You knew it was only a matter of time. Now it looks like vehicle prices are set to implode due to the collapsing economy. The effects of the lockdown from the coronavirus crisis are going to be far-reaching. Vehicle prices are on the thinnest of ice. There is an ever-increasing pileup of used cars at auction houses. Market watchers say this imbalance will last for months. It is inevitable prices will collapse. When that happens auto manufacturer lending units will have to write down values determined on off-lease vehicles. Since the residual values didn’t take into account a global pandemic their numbers were factored much higher than their value post-virus collapse.
Rental companies are selling down inventories to stay afloat
Another consequence of tanking prices is rental car companies selling down their inventory. The travel industry has been decimated. It is anticipated there will be a very soft travel ramp up once virus restrictions are lifted. Selling down fleets due to inactivity is one way these companies can stay afloat.
Drops in residual values can create severe liquidity problems for rental companies. For every 1% increase in fleet costs pull $20 million from earnings. And that’s before factoring interest, taxes, depreciation, and amortization. So calculated by Hamzah Mazari, a Jeffries analyst.
“Six months from now there will be unprecedented levels of wholesale supply”
“Six months from now there will be huge if not unprecedented levels of wholesale supply in the market,” Dale Pollak wrote in an open letter to auto dealers. He is the executive vice president of Cox Automotive which owns the largest auto-auction company in the US. “Cars are coming in, but they aren’t selling. Today’s huge supply of wholesale inventory suggests supplies will be even larger in the months ahead.”
In the last three weeks, 17 million Americans signed up for unemployment benefits. There will be no demand for new vehicles from those without jobs. Analyst Maryann Keller told Bloomberg, “There aren’t a lot of people in gloves and masks running out to buy cars. Auctions are mostly shut down and they’re filled with cars that have no buyers.”
GM Financial could lose all of the pretax profit it made in 2019
With General Motors Financial having $30.4 billion worth of leased vehicles a 10% drop in values can cost GM billions of dollars. It is already estimated there has been a 10% value drop which means depreciation expenses would be $2 billion. That is the amount in pretax profit GM Financial earned last year according to Joel Levington, a Bloomberg analyst. He says a similar situation exists at Ford Motor Credit. Ford has already reported a $600 million loss in the first quarter of 2020.
Many dealerships are selling off used cars at any price
Many dealerships are selling off used cars at any price to create cash flow. Now, there will be a huge spike in vehicles being sent to auction. The trick will be finding places to store them.
For many dealers to sustain their businesses through this time means selling off inventory at almost any price that helps them bridge beyond the crisis to be viable when things open up. The drama over the coronavirus will make way to the drama of uncertainty we will all be facing once the restrictions necessary to survive the pandemic are lifted.