The headlines focused on the fact that GE, a big industrial conglomerate, is beginning to sell off its $500 billion finance arm in small chunks. This week it put a $40 billion portfolio of corporate loans up for sale. But not all of GE Capital will end up on the block: GE is keeping the $90 billion division that finances purchases of medical equipment, power-generation gear and aeroplanes, or leases them to users. In part, that is because those fields are critical to GE: it makes all or part of the products being financed or leased. But it is also because the financing of old-fashioned capital goods is a booming business.
The gear GE sells is expensive; would-be buyers often lack the capital to buy it outright. For GE, therefore, the financial engineering that underpins the use of its wares is as important as the mechanical engineering that created them. Many hospitals, for instance, do not buy expensive scanners from GE, but lease them instead. When it develops improved versions, it helps the hospitals swap the new generation for the old, by passing the outmoded gear to another, thriftier institution, and so on down a long chain. By the same token, the sale of a plane that appears to be from Boeing to an airline may in fact be a sale to GE and a lease to the airline. In 85% of these cases, the plane will have engines made by GE or a joint venture.
Manufacturers have financed purchases of their own products for a long time, with mixed results. General Motors started its own finance operation, General Motors Acceptance Corporation (GMAC), in 1919, which helped it to expand its customer base and thus boosted its profits for decades. Eventually, and disastrously, GMAC expanded into mortgages. Just before the crisis, GM sold half of GMAC to raise money. Its subsequent collapse and nationalisation contributed to GM’s own bankruptcy in 2009.
Yet in 2010, shortly after GM had emerged from bankruptcy and while it was still under government control, it spent $3.5 billion in cash—a vast amount given its straitened circumstances—to purchase AmeriCredit, a Texan subprime auto lender. The company has since been renamed GM Financial. Its assets have grown from $11 billion to $49 billion in five years, an astonishing rate for a financial institution in recent years. China, where car-buyers are beginning to rely more on credit instead of buying with cash, is one area where it is growing fast.
Toyota continues to own a bank in America to help customers finance car purchases. BMW does as well. Car loans, after all, proved much more resilient during the crash than other forms of credit. For companies that do not have such financing arms, often because they use all the capital they can raise cheaply in their core business, a relationship with a finance firm is vital. This is all the more true, says Vincent Caintic of Macquarie, a bank, as ever stricter regulation makes it increasingly expensive for banks to offer car loans and the like.
Element Financial, a Canadian firm, has carved out a lucrative niche financing specific items, such as the railcars produced by Trinity Industries, an American conglomerate, and the small diggers made by Bobcat, part of a South Korean one. It went public in 2011 and its shares are up fourfold since (see chart). Over the same period, the S&P index of North American firms in financial services has not even doubled.
© The Economist Newspaper Limited, London (June 6th 2013)