The “Financialized” Structure of Automobile Corporations in the 2000s

Notes

1. As Chesnais (2005b: 46, authors' translation) stresses, the financial globalization, or “mundialization” in the author's words, results from three processes: “the monetary and financial deregulation or liberalization, the compartmentalization of national financial markets and the disintermediation, i.e. the expansion of lending operations, previously reserved to the banks, to all sort of institutional investor”.

2. A broad definition of this concept can be found in Epstein (2005) and Palley (2007).

3. These investors “adopt portfolio management strategies, reducing the average time of holding shares in accordance with more ‘immediate’ capital gains, internationalizing their applications and feeding the growth of derivatives markets” (Braga 1997: 206, authors' translation).

4. In Guttmann's words (2008: 15–16, authors' translation), “key innovations, although they gave to the general credit system flexibility and reaction capacity in relation to creditors' and debtors' needs, they also encouraged asset bubbles, risks underestimation and excessive leverage”.

5. See Chandler (1990), Braga (1997) and Gonçalves (2002).

6. Braga (1997: 216, authors' translation) emphasizes this fact: “as a result imposed by competition and risk management, companies engage themselves in finance that does not only imply an adequate debt and liability structure (to immobilize capital), but at the same time build an adequate creditor/asset position to have mobility, flexibility, innovative agility and velocity in capturing profitable opportunities in the several national productive and financial markets”.

7. According to Chesnais (1995: 11, authors' translation), “the groups' ‘financialization’ degree has increased in a considerable manner. This refers more and more to financial groups, undoubtedly with industrial dominance, but also with a diversification to the financial services, besides an increasingly important activity as operators in the exchange market”.

8. Process initiated through the separation between the company's property and control and intensified by the depth of the increasingly broad and liquid financial markets.

9. For more details about different features of the corporations' “financialization” process, see Aglietta and Rebérioux (2005), Borghi and Rocha (2010), Chesnais (1994, 2005a, 2005b), Coutinho and Belluzzo (1998), Crotty (2002), Farhi and Borghi (2009) and Plihon (2005).

10. About the company's growth with a long-term perspective, see Penrose (1959).

11. This choice of carmakers was based on their relevance within the industry in terms of world production and sales, as well as the diversity of their regions of origin (United States, Europe and Asia). The period, in its turn, was selected due to data availability for most of the companies. It should be emphasized that data for Honda and Toyota only begin in 2003. However, in order to avoid information losses, it was decided to use data from 2000 onwards for all other companies. Moreover, different from other companies' fiscal year, which ends on December 31st of each year, in the case of Japanese corporations the fiscal year ends on March 31st of the referred year. All data were extracted from the annual financial statements released by the respective carmakers on their websites, listed at the end of this article.

12. The merger, one of the biggest in this sector, ended after the sale of Chrysler at US$7.4 billion for Cerberus Capital Management, which acquired 80.1 percent of its shares and operations in financial services in 2007. As a result, Daimler extricated itself from financial obligations related to retirement costs and pension funds (US$19 billion), one of the challenges faced by American carmakers (Valor Econômico 2007). About the problems of this controversial merger, see Köhler (2009).

13. See, for instance, Womack, Roos and Jones (1990), Shimokawa (1996), Freyssenet and Lung (1999) and ECLAC (2004).

14. Total costs of the Big Three's benefits model were estimated between US$90 billion and US$95 billion in 2007. In September 2007, a general strike in GM's facilities in the United States occurred. It was only solved after an agreement with the UAW trade union, establishing a partial transference of the company's liabilities with the health plan of retired workers to an independent fund and the creation of a program of resignation, in order to allow cost reduction. As White and McCracken (2007, authors' translation) point out, “Detroit's problems are derived from a permanent reorganization of the world automobile industry in the face of globalization,” stressing “what has been increasingly clearer in recent years: that it is Toyota Motor Corp., not GM or the UAW, who establishes the parameters of labor cost in the American automobile industry,” since the difference between the cost of unionized operations in the US and facilities of Toyota and other Asian and European carmakers without trade unions was about US$25 and US$30 per hour.

15. About labor and other challenges faced by American companies, see for instance Osang (2006a, 2006b, 2006c) and The Economist (2005a, 2005b, 2005c, 2006). For some strategies adopted by GM, Ford, Chrysler, Volkswagen and Renault in reaction to the rise of the Asian competitors, see Mackintosh (2006).

16. About this discussion, see Borghi (2007) and Andrade (2009).

17. See The Economist (2002) for the problems faced by Fiat and the partnership with GM, and The Economist (2005d) for the company's recovering, which involved not only the end of GM's 20 percent stock ownership agreement—in 2000 GM invested US$2.4 billion and in 2005 it had to spend US$2 billion to undo the transaction—but also the restructuring promoted by Marchionne when he became Fiat's CEO. The restructuring plan consisted of launching new vehicles, using common platforms in producing vehicles from Alfa Romeo's brand, sharing components with other brands of the group (Maserati) and establishing alliances with other corporations in order to reduce costs and take advantage of economies of scale. About the group reorganization, see also Volpato (2009).

18. Part of Ford's restructuring plan consisted of selling luxury brands of its Premier Automotive Group (PAG). In 2007, Ford sold Aston Martin to a British consortium at US$848 million and in 2008 Jaguar and Land Rover to the Indian Tata Motors at US$2.3 billion (The Economist 2010a). This brand sales process accelerated after the international economic crisis.

19. They are called in this way, because they are subsidiaries of a group from the productive sector whose purpose is to provide credit to consumers for the acquisition of goods produced by the corporation.

20. Information on carmakers' financial arms was extracted from their websites, listed at the end of this article.

21. Like GMAC, Ford's financial arm also started its diversification process not necessarily related to vehicles. In 1985, it acquired the First Nationwide Financial Corporation, a savings and loan institution sold in 1994. In 1987, it bought the U.S. Leasing International Inc. and, in 1989, the Associates Corporation of North America (at US$3.35 billion), which would become independent in 1998 and be acquired by Citigroup in 2000. In 1994, the financial arm bought Hertz, a rental car company, which was then sold in 2005 (Bordenave 2000: 250–251; Mercer 2009: 187 and 199–200).

22. About this discussion, see Senter Jr. and McManus (2009: 168–169).

23. Ally Bank has been the main financing agent of Chrysler's dealers (Wernle 2011). Chrysler Financial was sold to the Canadian bank Toronto Dominion, an important institution of vehicles financing in Canada, at US$6.3 billion in 2010 and still keeps a huge dealers network (Cleto 2010; The Economist 2010b).

24. Jürgens (2009: 238) stresses this feature for Volkswagen: “…it is clear that VW has not taken the path that famous role models of the New Economy era had traced. Despite the expansion of financial services, VW has not followed Ford and other companies in officially announcing a strategy of ‘value migration’ away from automobile manufacturing as a low-margin activity towards higher-margin activities downstream the value chain. The official policy is that financial services support VW's core business activities of auto manufacturing”.

25. Such a case was also verified for Ford. As there were not net profits by segment, it was not possible to present a chart for the company. However, a similar trend could be observed through the profit before income taxes by segment. In this case, only in 2008 was there a financial loss (US$2.6 billion), contributing to an even higher corporation's loss, since the productive segment registered a US$11.8 billion loss. In all other years within the period 2000–09, the financial services segment presented a positive profit before income taxes and, except for 2000, higher than the profit from the productive sector which, in its turn, registered losses before income taxes from 2001 to 2008. Thus, the results from the financial services segment contributed in almost the whole period to decrease the corporation's losses and also to turn them positive between 2002 and 2005 (in the case of the profit before income taxes).