Tim O'Brien | Sep 12, 2008

Try telling Bill Gates and Michael Dell you can’t make money out of flogging tin to seppos. The two computer mega-nerds have been ‘swallowing up’ dealerships like spuds at an Irish breakfast, right across the US.

Do they know something we don’t?

Gates has stumped-up better than USD$100 million to bite off a 5.5 percent stake in Autonation, a US chain of dealerships. The Automotive Newsletter, AIM (September 2008), reports that Gates’ Cascade investments has taken a 2.9 percent share, with the balance, 2.6 percent, going to the Bill and Melinda Gates Foundation (you know, ‘wot does good works’ in Africa and so forth).

lincoln-mkx

Billionaire Michael Dell, Dell Computer’s number one propeller-head, also not widely known as a complete nong in matters financial, announced plans in May this year to partner with Jeffrey Rachor, former President of the Sonic automotive group, in a (reported) USD$500 million venture into vehicle retailing.

What’s going on here? The US economy is in more shit than the proctologist working the elephant enclosure. Some of those fine vehicles over there – like the deeply deplorable Lincoln Navigator – dealers can barely give away. So why would you throw good ‘computer dollars’ after very dodgy ‘automotive dollars’ if you didn’t reckon there was some life in the mongrel?

dell-gates

New car sales? Reuters reports that CNW Research (an independent US-based automotive marketing research company) is predicting losses in US vehicle sales of a mind-boggling USD$276 billion this year. (Try wrapping bourbon-damaged grey cells around that figure.)

The market is expected to tumble below the 15 million sales level - well shy of the 16.2 million units needed to make it profitable.

That’s only part of the story. Because the US banking industry invented a wholly new kind of fiscal stupidity, plunging the world economy into an abyss in the process, vehicle financing and the leasing market is also… well… rooted. According to CNW (Reuters) there is a “tidal wave of used SUVs coming off leases” that is expected to cost auto lenders up to USD$4.9 billion this year, and similar amounts in 2009 and 2010.

These are cars that were bought three and four years ago, in far happier times, but are now nearing the end of the lease. Because new and used SUV residual values have collapsed, they’re now worth about as much, and as sought after, as a three-legged tabby cat.

2008 Dodge Ram 1500 Quad Cab

A lot of these cars are going to end up back with the lenders. Consumers will walk away from them at the end of the lease period, and, because residual values have collapsed, dealers won’t be able to sell them for the value predicted in the lease.

“Close to 800,000 SUV leases will expire this year. They were written at an average residual value of 51% of the original capitalised cost.” Jim Henry, Auto Industry News and Insights, writes.

Most are not worth anything like that now. (This is going to compound difficulties for lenders like Ford Credit who reported 86 percent of Ford and Lincoln Mercury leased vehicles were returned in the first quarter of 2008.)

So, if you had a few billion ducats secreted about your person, would you be flinging them into US car dealerships? Not me, probably not you either.

Perhaps, for Gates and Dell, it’s an investment in the future and the ‘convergence’ of technologies (the phone becomes the computer becomes the car becomes the communications platform?). Or perhaps they’ve just got too much money… (hmm, beware of geeks bearing gifts).