off lease,” he says.
Ford's Volvo subsidiary tried the latter, “but is moving away from that,” says Ford Credit CFO Bibiana Boerio.
About 85% of Ford Credit customers buy another Ford product.
“That's phenomenal,” says Smith who credits customer retention marketing programs such as Red Carpet Lease.
New-vehicle buying and leasing represent 68% of Ford Credit's consumer lending. Used-vehicle lending is 32%. Of the new-car business, 46% are purchases, 22% leases.
The company's average financing is $24,195 over 54 months.
Meanwhile, Smith says his company is trying to mitigate off-lease losses on various fronts.
One is to avoid major volume concentrations of leased vehicles. You're in trouble if you're leasing 60% of a core product such as a Ford Taurus.
Another front is to remarket vehicles more efficiently. That includes shipping them to the most desired auctions so that you are not trying to sell “black cars in Florida and convertibles in Alaska,” says Smith.
But used-vehicle prices are off. The average auction price of an off-lease Taurus was $10,750 in Oct. 2000. It was $8,650 in March of this year. Other models fared no better. During that same time period a usedCamry's average auction price went from $11,475 to $10,250.
“The whole industry has come down, and we've gone down with it,” says Smith.
Some auto analysts and industry observers fret about the ultimate effects of auto makers offering hefty cash incentives and 0% financing for new-car purchases.
But Smith says 0% financing — whichfirst introduced to spur sales after Sept. 11 — “helped the economy enormously.” October new-vehicle sales soared “at a time of economic decline and national shock.”
Will there be a later price to pay for such generous incentives that can cut into profits and future sales?
“I'd argue that the data would support that it was sizeable incremental business opposed to pulling ahead sales,” says Smith. “We got high volume and low-risk customers.”
Nevertheless, it's still a shaky economy out there.
Smith notes that unemployment rates are still “fairly” high, customer confidence “still is not up to where it was” pre-Sept. 11 and bankruptcy filings continue to increase (up 20% since 2001).
That's something Ford Credit must deal with as it tries to “serve the needs of Ford and the industry” in a less gung-ho way than before, says Smith.