Nobody can yet estimate the damage caused by the corona crisis. The VW group is already calling for purchase premiums for new cars, flanked by unions and those prime ministers who are concerned about the well-being of the key industry in their country. Those who are in short-time work and fear for their job will probably not buy a car for the time being.
The loss of production and sales weighs heavily. Now the corporations face a second problem. There are billions of leasing and loan contracts on the balance sheets of the German auto industry, which come under pressure as the crisis grows. Daimler alone had to spend 400 million euros in risk provisioning for the possibly bursting financing this quarter. If things go badly, then we see the tip of an iceberg here.
Almost every second car that automakers sell is financed, mostly by the company’s own banks. This makes the auto industry a key component of the global debt economy, especially in the United States. Nowhere else is more pumped up than in the country of seemingly unlimited credit options.
Americans don’t save on a car, they sign a lease that is paid at the end of the month from current income. Unlike in Europe, manufacturers generally also assume the residual value risk if the car is resold at the end of the lease term.
In the past ten years, thanks to low interest rates, this has been good business. The car companies financed a car for the consumer and enjoyed a well-calculated cash flow each month. For many customers, a small car became an SUV. So not only ford, Toyota and GM increased their sales but also Daimler, BMW and the VW group.
Faster crash than in the financial crisis
At the end of 2019, the credit volume for car purchases rose to $ 1.3 trillion, which is the same as before the financial crisis in 2008. But as long as the labor market worked and borrowers and lessees were able to stutter their rates, things turned this wheel faster and faster. This is now over for many people. Since the outbreak of the corona crisis, 26 million Americans have registered as unemployed – a faster and deeper crash than in the financial crisis a decade ago.
If these people don’t find work again soon, the auto industry will be hit twice. In addition to the broken credit agreements, the automakers then remain on the used cars, which their customers are placing in ever increasing numbers on the yard. At BMW, the memories of the last burst bubble are still painful. In the financial crisis, the group had to write down around two billion euros on loan defaults and lease returns on the US market. How carefully the corporations calculated this time is open.
While the credit-financed US market threatens to collapse like a house of cards, China shines all the brighter. The giant empire has replaced the USA as the world’s largest sales market in the past ten years. The fact that the corona crisis is over for the time being in the Far East is making some car managers sleep better. The Chinese market has already almost reached the old level again. And unlike most Americans, the Chinese largely pay for their cars in cash.
If the credit bubble bursts in the United States, the market there will remain on the ground for a long time. This does not apply to China. In the shutdown of the past few weeks, the German auto industry has continued to run its component factories in Germany in order to supply parts to the factories in China. When VW, Daimler and BMW build cars again in their German factories, some of them go straight to the Far East.
And the US factories of the Germans are also supposed to start producing again because the mass of the off-road vehicles built there is shipped straight to Shanghai and Beijing.
Crises shift forces. Even before Corona, business in China was very lucrative for the auto industry, also because foreign automakers are increasingly relieved of the obligation to work in joint ventures with a Chinese partner.
With BMW, the majority takeover has already been approved for the first car company. Daimler and the VW group want to follow suit today rather than tomorrow and increase their production in the Far East. That will now accelerate. The industry will mainly collect car keys on the US market in the coming months, but cash in China.
More: Daimler suffers a sharp drop in profits due to the corona crisis.