No Rebates or Incentives Necessary : Car Makers Make Money Renting Money

DETROIT, July 20, 2004; Tom Brown writing for Reuters reported that Detroit may be known as the Motor City, but its automakers can seem more like banks these days than the gritty industrial powerhouses they were in the past.

At Ford Motor Co., core automotive operations earned more in the first quarter than its banking or finance arm, Ford Credit, for only the first time since 2000.

In its second-quarter financial results posted on Tuesday, Ford slipped back into a familiar trend, however. It earned virtually all of its $1.5 billion pretax profit from Ford Credit.

Ford's automotive operations posted a $57 million pretax loss in the quarter and without its lending operations, the second-largest U.S. automaker might have faced some troubling questions about the success of the multiyear turnaround program it launched in January 2002.

"I think that investors would probably be more comfortable if they made more money as a car company than as a bank," said David Healy of Burnham Securities, one of several analysts who questioned the quality of Ford's second-quarter results.

"At this stage of the business cycle, Ford's manufacturing business should be taking over and helping profits, and it's not," added Jeff Hines, president of Sovereign Advisers in Charlotte, North Carolina.

Ford's crosstown rival, General Motors Corp., is also expected to show heavy reliance on its finance arm, General Motors Acceptance Corp., when it posts its second-quarter results on Wednesday. Earnings at GMAC, which profits from loans for real estate as well as cars, accounted for about 60 percent of GM's total first-quarter profit.

FINANCIAL EARNINGS SET FOR SLOWDOWN?

What troubles analysts, given recent weakness in Ford and GM sales, is the sustainability of earnings from their credit companies.

Ford Credit helped boost Ford's overall results by cutting its loan provisions by about $200 million in the second quarter, as a stronger economy help bring down credit losses.

But both Ford Credit and GMAC could have trouble generating future earnings growth if interest rates continue to rise, as many economists expect.

"I do think the credit company earnings of both Ford and GM are going to get squeezed by higher interest rates," said Healy.

Ford Chief Financial Officer Don Leclair told reporters and analysts on a conference call that the company's goal is to have automotive operations generate about $3.5 billion to $4 billion of the $7 billion annual pretax profit it intends to make by 2006 as part of its turnaround strategy.

For the time being, however, he said Ford's decision on Tuesday to raise its full-year earnings estimate was only due to the company's lending operations and expected income from its Hertz rental car company.

"All of the upside is in financial services," Leclair said.

Ford and GM both face cutthroat competition and declining market share, as they lose sales even for many heavily discounted vehicles to Asian rivals.

However, analysts said that the earnings of the car companies' credit arms and automotive operations are intertwined, and the distinction between the two are somewhat artificial. Their credit arms only make money because, under auto industry accounting rules, much of the true interest cost of cheap or zero-percent loan deals comes out of the marketing budget of their automotive units, not the credit companies themselves.