Tim O'Brien | Nov 19, 2008

The bad news is set to worsen for the new car dealer sector. When GE and GMAC announced their intent to withdraw from dealer ‘floorplan’ financing, they set affected dealers a December 31 deadline to find alternative financing arrangements.

That deadline is coming at them like a train.

At least 30 percent, and possibly as many as 40 percent of new car dealers across Australia could be affected by GE and GMAC’s decision to ‘cut and run’. Many of the affected dealers, particularly those battling slowing sales, with lower turnover volumes or who write less of the more-profitable consumer finance on the cars they sell, will find it difficult to secure the operating credit necessary in time to avoid collapse.

Floorplan finance is not a particularly attractive investment for financiers. The margins on the credit provided to dealers in financing the floorplan (i.e. the dealer new car stock) are slim: sometimes as low as 1-2% above bank bill rate. Most are involved to get to the consumer market, car buyers financing through the dealership – it’s called ‘retail paper’ -where the margins are healthy and profitable.

In a market of slowing vehicle sales, plummeting consumer confidence and talk of recession, alternative floorplan suppliers are not bolting joyously into the market to scoop up the dealers left high and dry by GE and GMAC.

ford-credit-logoThe mess is compounded by fears the Ford Credit is examining its operation here and is also in some doubt as to its intent for its future in the Australian market.

And the closures have begun: a trickle now, but unless new financiers begin stepping into the breach, and quickly, the trickle could become a flood. Country new car dealers, in particular, are most exposed. A flood of collapses there would be a disaster for the regional communities they serve and for the employment theyprovide.

A flood of collapses would also put the rest of sector under pressure. What will GE and GMAC do with all the new cars they will suddenly have on their hands should large numbers of affected dealers be unsuccessful in securing new financing arrangements?

In the normal course of events, unsold new cars repossessed from failing dealerships would be cleared through vehicle auction houses. But suddenly having tens of thousands of new cars landing in the auction market will devastate the retail sector and crucify remaining dealers.

It would also, by extension, have a devastating affect on our local motor vehicle manufacturers.

The size of the ‘hole’ left by GE and GMAC’s departure is around $2billion. It will not be easily filled. There is now a quiet but desperate battle going on within the industry to bring new financiers into the market. And to buy a little more time. In documents sighted by The Motor Report, the Australian Automotive Dealer Association, VACC and the Federal Chamber of Automotive Industries have written to GE and GMAC to persuade them to extend their 60 day notice period.

They have also requested the Treasurer, Mr Wayne Swan, to formally request GE and GMAC to provide dealers with “at least six months notice of withdrawal of finance”.

holden_car_dealer1

In documents also sighted, VACC has written to the Chair of the Future Fund Management Agency, Mr David Murray, seeking an opportunity to meet to discuss the “short term credit facility” that has been proposed by the Federal Government to assist affected motor vehicle dealers.

Senator Conroy, in response to a question in the parliament on the 12th of November, confirmed that “the government has asked Mr David Murray to explore options to help facilitate larger and more liquid institutions, providing liquidity support to various market linked investment vehicles”. (Hansard)

He also said, “St George Bank and Esanda Finance have indicated that they are considering potentially extending their market share in the Australian car finance market following the withdrawal of GE and GMAC Australia. It is possible that $1 billion to $1.5 billion of the $2 billion shortfall could be picked up by Esanda and St George.”

Certainly Esanda and St George will pick up some. However, they can, and will, cherry-pick. But unless we see new entrants, a lot of dealers – and their employees – will be out in the cold.

As we have commented before, there is no good news in this for anyone. The battle is on in the new car sector to avert a disaster.