Ford July Sales

[igor]

Just look at the Toyota lineup.

Yaris, Corolla, Camry, Matrix.

Obviosly Toyota is using the wrong strategy.

 

you forgot Avalon.. and as mentioned above the full Scion lineup.

 

Igor

[Bluecon]

you forgot Avalon.. and as mentioned above the full Scion lineup.

 

Igor

 

 

You forgot about these.

 

xB

tC

xA

Prius

Actually I thought I was being quite generous. RJ said in the $20k to $30k range.

I think that will take all the Scions off the list, the Yaris the Corolla and the Matrix.

 

That leaves the Camry, Prius and the Avalon.

And I am not even sure about the Avalon. Is it high twenties?

Edited August 2, 2006 by Bluecon

[swenson88]

Actually I thought I was being quite generous. RJ said in the $20k to $30k range.

I think that will take all the Scions off the list, the Yaris the Corolla and the Matrix.

 

That leaves the Camry, Prius and the Avalon.

And I am not even sure about the Avalon. Is it high twenties?

 

But what is your point? Ford has the Fusion, 500, and Crown Vic in the $20-30K sedan range. Toyota has the Camry, Prius, and Avalon. I think what RJ was originally referring to went beyond sedans to all vehicles, in which case both manufacturers have many more - Freestyle, Freestar, Escape, Explorer, etc vs Highlander, Sienna, RAV4, 4Runner, etc. Toyota has just as broad if not a broader lineup than most manufacturers, and they're kicking tail as well as having some passenger cars that sell close to 500K annually. Will Ford or most other makes be able to match the sales of a Camry or Corolla? Not overnight. Maybe a long ways in the future. But, to compete they must try to come from all angles, and that's where having a diverse lineup filling all the niches comes in.

[Bluecon]

That's not where the market is headed, though. It seems that a larger number of a smaller volume products are the key to sustainable business (better to have a dozen models in the $20-30k price range, than just three or four)

Toyota has a small number of high volume cars not a larger number of smaller volume products.

[focus05]

I'd be curious to see what Toyota's fleet mix is. About a third of the new Rav4's and a good number of the new Camry's I've seen around where I live have been rental units. Same thing with Hyundai's.

 

Overall, I agree Ford needs to get its stuff together, but it's even more than that. The Explorer is much better vehicle now (having driven both during business trips). In fact, it drives better than any mid-size SUV I've rented (Chevy, Toyota, Dodge). The sheet metal is not that different, but I still think it's a fairly attractive vehicle. The problem is perception. My friend recently (February) bought a 4Runner, and I asked him why. He said because it was better than all the rest. Why? Because it was Toyota. He didn't even drive the Explorer, or any other vehicle. He just bought the name. However, there was some justice as he's had some mechanical issues with his "unbreakable" SUV and now he swears he'll never buy a Toyota again. I think Honda is his new love.

 

The prevailing perception will not easily be changed. It takes years. It took 15-20 years for the Japanese manufacturers to go from tinny rice rockets to high-quality, desireable vehicles in perception (and partly in product line). And it will take years for Ford to gain any positive image as well.

[igor]

I'd be curious to see what Toyota's fleet mix is. About a third of the new Rav4's and a good number of the new Camry's I've seen around where I live have been rental units. Same thing with Hyundai's.

 

Overall, I agree Ford needs to get its stuff together, but it's even more than that. The Explorer is much better vehicle now (having driven both during business trips). In fact, it drives better than any mid-size SUV I've rented (Chevy, Toyota, Dodge). The sheet metal is not that different, but I still think it's a fairly attractive vehicle. The problem is perception. My friend recently (February) bought a 4Runner, and I asked him why. He said because it was better than all the rest. Why? Because it was Toyota. He didn't even drive the Explorer, or any other vehicle. He just bought the name. However, there was some justice as he's had some mechanical issues with his "unbreakable" SUV and now he swears he'll never buy a Toyota again. I think Honda is his new love.

 

The prevailing perception will not easily be changed. It takes years. It took 15-20 years for the Japanese manufacturers to go from tinny rice rockets to high-quality, desireable vehicles in perception (and partly in product line). And it will take years for Ford to gain any positive image as well.

 

The prevailing perception is that Toyota never fleets away more than 15% of any model... it is largely correct.

 

Ford has recently (2003 -2004) significantly curbed the fleet sales of most of their vehicles..especialy those that are not in trouble: F-series only had 15% fleet sales in 2005, Five Hundred had 10%, Fusion is well below that, Mustang, even the vert ony had 10-12% of Fleet sales. The problem for Ford are the models in Trouble: CV, Taurus, and Focus are all fleeted away at 76,78 and 30 % respectively in 2005. Explorer is not doing too well either with about 30% in 2005. This raises the overal lineup fleet level and also the perception of Ford as a rental car maker, despite the new "core" models doing quite a bit better.

 

GM only this year moved away from fleets - accounting for about half of their decline in market share .. they had a lot of very, very bad models - for example Impala, even after redesign was over 50% of fleet sales - and they still have a lot of models in the lineup: MonterCarlo, GrandPrix etc that have zero retail appeal, and are fleeted away - but the new models: Cobalt, Impala, HHR etc, were reduced to acceptable levels this year, to improve their residuals and image.

 

DCX admitted last winter that ALL of their market share increase over past 5 years has been thanks to fleet sales. All of the vehicles, including the hot 300, Charger and Magnum have over 30% of fleet ration, and that is a lot. They actually have moderately competitive lineup, but they refused to cut productoin, and as a result have huge inventory problem. They are also happily rebadging all their models, creating a lot of overlap among their 3 US brands - especially making them more and more SUV and Truck Heavy - a questionable strategy given the market context. They have been not smart with their models and arguabley, product wise are worst off from the Big2.5 - they just have not learned their lesson of rebages and fleets the way GM and Ford had to, because Ford and GM could not afford to lose any more money.

 

Overall, value brand standard is 15% for any model, 20% is acceptable on cars and some 30% on work trucks (not SUV's) - as long as the ration of rental fleets is low-ish among the fleet sales. For Domestic, under 30% is currently acceptable as a step in the right direction - but further cuts are needed. For luxury brands, 2-5% is standard.. any model with over 10% fleet sales is an exception and anomaly among luxury models.

 

Ford, once it removes its stagnant models mentioned above, is a fine shape, with - should I say - above average retail performance. GM is close to achieving that, but it will take longer, becasue it has such a wide spread of large sendans/coupes with no retail appeal and their redesigns are not coming before 2010.

DCX is treading water right now, but their overall profitability gives them more leeway.

 

Igor

[Bluecon]

The prevailing perception is that Toyota never fleets away more than 15% of any model... it is largely correct.

 

Ford has recently (2003 -2004) significantly curbed the fleet sales of most of their vehicles..especialy those that are not in trouble: F-series only had 15% fleet sales in 2005, Five Hundred had 10%, Fusion is well below that, Mustang, even the vert ony had 10-12% of Fleet sales. The problem for Ford are the models in Trouble: CV, Taurus, and Focus are all fleeted away at 76,78 and 30 % respectively in 2005. Explorer is not doing too well either with about 30% in 2005. This raises the overal lineup fleet level and also the perception of Ford as a rental car maker, despite the new "core" models doing quite a bit better.

 

GM only this year moved away from fleets - accounting for about half of their decline in market share .. they had a lot of very, very bad models - for example Impala, even after redesign was over 50% of fleet sales - and they still have a lot of models in the lineup: MonterCarlo, GrandPrix etc that have zero retail appeal, and are fleeted away - but the new models: Cobalt, Impala, HHR etc, were reduced to acceptable levels this year, to improve their residuals and image.

 

DCX admitted last winter that ALL of their market share increase over past 5 years has been thanks to fleet sales. All of the vehicles, including the hot 300, Charger and Magnum have over 30% of fleet ration, and that is a lot. They actually have moderately competitive lineup, but they refused to cut productoin, and as a result have huge inventory problem. They are also happily rebadging all their models, creating a lot of overlap among their 3 US brands - especially making them more and more SUV and Truck Heavy - a questionable strategy given the market context. They have been not smart with their models and arguabley, product wise are worst off from the Big2.5 - they just have not learned their lesson of rebages and fleets the way GM and Ford had to, because Ford and GM could not afford to lose any more money.

 

Overall, value brand standard is 15% for any model, 20% is acceptable on cars and some 30% on work trucks (not SUV's) - as long as the ration of rental fleets is low-ish among the fleet sales. For Domestic, under 30% is currently acceptable as a step in the right direction - but further cuts are needed. For luxury brands, 2-5% is standard.. any model with over 10% fleet sales is an exception and anomaly among luxury models.

 

Ford, once it removes its stagnant models mentioned above, is a fine shape, with - should I say - above average retail performance. GM is close to achieving that, but it will take longer, becasue it has such a wide spread of large sendans/coupes with no retail appeal and their redesigns are not coming before 2010.

DCX is treading water right now, but their overall profitability gives them more leeway.

 

Igor

Link please!

[igor]

2005 data

 

Cars: http://www.fleet-central.com/af/t_pop_pdf....05/cars_web.pdf

 

Trucks:

http://www.fleet-central.com/af/t_pop_pdf..../trucks_web.pdf

 

2006 data - various articles since january -sorry no link..

 

one article worth linking

http://www.detnews.com/apps/pbcs.dll/artic.../603290375/1148

[swenson88]

Toyota has a small number of high volume cars not a larger number of smaller volume products.

 

No, Toyota has the SAME number of models as other makes, they just happen to have two models (Corolla and Camry) that outsell everyone else by a wide margin. It's not like Toyota sells four vehicles and that's it, they fill just about every niche (except sports car) available.

 

Toyota -

Yaris

Corolla

Corolla Matrix

Camry

Camry Solara

Prius

Avalon

 

RAV4

Highlander

FJ40

4Runner

Seqoia

Land Cruiser

 

Sienna

 

Tacoma

Tundra

 

 

Ford -

Focus

Fusion

500

Crown Vic

Mustang

(GT)

 

Escape

Freestyle

Explorer

Expedition

(upcoming Edge)

 

Freestar

E-Series

 

Ranger

F-Series

 

 

 

Sure seems to me that Toyota has BOTH a large number of small-volume products that sell anywhere from 50-150K units/year and a small number of high-volume products that sell >200K units per year. The problem is you seem to think every manufacturer should be able to magically pull that off, yet it took Toyota roughly 30 years to get to this point. Ford and the other domestics are still on a downward trend due to past problems and the poor public reception that resulted. 450K Camry buyers aren't going to switch to any American car until Consumer Reports tells them it's okay. Until then, 150K Fusions a year is nothing to sneeze at, and Ford should be damn happy they're selling that many.

[matthewq4b]

Gee, Matt, you think some of the decline from last July to this might be due to Employee pricing?

 

Car sales are way up at Ford of Canada. Even the Crown Vic.

 

And Ford is not going to build the Fusion at a second plant. There's no need to repeat the mistakes made with the Taurus. One car can't keep two plants busy in this day and age, unless its the Accord or Camry.

 

 

Richard I,m looking at YTD Not just July. Every divsion is down (except LR) and every name plate that was carried over from 05 is down as well.

 

Employee pricing for July of last year is not going to make up the differance for most of the falls In YTD sales.

 

 

Matthew

[RichardJensen]

Richard I,m looking at YTD Not just July. Every divsion is down (except LR) and every name plate that was carried over from 05 is down as well.

 

Employee pricing for July of last year is not going to make up the differance for most of the falls In YTD sales.

Matthew

You could look at June YTD totals and compare?

 

http://media.ford.com/article_display.cfm?article_id=23686

 

As of the end of JUNE, Ford's overall volume was 4% off year earlier levels. Factoring in Mazda, Ford's overall volume was off only 3%.

 

Now, as a result of comparison against July numbers from last year, Ford's volume is off 9.5% without factoring in Mazda, and 8.5% factoring in Mazda

 

Until the end of June, the entire decline in Ford volume could be more than accounted for in declining sales of the Explorer and Expedition.

 

If Ford did not have those two models at all, they would have shown a year over year increase in sales at the end of June.

[matthewq4b]

You could look at June YTD totals and compare?

 

http://media.ford.com/article_display.cfm?article_id=23686

 

As of the end of JUNE, Ford's overall volume was 4% off year earlier levels. Factoring in Mazda, Ford's overall volume was off only 3%.

 

Now, as a result of comparison against July numbers from last year, Ford's volume is off 9.5% without factoring in Mazda, and 8.5% factoring in Mazda

 

Until the end of June, the entire decline in Ford volume could be more than accounted for in declining sales of the Explorer and Expedition.

 

If Ford did not have those two models at all, they would have shown a year over year increase in sales at the end of June.

 

 

The only carry overs that showed an increase as of june were the freestyle escape and montego.

and LR still

 

Either you can argue that it was employee pricing or a continued decline.

Personally I feel it is a continued decline things are not turning around. Ford has to get really agressive in the advertizing dept and quit goofing around with with catchy slogans.

 

 

Matthew

[RichardJensen]

The only carry overs that showed an increase as of june were the freestyle escape and montego.

and LR still

 

Either you can argue that it was employee pricing or a continued decline.

Personally I feel it is a continued decline things are not turning around. Ford has to get really agressive in the advertizing dept and quit goofing around with with catchy slogans.

Matthew

Yeah, I guess that whole CD3 thing is a flop, and the sustained demand for the 'boring' D3s is not worth mentioning (Highlander + Avalon volume is down year over year, as is 300 and Pacifica volume, but those boring old D3s are soldiering on), not to mention that the Mustang could hardly be expected to sustain year earlier levels. Or that those seven vehicles and the Explorer and Mountaineer have had only one recall among them. Just a bunch of crap since Ford's sales were down due to falling demand for the Explorer and Expedition.

 

Sad, really. Things aren't turning around at all, because they're not turning around fast enough, I guess.

[skor]

Can anyone say "bankruptcy"?

 

Gas isn't going to drop to $1/gal again ever -- or $2/gal for that matter. Ford put all it's eggs into trucks and SUVs, they have no cars that sell AND MAKE A PROFIT in the North American market. Sure, they claim that they have new product for 2008 -- too late.

 

It's all over except for the scrap metal sale.

[NickF1011]

Can anyone say "bankruptcy"?

 

Gas isn't going to drop to $1/gal again ever -- or $2/gal for that matter. Ford put all it's eggs into trucks and SUVs, they have no cars that sell AND MAKE A PROFIT in the North American market. Sure, they claim that they have new product for 2008 -- too late.

 

It's all over except for the scrap metal sale.

 

As far as anyone is aware, the CD3's and D3's are profitable. Heck, even the old Panther is profitable....as is Mustang.

 

The Focus is the only car they build that ISN'T currently profitable that I know of.

[Michael Reynolds]

Can anyone say "bankruptcy"?

 

Gas isn't going to drop to $1/gal again ever -- or $2/gal for that matter. Ford put all it's eggs into trucks and SUVs, they have no cars that sell AND MAKE A PROFIT in the North American market. Sure, they claim that they have new product for 2008 -- too late.

 

It's all over except for the scrap metal sale.

 

All this according to whom? You? Give me some raw data indicating that? What are Ford's cash reserves? Can Ford pay their suppliers? etc, etc, etc.......

[wescoent]

Everything is down this month, so lets analyze it a little further beyond just Employee Pricing.

 

I'd tend to agree that Ford's sales collapse seems largely due to very soft demand for the Explorer and

Expedition, as well as a slight downtick in other product lines as well. The complete death of the Taurus will result in a hit to Ford sales as well... I think fleet buyers will not flock to the Focus and Crown Vic... rather, I'm going to predict a flight to the Koreans and the Chevy Impala. However, remember, we are getting a slew of new products in. I believe the new Expedition will result in considerably higher sales for that line, keeping in mind we are also getting an extended edition. The Edge will be a very hot seller as well. The redesigned Five Hundred, Freestyle, Escape, and Focus should also be a shot in the arm for those model lines early next year.

 

Mercury's sales declines have to do with softening demand for the Grand Marquis, a total loss of the Sable, and weaker demand for the Montego, all of which the Milan cannot make up for on its own. The redesigned Montego for next year should stem losses from that line.

 

Lincoln on the other hand seems to be hold its own. As the LS slowly dies, and the Town Car bleeds, the Zephyr picks up all the lost volume and then some. The redesigned Navigator and MKX should be a major shot in the arm for Lincoln truck sales, and I'd predict a yearly increase for Lincoln sales for the year.

 

Comparatively, Jaguar is a total disaster. The only fresh model is the brand's lowest volume seller. They need a redesigned S-Type right now.

 

Volvo is also starting to get stale. The new S80 should help, and next year, the XC50 and C30 should also give them some needed volume.

 

In the meantime, Land Rover is on fire. While the Range Rover and LR3 saw a small downtick, the all new Range Rover Sport is flying off the lots. Once the new LR2 hits dealers, Land Rover should see an even further boost in sales. All of this as SUV sales dwindle.

[NickF1011]

Everything is down this month, so lets analyze it a little further beyond just Employee Pricing.

 

I'd tend to agree that Ford's sales collapse seems largely due to very soft demand for the Explorer and

Expedition, as well as a slight downtick in other product lines as well. The complete death of the Taurus will result in a hit to Ford sales as well... I think fleet buyers will not flock to the Focus and Crown Vic... rather, I'm going to predict a flight to the Koreans and the Chevy Impala. However, remember, we are getting a slew of new products in. I believe the new Expedition will result in considerably higher sales for that line, keeping in mind we are also getting an extended edition. The Edge will be a very hot seller as well. The redesigned Five Hundred, Freestyle, Escape, and Focus should also be a shot in the arm for those model lines early next year.

 

Mercury's sales declines have to do with softening demand for the Grand Marquis, a total loss of the Sable, and weaker demand for the Montego, all of which the Milan cannot make up for on its own. The redesigned Montego for next year should stem losses from that line.

 

Lincoln on the other hand seems to be hold its own. As the LS slowly dies, and the Town Car bleeds, the Zephyr picks up all the lost volume and then some. The redesigned Navigator and MKX should be a major shot in the arm for Lincoln truck sales, and I'd predict a yearly increase for Lincoln sales for the year.

 

Comparatively, Jaguar is a total disaster. The only fresh model is the brand's lowest volume seller. They need a redesigned S-Type right now.

 

Volvo is also starting to get stale. The new S80 should help, and next year, the XC50 and C30 should also give them some needed volume.

 

In the meantime, Land Rover is on fire. While the Range Rover and LR3 saw a small downtick, the all new Range Rover Sport is flying off the lots. Once the new LR2 hits dealers, Land Rover should see an even further boost in sales. All of this as SUV sales dwindle.

 

Very good analysis on things. I agree pretty much with everything you said...except I doubt the Expedition will see much growth...if any. I think the refresh and LWB versions will stem the losses, but I don't think they'll do much to INCREASE volume. I also think the drop in Explorer sales isn't as bad as people think. Remember, the Explorer is moving from 2 assembly plants to 1. It still has plenty of volume to keep a single plant busy and still brings in plenty of cash - selling even 150,000 of them a year would still be nothing to sneeze at when you look at the big picture. I do agree the Edge is going to do very well.

 

All of PAG's vehicles, aside from Land Rover and tiny ol Aston Martin, are just OLD. They aren't refreshing them quickly enough either. The X-Type and S-Type should have been replaced by now. The new Volvos can't come soon enough. Volvo hasn't been a complete freefall, but they've seen continued month-over-month declines for some time now.

[skor]

All this according to whom? You? Give me some raw data indicating that? What are Ford's cash reserves? Can Ford pay their suppliers? etc, etc, etc.......

 

Ford is burning through its cash. Why do you think they are looking into dumping Jaguar and selling off part of their finance arm?

 

Market share continues to drop for both Ford and GM and continues to rise for Toyota and Honda. While market share continues to slide, legacy costs don't. It's only a matter of time before both GM and Ford go under or are acquired by a viable auto maker. The only question is who goes tits up first.

Edited August 3, 2006 by skor

[Nels Nelson]

It's only going to get worse. Why, you may ask? To quote James Carville: "It's the economy, stupid".

 

The economy is slowing and concerns are growing that it may be heading for a recession by the first quarter of "07.

 

Statistics for June indicate that the market for residential housing has entered a recession. With house prices predicted to decline in many markets, this will put an end to the house as ATM through the use of home equity withdrawals. Many have used this source to purchase new cars.

 

Furthermore, estimates of as high as 30% of those with auto loans are upside down.

 

An recession will affect all of the manufacturers, but the weakened condition of Ford and GM will make it worse for them.

 

You can smell the fear.

[Bizuce]

Thats just a completely ignorant response, no offense. To think a middle class would somehow prevent all recession is absurd. Growth is cyclical: look up trends, read books, go to school, etc.

 

Even so, your comment is based on a generalization of perception with no economic principles or basis on fact. The fact is recessions and expansions come and go throughout time for many reasons. If you want to maximize growth oppurtunity the best way is to keep the government out and let the market dictate who is the most efficient and who needs to go through "creative destruction". Ford must weed itself and find out how to survive. Luckily, I think Ford's necessary culture change has slowly begun. New models with continued successful quality launches is even more reason for optimism.

[Michael Reynolds]

Ford is burning through its cash. Why do you think they are looking into dumping Jaguar and selling off part of their finance arm?

 

I like how people look at things from the surface and make assumptions. First of all if Ford does dump Jaguar, and that's a big if, they would stand to loose the money put into the Jag, as well as what was paid up front for the brand.

 

Due to Ford's bond status it costs much more money these days for Ford Credit to loan out money. Therefor, straining that arms ability to generate higher profits.

[630land]

If the Fusion was bombing like the Dodge Durango, then yeah Ford would be worse off. But it shows some are willing to buy retail for a Ford car. BOF SUV sales are so bad, GM will kill off the Blazer clones.

Edited August 4, 2006 by 630land

[RichardJensen]

Due to Ford's bond status it costs much more money these days for Ford Credit to loan out money. Therefor, straining that arms ability to generate higher profits.

Not necessarily true.

 

This is how things work:

 

Ford Credit is basically like FannieMae, they buy loans originated at car dealers, and service them.

 

(it goes like this)

 

Ford Motor sells car to the dealership

 

The dealership sells the car to a customer

 

The customer finances the car through Ford Credit

 

Ford Credit pays the dealer for the car.

 

The dealer pays Ford Motor for the car

 

------------------------

 

Buying the car loan requires cash. Ford Credit and GMAC need to have ready access to lots of cash in order to do business on a day-to-day basis.

 

How do they get cash after they buy a loan from a car dealer?

 

In the past, when both companies had investment grade credit ratings, they would issue commercial paper. Commercial paper is basically an unsecured cash loan. It's generally very short term (30, 60, or 90 days) and carries a very low interest rate (often close to the Fed Funds rate--the "discount rate" that the Fed has raised throughout the year).

 

Now, since Ford and GMAC do not have investment grade credit ratings, they basically cannot issue commercial paper.

 

Instead, Ford Credit packages a portfolio of loans that it has purchased, and transfers them to a separate entity. This entity then sells shares or issues notes that carry a monthly dividend, and a guarantee of repayment at the end of the life of the entity. These shares or notes are called asset backed securities.

 

After investors have fully 'subscribed' the stock or notes issued by the entity, the entity transfers this cash to Ford Credit, which then has cash with which to purchase additional loans.

 

Also, the entity does not pay out as much in interest to its investors as it receives from customers. This balance reverts to Ford Credit at the time the entity is dissolved, or it is periodically paid to Ford Credit in the form of dividends during the time this entity is in existence.

 

Asset backed securities are priced by a certain number of basis points (hundredths of a percent) over the yield of a treasury note with a similar maturity (e.g. if the Ford Credit Auto Owners Trust notes are 5 year notes, the spread will be, say 50 basis points--.5%--over the yield of a 5-year treasury note).

 

Now, 5-year treasury notes generally carry a higher yield than fed funds, which means that Asset backed securities are generally more expensive than Commercial paper. However, the treasury yield curve is currently inverted (because the Fed has rapidly raised short term interest rates). This means that even if Ford had an investment rating right now, they would likely be issuing large quantities of asset backed securities. Why? Because it is cheaper.

 

The principal downside to asset backed securities, apart from the higher interest that often must be paid, is that they are rigid instruments, and not as flexible as CP. They also cost more to administrate.

 

However, both Ford and GMAC have been working with asset backed securities almost exclusively for years. Any increase in cost would've been seen from 2002-2004, not at this late a date.

Edited August 4, 2006 by RichardJensen

[Michael Reynolds]

Not necessarily true.

 

This is how things work:

 

Ford Credit is basically like FannieMae, they buy loans originated at car dealers, and service them.

 

(it goes like this)

 

Ford Motor sells car to the dealership

 

The dealership sells the car to a customer

 

The customer finances the car through Ford Credit

 

Ford Credit pays the dealer for the car.

 

The dealer pays Ford Motor for the car

 

------------------------

 

Buying the car loan requires cash. Ford Credit and GMAC need to have ready access to lots of cash in order to do business on a day-to-day basis.

 

How do they get cash after they buy a loan from a car dealer?

 

In the past, when both companies had investment grade credit ratings, they would issue commercial paper. Commercial paper is basically an unsecured cash loan. It's generally very short term (30, 60, or 90 days) and carries a very low interest rate (often close to the Fed Funds rate--the "discount rate" that the Fed has raised throughout the year).

 

Now, since Ford and GMAC do not have investment grade credit ratings, they basically cannot issue commercial paper.

 

Instead, Ford Credit packages a portfolio of loans that it has purchased, and transfers them to a separate entity. This entity then sells shares or issues notes that carry a monthly dividend, and a guarantee of repayment at the end of the life of the entity. These shares or notes are called asset backed securities.

 

After investors have fully 'subscribed' the stock or notes issued by the entity, the entity transfers this cash to Ford Credit, which then has cash with which to purchase additional loans.

 

Also, the entity does not pay out as much in interest to its investors as it receives from customers. This balance reverts to Ford Credit at the time the entity is dissolved, or it is periodically paid to Ford Credit in the form of dividends during the time this entity is in existence.

 

Asset backed securities are priced by a certain number of basis points (hundredths of a percent) over the yield of a treasury note with a similar maturity (e.g. if the Ford Credit Auto Owners Trust notes are 5 year notes, the spread will be, say 50 basis points--.5%--over the yield of a 5-year treasury note).

 

Now, 5-year treasury notes generally carry a higher yield than fed funds, which means that Asset backed securities are generally more expensive than Commercial paper. However, the treasury yield curve is currently inverted (because the Fed has rapidly raised short term interest rates). This means that even if Ford had an investment rating right now, they would likely be issuing large quantities of asset backed securities. Why? Because it is cheaper.

 

The principal downside to asset backed securities, apart from the higher interest that often must be paid, is that they are rigid instruments, and not as flexible as CP. They also cost more to administrate.

 

However, both Ford and GMAC have been working with asset backed securities almost exclusively for years. Any increase in cost would've been seen from 2002-2004, not at this late a date.

 

Thanks, so in a nutshell it's just a more complicated process? Is that increase in cost something that both lenders are still absorbing?

 

Because at the end of the day, selling a portion of Ford Credit is not going to rake in a ton of money. Will it?