Learning from past lemons , Ford has USL Capital unit humming.

SAN FRANCISCO -- Ford Motor Co. got it's nose bloodied when it ventured into the savings and loan industry. But its experience in commercial finance has been something of a salve for the wound.

Using its auto credit operation as a launching pad, Ford diversified into financial services in the mid-1980s to counterbalnce the cyclical car and truck industry.

But Ford's vaunted financial analysis and risk control techniques failed in the thrift industry. First Nationwide Financial, Corp. lost tens of millions. of dollars, prompting the company to sell it earlier this year.

By contrast, the auto giant's 1987 purchase of U.S. Leasing Corp. for $ 512 million has been a winner.

Change of Identity

In the last seven years, U.S. Leasing has changed its name to USL Capital and diversified into a range of nonleasing businesses.

Under James G. Duff, 56, a plain-speaking Kansan and Ford Motor Credit Co. veteran installed as president in 1988, the unit has systematically reduced risk and streamlined operations while growing at double-digit annual rates. Pre-tax income totaled $201 million last year, double the 1989 level.

"Prior to the acquisition, U.S. Leasing was an aggressive and unfocused player," said Sanja Sharma, an analyst for the debt rating agency, Moody's Investors Service.

"What Jim Duff has brought is a sense of extreme discipline and focus. It's automotive thinking, measuring unit costs and introducing production management techniques."

Ford is a corporation which, above all, values successfully achieving planning goals. In that light, Mr. Duff's own summation of his unit's performance is strong praise. "We've done what we said in the acquisition," he declared during an interview in his office overlooking San Francisco Bay.

But Mr. Dulls success makes it more difficult to keep meeting Ford's expectations. Much of the gains so far have come from slashing the work force and wringing out costs. Going forward, profit growth must come from expanding revenue.

Commercial finance in general and leasing in particular are plagued by cutthroat competition. Continuing to produce the growth Ford wants while keeping returns high and controlling risk is a tall order indeed.

"The industry is growing at a 6%-8% annual rate," noted John H. Giddens, a leasing consultant and former U.S. Leasing executive who left before the Ford acquisition. "Where is the [double-digit] growth rate going to come from?"

Mr. DUff conceded the point. "Our biggest problem is producing sustainable 13% compound growth, meeting risk parameters and reward parameters," he said. "The larger we get the tougher it gets."

In the Ford financial services universe, nonbank finance company activities are divided between The Associates Corp., which handles consumers, and USL Capital which serves businesses.

Ford signaled its strategy last year when it jettisoned the name U.S. Leasing, adopted when the company was set up to lease .fruit packing equipment in i%2. Clearly, Ford wants to build USL Capital into a major commercial finance powerhouse, perhaps even challenging industry leader GE Capital, the class act of the field.

"We have the commercial finance charter," explained Mr. Duff. "Leasing doesn't say what we do."

Today, USL Capital is an amalgam of leasing and nonleasing businesses inherited in the 1987 acquisition or transferred from Ford Motor Credit. Assets total $7.8 billion although some $3 billion of that is carried on Ford Motor Credit's books for tax reasons.

Straight lending is taking a bigger share of the balance sheet, but leases still represent about 75% of USL Capital's financing assets. The unit ranks as the nation's fifth-largest lessor, adding $2.06-billion in new equipment in 1993, according to Asset Finance & Leasing Digest.

Still, that total is dwarfed by GE Capital whose 1993 leasing volume was nearly seven times greater.

Mr. Duff has combined seven U.S. Leasing operations and an equal number of activities transferred from Ford into six business lines. To avoid risky concentrations, no single unit accounts for more than 32% of the company's earning assets. "My goal is six units each with 20%," Mr. Duff joked.

This consolidation reflects Ford's emphasis on cost control and efficiency. In the last few years, Mr. Duff has imported a raft of Ford executives expert in the automaker's rigorous financial analysis techniques.

They have combined back office functions, shed marginal business lines and cut back jobs by almost two-thirds, dropping the employee headcount from 1,878 to 719, a 62% decline.

In business equipment finance, for example, once the company's core business, Mr. Duff and his lieutenants sold off units that leased instruments and medical equipment, eliminating hundreds of jobs in two strokes.

They also cut back low-margin vendor programs, in which the company acts as an intermediary for manufacturers of such items as postage machines and photocopiers.

"We have downsized pretty dramatically, eliminating labor-intensive, no-profit businesses," noted Floyd S. Robinson, the business equipment division's chief.

Focusing on High Margins

Today the unit concentrates on high-margin operations that don't take a lot of people to manage, such as leasing office furniture and computers. A typical customer might be a big law firm that wants to update its computer system every few years and therefore prefers leasing to buying.

The number of business equipment schedules, as leasing contracts are called, has fallen from 65,000 four years ago to about half that number today.

But the average schedule size has multiplied eight-fold from $75,000 to $600,000. What's more, said Mr. Robinson, profits per employee have tripled.

These initiatives have given USL Capital a 1.5% ratio of operating costs to earning assets compared to an. industry average of 3.9%. "They are the lowest cost provider in most of their businesses," said Mr. Sharma of Moody's.

That edge is vital, especially in up-market transactions, such as aircraft leasing, where price competition is most intense.

USL Capital is handicapped by debt ratings a notch or two below such top-rated competitors as GE Capital, saddling it with higher funding costs. That reflects Ford Motor's standing with the rating agencies.

"Our rating for the foreseeable future is tied to the fortunes of the automotive industry," said George Stallos, USL Capital's chief financial officer.

In addition, ranking companies, flush with capital and hungry for revenue, are stepping up activity in leasing and commercial finance.

Banks can be deadly rivals. Cheap, deposit-based funding and higher leverage ratios allow them to earn acceptable returns at cut-rate prices. NationsBank is said to be especially aggressive in the market these days.

But, according to many leasing experts, banks generally have been ineffective as lessors. That reflects their history of bouncing in and out of the business depending on their need for earning assets.

What's more, banks tend to be more comfortable with a financial statement than a fleet of trucks or a warehouse full of office furniture. Lessors structure transactions based on the residual value of goods at the end of the lease contract.

Bankers typically want to recover as much cost as possible from the contract itself and minimize the risk inherent in owning hard goods.

"They are not equipment people - they are lenders," said Mr. Robinson, who came to USL Capital from the leasing unit of the Rhode Island-based bank company Fleet Financial Corp.

Despite the poaching and price wars, Mr. Duff likes where he is sitting.

In addition to cost, USL Capital's chief claims he has a quality advantage that will bring new business in areas where service is key, such as vehicle fleet management.

But to meet growth targets, Mr. Duff is also weighing acquisitions. "We ought to he able to grow our present businesses, but we will look for a logical seventh business line," he said.

Mr. Duffs main concern is to buy businesses that don't require a lot of people to run. One possibility, he noted, is shipping container leasing since USL Capital already leases trucks and rail cars.

The landscape is littered with industrial companies that lost big in commercial finance. Mr. Duff will not expand if it involves taking on the kind of risk that brought Westinghouse Credit to its knees.

"Ford's-expectations are for stability, growth and size," he said. "But, as a first principle, if one thing has to go, its growth."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER