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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.
Why?
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…
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