GM’s Ally Deal Gives It a Big Global Foothold
In the auto industry, this is the kind of deal that makes a ton of sense.
General Motors, just three years out of bankruptcy, is taking a big step to bolster its captive finance operations overseas. The world's largest automaker bought the international operations of Ally Financial for $4.2 Billion.
What does GM get in exchange? It will acquire Ally's operations in Europe, Latin America and a 40 percent stake in a Chinese auto finance company. (Read More: GM to Buy Ally's Europe, Latin America Operations.)
In short, GM s acquiring another piece of the GMAC international portfolio it owned before the company started selling it off six years ago.
Funding International Sales
GM made this deal to give itself a better shot at closing more sales overseas. After announcing the deal, GM CFO Dan Ammann said adding a stronger captive finance operation overseas will help GM finance more sales internationally. "It's going to result in a significant increase in sales," said Ammann. (Read More: European Car Market Contraction Sharpens in September.)
Two years after its IPO, GM is still rebuilding its business. The one area needing the most help is GM sales in Europe and developing markets. Europe has its own set of issues I've written about often. But the story with developing markets has been under reported. Over the next 10-20 years the battle in the auto industry will be in developing markets where many people are just starting to buy their first car and few have ever taken out an auto loan. (Read More: Two Years After IPO, GM Still Is Looking For Love.)
Risky Move or Safe Bet?
The combination of GM going further into the auto loan business and many of those loans targeting developing markets has some people wondering if General Motors is making the same mistakes it made back in in 2004-2006 when GMAC turned into a drag on the bottom line.
First, the problems behind the huge losses with the old GMAC were brought on primarily by GMAC's mortgage portfolio. Back then, the GMAC mortgage operation ResCap was racking up losses as the housing market started to struggle. The new GM and its captive finance subsidiary, GM Financial, are focused on writing auto loans, not mortgages.
Second, just because GM is expanding its auto loan portfolio in developing markets does not automatically mean it's a risky move. The developing markets like India, China, Russia is where the biggest growth in auto sales will come from in the years ahead.
If properly managed, the auto loan market in those countries could turn out to be lucrative. More importantly, auto loans will increasingly be the way people pay for their new cars and trucks overseas. (Read More: The New American Standard: An Asian Model Car)
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