From cash cow to cash eater
Ford Credit has had high highs and low lows
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The formation of a captive finance arm was not a new concept: General Motors Acceptance Corp. had opened 40 years earlier. Ford had an arrangement with an outside company, Universal CIT. But Universal CIT wasn’t obligated to buy finance contracts from Ford dealers, says John Noone, executive vice president for North American diversified and major accounts at Ford Credit.
“There was a time when Ford dealers did
not have the same advantage as GM
dealers,” he says.
Ford’s financing business started slowly. Within three years, it had 100 branches — small offices in major cities near Ford, Mercury and Lincoln dealerships, Noone says. But by 1963, Ford Credit had about 1,000 employees. And by 1964, it had $1 billion in finance receivables, tiny compared with the nearly $200 billion in receivables on its books today.
Business was spread out
Consumer financing wasn’t as sophisticated as it is today, Noone says. But financing was active. “In the 1960s, ’70s and ’80s, a large percentage of consumers did acquire their vehicles by using some kind of a credit tool,” he says. “A lot of that business was through the local banks or their credit union or their savings and loan, and it was distributed more broadly than today.”
Loans were also for shorter terms, generally for 36 months and sometimes 48 months in the early 1980s, Noone says. Only later did car loans jump to 60 months.
The advent of high interest rates in the late 1970s and early 1980s changed auto financing. As rates soared, Ford and other manufacturers realized that they had to reduce the cost of financing by using interest supplements, “or subvention, as we call it,” Noone says.
That spawned the era of lower interest rates from the captive finance arms.
The early subvention interest rates, Noone says, were about 5.9 percent, which is higher than today’s rates. But the schemes also filled another need for dealers who had to arrange financing for their customers.
“During that recessionary period, a number of banks and other financial institutions weren’t as active in providing financing,” Noone says.
Banks became even more cautious about lending money to consumers with less than perfect credit, he says.
In the 1970s, the subvention programs gave Ford Credit about 20 percent of the business in financing Ford, Mercury and Lincoln vehicles. Today, it’s closer to 40 percent, although it rose above 50 percent during the last quarter of 2001, when 0 percent financing was launched.
Difficult times
After years as a reliable cash cow, Ford Credit has had a difficult time the past few years.
Its results improved in 2002, but 2001 was a rough year. The captive finance company earned $1.2 billion in net income in 2002, compared with only $839 million in 2001.
The parent company disclosed Ford Credit’s problems after Bill Ford replaced Jacques Nasser as Ford Motor CEO in October 2001. Ford Credit Chairman Don Winkler, who had been chosen by Nasser, resigned under fire in December 2001.
Greg Smith, a veteran of Ford and Ford Credit, replaced Winkler. Smith had been Ford Credit president and COO.
Winkler expanded Ford Credit too fast by buying too deep — that is, buying too many loans in the subprime and used-car segment. That, in turn, forced the parent to set aside more money than expected for credit losses.
For 2003, Ford Credit continues to pursue a strategy of slower growth. Under Smith, the captive finance arm is an important part of the parent company’s revitalization plan.
From 1997 to 2001, Ford Credit’s earnings made up 32 percent of Ford Motor Co.’s net income. But Ford Credit lost $297 million in the fourth quarter of 2001.
So in late 2001, the captive swapped its goal of becoming a global auto finance superpower for one more down-to-earth: improving its cash contribution to the parent company.
You can reach Diana T. Kurylko at dkurylko@crain.com. -- Follow Diana on 
