Ford Discusses USFL's Future

In October 1987, Ford Motor Co. surprised the vehicle leasing industry by announcing its acquisition of United States Leasing International, the parent corporation of United Slates Fleet Leasing. What added weight to this announcement was that it came on the heels of two earlier acquisitions - Ford's $1.2 billion financing of a management buy out of Hertz, and GF Capital s purchase of Gelco.

Almost from the moment Ford announced its proposed acquisition of USLI, the industry was abuzz with speculation on Ford's future plans for United States Fleet Leasing. Even one year later, opinions vary as to the impact of Ford's entry into the vehicle leasing business. To determine what Ford's plans are for United States Fleet Leasing, Automotive Fleet's Executive Editor Mike Antich interviewed Kenneth Whipple, president of the Ford Financial Services Group and executive vice president of Ford Motor Co. (USLI is a member of the Ford Financial Services Group.) Whipple became president of Ford Financial Services Group on March 1, 1988. Prior to this, Whipple was chairman and chief executive officer of Ford of Europe.

 

AF: Why did Ford purchase United States Leasing International?

Whipple: For some time Ford has been embarked on a diversification program in financial services. The root of this diversification program is to acquire businesses we were already in and build on these competences. There were two competences that we were building on in the case of U.S. Leasing International. First, through Ford Credit's activities, we are one of the largest and most sophisticated borrowers in the country. Secondly, for quite a number of years, about 10 percent of Ford Credit's business has been involved in diversified financing such as commercial financing, leasing, and other tax-oriented businesses. These are the same kinds of businesses that U.S. Leasing is involved with. We wanted to diversify into businesses we knew something about and which were to some extent counter-cyclical to the basic automotive business. These were the fundamentals that led us to U.S. Leasing. You could say the same thing if you look at our other forays into financial services such as the acquisition of First Nationwide Bank. It's the same reasoning, different set of skills.

 

AF: What was the sequence of events that led to the acquisition?

Whipple: Part of it is already what I mentioned; deciding that the diversified financing business was an area we wanted to be in. The second part resulted from a group we put together internally that screens the field of companies that might be available. This group also investigates how we might expand internally because that always is an option. U.S. Leasing International just seemed to standout.

 

AF: One component of U.S. Leasing International is United States Fleet Leasing. Were there any sort of internal deliberations within Ford Motor Co. as to the possible ramifications this acquisition may have within the fleet leasing industry?

Whipple: United States Fleet Leasing is a fairly important part of U.S. Leasing because not only does it impinge on the finance business but also the car business. We had a fair amount of discussion in terms of whether it fits strategically with the rest of our businesses. I guess the jury may still be out on that. But we concluded on at least a couple of things: One, we wanted to demonstrate that we really could run the vehicle part of U.S. Leasing as a stand-alone type of business. We wanted to dispel any suspicion that (USFL) would end up with 100 percent Ford Motor Co. cars. As you know, we have a number of Ford dealers that are reasonably big in that business and we wanted to demonstrate that we were not going to be unfair competitors in any sense. I think we are on the road to doing that. Secondly, we concluded from a strategic sense that the knowledge we gained by being in the (vehicle leasing) business in a big way would be helpful. This includes managing used-car residuals, understanding the cost of ownership of the basic cars, the financing considerations of business that is done at Ford Credit, and so on. It seemed that we ought to know a lot more and this was one way to learn. The final consideration was gaining firsthand knowledge about fleet management. What do customers really want? How can we pursue that market? We are demonstrating that (USFL) is really a hands off business. It's an ongoing independent profitable business.

 

AF: We've heard stories that there is an internal group within Ford that is analyzing the pros and eons of retaining United States Fleet Leasing as part of the Ford organization. Is there any truth to those rumors?

Whipple: Right around the time of the acquisition, or shortly thereafter, we took a long hard look at this question. Very early on, we were just unsure. You can never say 100 percent for sure but the answer to that strategic question is that, yes, we do intend to keep U.S. Fleet Leasing.

 

AF: There is no intention on the part of Ford Motor Co. to sell USFL?

Whipple: That's right.

 

AF: Is Ford Financial Services Group looking at any similar type of lessor acquisitions within the vehicle leasing industry?

Whipple: I guess I have to broaden that a little bit. It wouldn't be right for me to comment on whether we're looking at a specific company. This is one of the businesses we intend to put some importance in and part of it has to be opportunistic. We know strategically where we are going. We do have a specific group within Ford Financial Services that is charged with looking at acquisitions. This is the group, for example, that did the First Nationwide acquisition. They did the U.S. Leasing International acquisition. At any given time, we're looking at three or four companies as possibilities. I can't comment on anything specific but we are interested in doing some more financial services acquisitions.

 

AF: What about within the vehicle leasing industry in particular? Is that a marketplace you are looking at for possible expansion?

Whipple: We're looking to get bigger there. I really can't say specifically whether this expansion will be 100 percent internal growth or whether it will be acquisitions because I'm into the opportunistic part of it. We would like to get bigger.

 

AF: Do you have any projections as to the growth of USFL's vehicle leasing business? Are there any internal projections as to the type of growth you are looking at or would like to achieve?

Whipple: Not really. This is not 100 percent of a cop out. Altogether, Financial Services accounts for a little less than 20 percent of Ford's total results. Over the very long term, and here we are talking 10 to 20 years, we would like to be something like 30 percent of Ford's total results. We really don't have a specific five-year business plan for U.S. Leasing as we do for every other operation in the Ford organization. The reason for this is because we are presently in the process of putting one together. We will probably have it completed by the end of the year. I really don't have a number for the fleet part of it. The leasing part is important in that it relates to the rest of our business but it is quite small in relation to Financial Services in total, so it is hard to focus on it.

 

AF: There have been a number of lessors sold in recent months and most management people at the acquired companies have indicated to us that leasing has become a marginally profitable business with profit centers eroding and very competitive rates being offered. Does Ford project otherwise?

Whipple: I think vehicle leasing is going to be a good business. It will be a profitable business. The industry is fragmented and there is certainly the potential for a lot more consolidation, but it's hard to see precisely how that is going to happen. GE has been involved in the consolidation and I think they have 18 or 19 percent of the market themselves but there are scads of other players beyond that.

 

AF: How will USLI be merged into the Ford organization?

Whipple: We made quite a point before the acquisition that we were going to make the operation as independent as possible. It reports directly to me. The diversified financing operations that were organizationally part of Ford Credit will be merged into U.S. Leasing. The merger will almost double the size of the assets managed by U.S. Leasing. We're in the middle of that process now, and these businesses will be completely merged by the end of the year.

 

AF: What is the dollar value of those merged assets?

Whipple: I don't know because we haven't figured out which assets will be transferred off the books of Ford Credit. If U.S. Leasing before the transfer was $2 billion it will be approximately $3.5 billion in a combined operation, but not all of that may show up in U.S. Leasing's published financial statements for a while. But it gives you an idea of the size of the assets that are physically under management by that company.

 

AF: What safeguards will be utilized to ensure the full integrity of other leasing companies in terms of your in-house relationship with USFL?

Whipple: As we go along, the best way to demonstrate this is by showing it really is at arm's length. We want to keep them separate and I think we are demonstrating that. There is a lot less worry and apprehension now than at the time of the acquisition. People know what the composition of the various fleets are in terms of cars. They know when and whether any sweetheart terms are being offered. We will proceed, as we have, by following these rules. I don't think anybody is going to worry.

 

AF: What sort of efforts did you make at the time of the acquisition to try to ameliorate these concerns.

Whipple: Early on, there was a time when we quite frankly said that we weren't sure what the answers to these strategic questions were. At that point, we were not sure whether it made sense for us to be in this business in the long run. Nowadays, we are a lot more certain. We think we are demonstrating as we go along that we can be in this business and not hurt other people including our dealers.

 

AF: Prior to the acquisition of USLI, were Ford Division and Lincoln-Mercury Division fleet departments involved in the internal deliberations on whether to acquire the lessor?

Whipple: Only in terms of what can be learned about used-car residuals but not at all in the management, pricing, or the terms of the acquisition. We made quite a point of keeping them separate.

 

AF: You mentioned one impact on USLI by the acquisition has been almost doubling its assets. What other impact will this acquisition have on USLI and USFL?

Whipple: What we are trying to do is make sure they keep their independence. Sometimes this is a fine line to walk. We are not purging any of their operating activities or departments. We are trying to keep them with a circle drawn around them. There are some areas where we can transfer things we are really good at, such as our borrowing expertise. We currently have a combined group that is looking at how we can use Ford Credit's borrowing expertise and give U.S. Leasing that same advantage. U.S. Leasing customers are more secure by having Ford Motor as a parent of U.S. Leasing than by not having it as a parent. There are two other areas where we are trying to transfer Ford expertise. One is the area of quality which we're trying to make an important part of Financial Services. The other is productivity and cost efficiencies. We have groups that are working in both of these areas. When you add it all up it will create a much stronger position for U.S. Leasing.

 

AF: One final question: What sort of projections do you have in regards to Ford Credit's retail leasing business - Red Carpet Leasing? Do you have any projections for the type of growth you are looking for in that market?

Whipple: Not in numbers. We've had a little leveling off, probably because people were uncertain as to what effect the tax law changes were going to have. But I think it is a business that has a very substantial growth potential. We are into the stage where people are comfortable with the turn-in process. The idea that you return a car and have some responsibilities for damage was a somewhat foreign thing. People are comfortable with that now. The other part of it is that we are getting the distribution end sorted out where at most decent sized dealerships you can deal with a retail salesman on either a lease or a retail purchase basis. Not that many years ago, if you wanted to consider a lease you had to go to the lease department. Some of that is just coming together. I think we're in for continued expansion with Red Carpet Leasing.