Should Auto Firms Finance Your House?

General Motors wants to finance your house; so does Ford. And Chrysler has just opened an industrial leasing and commercial finance company in Greenwich, Conn. What’s going on?

The auto companies are expanding in financial services. GM, after buying two mortgage-related companies last year, has formed GMAC Mortgage as a division of its auto financing subsidiary, General Motors Acceptance Corp. It is testing the market by making mortgage loans in Michigan. Ford last year acquired First Nationwide Financial, a savings and loan holding company. And Chrysler bought a network of consumer finance companies from Bank of America.

So, we get three more entries in the game of Let’s Play Banker. Not only is every insurance company, bank and brokerage house trying to get into each other’s business these days, but we’ve got Sears, Roebuck and American Can joining them. Can the car makers possibly bring anything to the game, or is this another brainstorm from the industry whose past strategies were so clumsy that better than one in four new cars sold in America is now an import?

Advantage Is in Money

Well, try not to look surprised, but Detroit may have something going on this one. What the car makers bring to the game are customers and money, and, of the two, pay attention to the money.

The car companies have customers, to be sure. GMAC, for example, has car loans outstanding to 7 million people--potential mortgage customers, in theory. But all of the many competitors in the mortgage game have customer lists as well.

The Detroit advantage is in money--more than $80 billion in assets for GMAC, roughly $30 billion for Ford Credit and $16 billion for Chrysler Financial. Their strong credit ratings, allowing them to borrow at the best rates, are a big help, too, notes analyst Maryann Keller of the Furman, Selz investment firm. Simply put, the car makers can hold their own in the finance business.

What does that mean for the automobile business? An interesting and profitable sideline today, and a stable source of earnings in the stormy years ahead. Last year, for example, GMAC earned more than $1 billion, or roughly 25% of General Motors’ net profit; Ford Credit contributed more than 20% of Ford Motor’s earnings. If the companies can expand those finance earnings by touching a corner of the housing business, so much the better. Because they face tough battles in the automobile business in the next few years.

Constant Oversupply

The car market in this country appears to be entering a period of constant oversupply. Imports from Japan and Western Europe are being joined by newcomers from Korea, Taiwan and Yugoslavia. U.S.-made foreign cars are a growing presence. Last year there were 279,000 foreign-owned, U.S.-built cars sold here. Two years from now there will be more than 1 million such cars sold, industry analysts say. The foreign-owned segment of the market will then be close to 40%, in the estimate of Charles Brady of Sanford C. Bernstein & Co. And Detroit’s Big Three will have suffered a further erosion of their market share.

Why will they lose market share? Can’t they compete?

As a matter of fact, the U.S. car makers are better able to compete today than they have been in years. Ford and Chrysler have pared and pruned their operations into excellent shape. Ford, after spending $3 billion to develop it, has the hottest car on the market in the Ford Taurus/Mercury Sable. General Motors is spending billions to build new plants and modernize old ones.

The problem is, a market that has supported sales of 10 million to 11 million cars in good years is about to be inundated with supplies approaching 13 million cars a year. The car business is about to become like the steel industry, with competitors cutting prices and battling for market share. The news from GM in the next few years may well be of plant closings as the giant brings its 5.2-million-car capacity in line with realistic expectations for the domestic market. The news from the Japanese car makers is likely to be more production in the United States, as the strong yen shifts the advantage away from importing here.

Free-for-alls are expensive. Inevitably in such markets, profit margins get thinner while demands for new investment to improve worldwide operations grow more intense. The years from now to 1990, in short, will be a time when the American car makers will be happy to have extra profits from their growing financial operations.

Sometimes, you know, even Detroit has method in its madness.