4 Reasons The Auto Industry Is In Deep Trouble
The coronavirus crippled employment, businesses, countries, and the entire economy and is still doing so.
Most investment analysts and sites focused on the hardest hit industries – airlines, restaurants, hotels, cruise ships, etc.
And these are getting crushed.
But there are other industries having trouble too.
Today I want to highlight one of the least talked about industries facing major trouble today.
4 Reasons The Auto Industry Is In Deep Trouble
There are 4 main reasons the auto industry is in gigantic trouble worldwide right now.
1. Auto Delinquencies
2. New Car Sales Cratering
3. Low Profit Margins and Cash Flow Production
4. Car Rental Business Coming To A Complete Stop
Auto Loan Delinquencies
The first issue the auto industry began back in the last quarter of 2016… More and more people not paying their auto bills.
The chart above shows the percentage of auto loans more than 90 days delinquent.
As of May 2020, we’re now sitting at an estimated 5.1% auto loan delinquency rate. Meaning for every 100 vehicles loans 5 are now 90 or more days without being paid.
And even though the latest numbers for June aren’t out yet, I can guarantee that’s now higher due to the continued mass unemployment.
As you saw in the chart above the 90+ day delinquency rates been rising since 2016… But this coronavirus and mass unemployment are accelerating things.
But this isn’t just affecting current and past vehicle loans which is bad enough… Its also affecting new sales as well which gets us to reason #2 the auto industry is in deep trouble.
New Car Sales Hammered
Last week GM reported a 34% fall in auto sales.
Fiat’s sales fell 38.6%.
Toyota’s fell 34.6%.
Nissan’s fell 49.5%.
Hyundai’s fell 23.7%
Porsche’s sales fell 19.9%.
And Volkswagen’s sales fell 29%.
All in the 2nd quarter of 2020.
These 2 things combined – the auto loan delinquencies and massive drop in new car sales – is horrific for the automakers.
Because the auto loan industry is already one of small profits and cash flows. Which gets us to issue #3 facing the auto industry.
Low Profits and Cash Flow
Low profits and cash flow in the auto industry worldwide are now leading to massive issues for these companies.
But particularly US based auto makers because they’re overburdened from past and present pension obligations.
Low profits and cash flow combined with huge past and present pensions is why most of the US based auto makers required a bailout by the United States Government during The Great Recession.
Why does this industry have low profit margins though?
Because they’re selling commodities – until you get to the super luxury cars. And commodities always get less and less profitable over time.
EDITOR’S NOTE – Commodities don’t have powerful brand names and can’t charge premiums for their products or services. For example most people don’t care whether they have a GM or Ford vehicle. They care most about the best deal on the new vehicle purchase they can get.
Yes there are some nuances to this in the auto industry. Think Toyota being known for reliability and some people being wiling to pay more for Toyota’s as an example. But in general the auto industry is a commodity business at the lower price points of things.
Commodity businesses lead to ever lower profits and cash flows.
So when problems come up its inevitable that this industry is hurt because they don’t have any profits or cash saved up to use in a time of need.
And there’s also another huge problem though that almost no one is talking about.
Car Rental Business Comping To A Complete Stop
The hardest hit industry from the coronavirus has been the travel industry so far.
At one point in April airlines in the US we’re estimated to be losing a combined $200+ million per day due to the stoppage of travel.
This hammered airlines, hotels, restaurants, and tourism related companies.
But it also sent ripple effects out to various other industries including the auto industry. In this case specifically the car rental business and specifically Hertz which we talked about in the following 4 articles.
In the first Hertz article above on May 23rd I said the following about how this will affect the entire auto industry. Emphasis below is mine now…
When the crisis first hit the US in March, Hertz laid off or furloughed 16,000 of its employees or 25% of its workforce, eliminated 90% of future planned vehicle acquisitions, and stopped all “nonessential” spending in the hopes to save cash and survive.
Hertz even tried selling some of its large rental fleet at auction with massive discounts to get more cash.
But even these drastic actions didn’t work.
On May 12th during the company’s 1st quarter earnings call former Hertz CEO Kathryn Marinello said “companies aren’t built to work when revenue drops to zero. There’s only so long that companies’ reserves will carry them.”
Apparently, Hertz’s reserves only carried them another 10 days.
I say former CEO above, because Marinello resigned as CEO of Hertz on May 16th… Just 4 days after the 1st quarter conference call.
Hertz is likely to come to an agreement with its debt holders to continue operations for the long term under a more stable debt structure. But the effects of this are already wide ranging.
One example is major auto makers like Ford (F), Toyota (TM), Fiat Chrysler (FCAU), and General Motors (GM).
Last year Hertz bought 1.7 million vehicles in the US – or 10% of total vehicle production in the States.
Hertz is one of the largest vehicle buyers in the world and its already announced that its cutting vehicle buys by 90% due to lack of people travelling and needing car rentals.
If this continues car makers are going to be hammered.
I saw this coming in May and knew auto makers were going to get crushed in the coming months… But I didn’t expect auto sales to drop as much as they did in the 2nd quarter.
This drop in car purchases from Hertz and other car rental companies is another reason automakers are in deep trouble.
To protect yourself and your investments I recommend staying away from this entire industry for the time being for the 4 reasons mentioned above. And because with coronavirus cases spiking in the US and worldwide there appears to be no end in sight for the auto industry.
To learn other ways to protect your investments read the following articles…