On the effect of the captives' accounting change, and the latest on consumer credit
Earlier in the year, the captives implemented a large accounting change. And I don't want to bore [you] with the details, but the basic goal was to assume that losses on leases would occur upfront as opposed to a point in time. And that increased the reserves at both Ford Motor Credit and GM Financial at the beginning of the year. And now, with recovery rates strong and consumer credit quality robust, the autos have been able to reevaluate what the assumed total losses might look like. And essentially, they're reclaiming that profit potential that was taken away at the beginning of the year and that's coming in.
Now, when we talk about consumer credit and the state of the consumer, they're leading the charge in the market. And you can see that through the GDP data with double-digit growth in goods and services in July. I'm sure that would have been higher, too, if there were more vehicles available.
But I think what that means for Ford Motor Credit and GM Financial, they were able to record more than a half a billion of profits in Q2 before taxes from the lower expected credit losses. I would expect that trend to wean out a little bit in the second half. And that's because there were government programs that were given during the height of the pandemic that are running off. And so you will see credit tick up a little bit in terms of losses, but should still be year-over-year positive for the finance companies.
On whether a Subaru-Toyota Financial marriage makes sense
I think Subaru is kind of an interesting component, especially because about 20 percent of the Subaru business is lease business. So having access to very low-cost financing — and Toyota has the lowest-cost financing in the global automotive sector — is one mechanism they could use to further increase their profitability and certainly share that with their partner Subaru.
On whether Stellantis and Tesla also could be targets for Toyota Financial
I think with Stellantis … now that they have combined and the merger seems to be going quite well, they should really be thinking about their own captive finance company. Clearly, they have a stake in one. But having a global captive finance to really go after the Ram and Jeep business, I think, would be a very good competitive move on their part, especially when you think about Ford and what they're doing, going after the commercial customer in a more meaningful way. Being able to give the Ram customer the same kind of product would be competitively a wise move, in my view.
Tesla, as we know, is vertically integrated. They do everything on their own, and as their credit quality improves — and my view is that they will eventually move to investment grade, perhaps within the next 24 months — that will open the doors for them to have a full financial company as well.
On whether Stellantis could expand its European captive to North America
I don't want to pretend that I'm a regulatory analyst, but what I would tell you is that it is something that the former Fiat Chrysler had talked about prior to the merger as one of their goals. And it was one of the reasons they wanted to be investment grade, was to have access to low-cost financing for that. I think they understood the value of having a full captive, both from the strategic standpoint that we talked about, as well as the financial benefits of having one. My guess is that will be something that they'll look at, especially as their consolidation continues. And if the merger goes well, it'll free up their time to do that. I would assume that would happen in the coming years.
On the barriers Tesla would face starting its own finance company
Starting [a captive lender] from scratch is difficult. And that's why GM bought back into it after they sold GMAC. So that might be something they would consider in terms of an acquisition. And the same thing for Stellantis as well. It doesn't necessarily have to be an organically grown business. That could be something that could be acquired. Because really to be able to put together the kind of talent and technology infrastructure that you need would take a lot of time and for something like that, it might be cheaper to execute such an event through an acquisition than an organically grown business.
On how GM Financial has grown and strengthened
They've done a very good job over the past five years of reducing risk on the asset base. If you looked at their retail loan portfolio in 2016, maybe 40 percent of it was subprime — which obviously exposes the business to operating losses during downturns. They've got that down to about 19 percent now and that continues to shrink. They've done a very good job of managing the risks over there.
On whether a lack of floorplan is concerning for automakers and captives
If anything, I would say it's probably a net benefit to the dealership because the dealer has less capital tied up right now, both in inventory and I guess the other side of the balance sheet would be on the floorplanning they have with their manufacturing partner. I think the question for the whole auto industry, and it's a major issue, is going to be, what is the right amount of inventory for the dealer to have? Because clearly as supply starts to loosen itself up, we've seen how powerful pricing can be right now. If you restock them to kind of the same levels that you had in the past, that will again bring back heavy discounting and lower your total profitability. I'm sure they're all working on their algorithms to try to figure out what's the right amount of inventory to make sure that you're giving the customer what they want at the time that they want it and in the style that they want. But at the same time not to overstock the dealers, and that way they can kind of maximize the total profitability. That'll help the whole food chain of autos and auto suppliers and dealers over time. But who knows in such a fragmented market if everybody will play nicely, or somebody will go after market share. It certainly has happened before in the world of autos.