THE auto industry – already fretting lengthy factory shutdowns and depressed new-vehicle demand – is starting to sound the alarm about a potential used-car price collapse that could have far-reaching consequences for manufacturers, lenders and rental companies.
Used-vehicle auctions are for now virtually paralyzed, much like the rest of the economy. The grave concern market watchers have is that vehicles already are starting to pile up at places where buyers and sellers make and take bids on cars and trucks – and that this imbalance will last for months.
If that fear is realized and prices plummet, it will be detrimental to automakers and their in-house lending units, which likely will have to write down the value of lease contracts that had assumed vehicles would retain greater value. Rental-car companies also will get less money from selling down their fleet of vehicles, which are sitting idle amid a global pandemic that’s been catastrophic for travel.
“Six months from now, there will be huge, if not unprecedented, levels of wholesale supply in the market,” Dale Pollak, an executive vice president of Cox Automotive, which owns North America’s largest auto-auction company, wrote in an open letter to auto dealers last week. “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.”
Lease extensions
Automakers are doing what they can to limit the damage. General Motors Co. and Ford Motor Co.’s finance units already are offering customers one-month lease extensions. In addition to relieving pressure on consumers wary of going into showrooms, this will delay some of the influx of off-lease vehicles headed to auctions that are for now operating only virtually.
But these measures are unlikely to go nearly far enough to address the asymmetry between the supply of used vehicles and demand that is unlikely to rebound anytime soon given that almost 17 million Americans sought jobless benefits in just the last three weeks.
“There aren’t a lot of people in gloves and masks running out to buy cars,” said Maryann Keller, a former Wall Street analyst who’s now an auto-industry consultant in Stamford, Connecticut. “Auctions are mostly shut down and they’re filled with cars that have no buyers.”
Residual risk
Used-car sales fell 64 percent in the last week of March, according to Manheim. The Cox Automotive-owned auction company estimates that prices have fallen about 10 percent in recent weeks, though that figure is based on unusually low volume at auctions.
If that level of decline lasts or worsens, it could have huge implications for GM, whose General Motors Financial unit had $30.4 billion worth of vehicles leased to customers at the end of last year. If GM Financial needs to boost its estimate of how much those vehicles are going to depreciate in value, each percentage point increase raises the firm’s expenses by $304 million, according to a regulatory filing.
GM assumed a four percent decline in residual values this year. If the 10-percent drop Manheim has seen recently persists, depreciation expense could counter the $1.9 billion that GM Financial earned in pretax profit last year, said Joel Levington, a credit analyst with Bloomberg Intelligence. Ford Motor Credit faces similar risk, he said.
Ford said Monday it’s considering additional actions to raise cash after reporting a preliminary $600 million first-quarter loss. One option could be for Ford Credit to take advantage of thawing in the asset-backed securities market, Levington said in a report.(Bloomberg)
