The Big Three Are Eating Through Cash

Image: Getty (Scott Olson / Staff)
Image: Getty (Scott Olson / Staff)
The Morning ShiftAll your daily car news in one convenient place. Isn't your time more important?

A look at the factors in play as The Big Three burn cash during the coronavirus shutdown, Nissan’s performance in China could spell good news for the industry, and Tesla is making money from CO2 credits. All that and more in The Morning Shift for April 30, 2020.

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1st Gear: The Big Three Are Eating Through Cash

It should be no surprise that, as automakers struggle to sell cars during the coronavirus pandemic, but continue paying employees and dealing with other overhead expenses, OEMs are burning through cash. The Detroit Free Press quotes David Whiston, equity strategist from financial services firm Morningstar, who describes the gravity and urgency of American Automakers’ restart conundrum. From the site:

Auto industry experts say the companies must restart their North American assembly factories in the next month as costs mount with each passing day the lines remain idle.

“The cost of staying closed is immense and eventually they will run out of time and die without new capital,” said David Whiston, equity strategist for U.S. Autos at Morningstar Research Services. “That’s why getting restarted even in late May or June is important.”

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May 18 is the rumored target date among the big three, the story writes, before getting into just how much cash GM and Ford are blowing through right now as their plants idle:

In the meantime, General Motors and Ford Motor Co., the two companies Whiston covers, are each burning roughly $130 million to $150 million of cash a day even as their assembly lines are stagnant, he said. There are costs such as plant security, cleaning personnel, utility expenses to keep certain machines running, labor costs and so on.

The article mentions how dreary the car market is right now, citing Cox Automotive, who says April saw sales 53 percent lower than a year ago, and 37 percent lower than last month. The article also discusses some of the strategies The Big Three are using to procure and save enough funding to get through this hardship, writing:

Last month, Fiat Chrysler Automobiles secured almost $3.9 billion in additional credit. GM has drawn down about $16 billion from its revolving credit facilities. Ford said it will borrow $15.4 billion in unused amounts against two credit lines.

All three have also announced some cost-cutting measures, including white-collar pay deferrals and executive pay cuts.

Ford raised an additional $8 billion in new debt securities and GM suspended its dividend, a savings of about $2 billion a year. Ford had cut its dividend in March, representing an annual cost to it of $2.4 billion.

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But even with this cash, the paper isn’t going to last forever. Whiston thinks it will dry out before the end of the year:

“If plants don’t restart I think GM has enough cash to get to roughly October maybe late September while Ford, thanks to its $8 billion bond deal last week, can probably get to nearly Christmas,” Whiston said.

[...]

But the longer the three live off their credit lines, the deeper into debt they fall and the higher their interest costs climb. Capital investment in research and development and new product launches could tighten, too.

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The article also mentions supply chain concerns, particularly singling out Mexico, where a number of car parts are sourced. The story quotes vice president of Industry, Labor & Economics at the Center for Automotive Research, Kristin Dziczek, who apparently has concerns about what COVID-19 could do to crowded, and economically struggling parts of Mexico.

She’s also worried that suppliers could run out of money, which would have huge effects on car production:

But then there is the worry of a supplier cash crunch. If they can no longer afford to operate, it could disrupt automaker production, said Dziczek.

“Suppliers still have some revenue coming in from the deliveries they did before March 15 due to their contract terms, which usually takes them to two months out,” Dziczek said. “So after May 15 or so, they will have no more revenue.”

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There are also worries about inventory. The story references Cox Automotive, who said Ford and GM had a 99-day supply of cars as of April 1, and FCA had 108 days. Now it’s nearly May, and those numbers are down, since new vehicle production has been frozen all month.

The story concludes with Dziczek from the Center for Automotive Research saying the key will be for automakers to avoid starting and stopping, as this “eats capital and that’s mainly felt in the supply chain.”

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The dynamics of this industry restart are going to be interesting.

2nd Gear: Nissan’s Performance In China Is A Hopeful Look At A Post-Coronavirus Car Industry

Right now, the auto industry is shut down in the U.S.. Employees are being furloughed, salaries are being slashed, plants have sat idle for over a month, the supply chain is compromised, and dealerships are struggling to find ways to stay afloat.

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Automakers are burning tremendous amounts of cash, and while they’re keen to get things back up and running before the well dries, there’s an understandable hesitance given the incredibly contagious nature of COVID-19.

Naturally, with the car industry frozen, and with shriveled consumer demand for cars as people lose their jobs and remain in their homes as the entire economy falters, automakers’ financial results have been awful over the past few months.

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Though many carmakers have voiced interest in restarting operations early next month, a big question everyone has is: Will the industry bounce back when things start to open up? And if so, to what extent?

We don’t really have a good answer at this point, but many have been looking to China to get some idea, since the nation has been reopening its economy after coronavirus erupted from the city of Wuhan late last year, while other major car markets remain shuttered.

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A good indicator from China is that Nissan appears to be rebounding remarkably well, with Reuters writing that the company’s sales in the country have returned to nearly the same level as the same month the year prior. From Reuters:

The data reinforces growing optimism that the world’s biggest car market is stabilising fast as businesses return to normal in China, making it a rare bright spot as most dealerships in Europe and the United States remain shut due to lockdowns.

Nissan’s vehicle sales in China, which include Nissan, Infiniti and China-only brands, as well as light commercial vehicles, contracted just “a few percent” in April from a year earlier when it sold roughly 121,000 vehicles, said the people who saw the data.

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Reuters notes that this comes after Nissan announced a nearly 45 percent drop in year-over-year sales in March, and an over 80 percent decline in February.

Reuters’ anonymous source who provided the data—which will apparently be available from Nissan on May 11—discussed reasons behind the company’s significant sales improvement, including consumers wanting to reduce reliance on public transportation. From the news site:

“We’re putting all efforts on China and the U.S. market to regain momentum,” said the other source, adding Nissan is ramping up marketing and offering incentives to dealers to improve sales.

He also pointed to what he described as nascent signs of “changing views” on public transit and ride-hailing services resulting from the coronavirus outbreak which might have encouraged some consumers to shun such services and opt to buy cars instead.

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Nissan isn’t just a single example of a post-COVID auto industry revitalization. A couple of weeks ago, Volvo’s CEO discussed how demand in China was returning, with Automotive News Europe writing:

Output at both vehicle assembly plants will resume slowly as the automaker initially will only produce vehicles that have already been ordered, a spokeswoman said. Samuelsson said Volvo expects to produce three to four days next week to meet the demand, which, particularly from China, is is returning to normal. That being said, he added that “there will be considerable reduction from the maximum capacity that we have.”

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Another story from mid April titled “Volkswagen China boss sees sales in China on recovery course,” echoes these sentiments, with Reuters writing:

China is VW’s single biggest market accounting for a big chunk of its profits.

Sales reductions due to the virus’s spread in China had slowed in April, the head of Volkswagen’s China business Stephan Woellenstein told reporters on a call.

Referring to the country’s car market overall, Woellenstein said the decline in sales in April was estimated to be between 15% and 20% from a year earlier, while the drop in March, at the height of the pandemic, had been 40%.

“If things continue as they do now, we could have reached last year’s level again in June,” he said. “We see a normalisation with view to the summer.”

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We can only hope that the U.S., Europe, and other major car markets will bounce back in the same manner. And that it will be sustainable.

3rd Gear: Tesla May Not Be Selling Many Cars, But It’s Still Selling CO2 Credits

Tesla announced a net income of $16 million for the first quarter of 2020 despite coronavirus lockdowns, Automotive News reports. Two major factors contributed to the California-based EV maker turning a profit. First, the Tesla Model Y crossover was, per CEO Elon Musk, profitable in its first quarter on the market.

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Second, Automotive News writes, Tesla made lots of money selling emissions credits. From the story:

The electric vehicle maker was aided by $354 million in regulatory credits sold to competitors, a 64 percent jump from the same period a year ago and 166 percent more than last quarter.

[...]

Meanwhile, Tesla’s boost from emissions credits comes courtesy of its legacy competitors. Tesla sells the emissions credits to manufacturers who need them to comply with emissions standards that are getting stricter in most markets around the world.

While Tesla doesn’t divulge which automakers it sells credits to, General Motors and Fiat Chrysler Automobiles disclosed last year that they had reached agreements to buy U.S. greenhouse-gas credits from the company.

FCA has said it’s going to spend 1.8 billion euros ($2 billion) on credits over three years and reached a deal in 2018 to pool its fleet with Tesla’s to comply with stricter European Union rules on carbon-dioxide emissions.

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That’s one way to remain less reliant upon fluctuating car demand: Just make clean cars, and sell credits.

4th Gear: A Number Of Automakers Are Reevaluating Plans To Reopen Early Next Month

May 4 has been touted as a big day for the auto industry, as this is when a number of automakers have announced they’ll be re-starting operations. But, as we noted a few weeks back, that date was never really a certainty. There really isn’t much certainty these days, especially in the auto industry.

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So it should be no surprise to read the headlines “Fiat Chrysler ‘re-evaluating’ May 4 resumption date” and “VW pauses U.S. restart indefinitely; Toyota delays a week to May 11.” Automakers, the UAW, and state and local governments remain hesitant.

From the story on Fiat Chrysler, which comes to us from the Detroit News:

Fiat Chrysler Automobiles NV on Monday said it is delaying indefinitely its plans to resume vehicle production in North America. It previously said it would progressively ramp up manufacturing starting May 4.

“In light of the updated state stay in place orders, the Company is re-evaluating its plans to resume its North American operations and will communicate new restart dates in due course,” the automaker said in a statement.

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The story goes on to note that Ford and GM have already delayed their restarts “indefinitely,” though the automakers are apparently eyeing mid-month to get things fired back up. From the article:

Discussions between Detroit’s three automakers and the state of Michigan are coalescing around May 18 as a possible resumption date, said one person familiar with the situation that was first reported by The Wall Street Journal. But plans remain extremely fluid, said that person and another who were not permitted to speak publicly on the discussions.

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Automotive News notes similar decisions by Toyota and VW. Here’s what the former had to say:

Also Wednesday, Toyota Motor North America said it was delaying for one week its planned Monday, May 4, return to production in North America, “based on an extensive review with our supplier and logistics network.” Instead, Toyota said its factories would now plan to return to production the week of May 11.

“Toyota intends to gradually resume its manufacturing operations in compliance with federal health and safety guidelines, and local and state ordinances where our facilities are located,” the Japanese automaker said in a statement. “The health and safety of our employees and stakeholders remain a top priority, and we have implemented new protocols at all of our North American manufacturing plants to help mitigate the spread of COVID-19.”

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And here’s VW’s statement on how it will proceed in its plan to start vehicle production:

“Before setting a new start date, Volkswagen of America will weigh the readiness of the supplier base, as well as market demand and the status of the COVID-19 outbreak,” the automaker said in a statement released Wednesday. “The company will continue to work from an organizational perspective and refine and strengthen the health and safety measures to safeguard our employees.”

Volkswagen suspended production at its Chattanooga Assembly plant, which builds the Atlas and Atlas Cross Sport crossovers as well as the Passat sedan, March 21.

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5th Gear: Key Pickup Truck Parts Supplier Damaged By Tornado Is Working To Get Things Back Up And Running

Back in April, a Tornado inflicted severe damage on auto supplier BorgWarner’s facility in Seneca, S.C.. Per Automotive News, this resulted in the death of a 77-year-old contract worker, and in minor injuries to others.

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This facility is the source of transfer cases for extremely high-volume pickups like the Ford F-150, Ram 1500, and Toyota Tundra. Automakers are already going to have a hard time assembling cars once government restrictions lift, as supply chains take time to get back in order. This tornado-damaged BorgWarner plant, some have worried, would only further add to the struggle.

But now Automotive News reports that the facility will re-start production soon. From the story:

BorgWarner is planning to resume limited production in early May at its Seneca, S.C., facility that was severely damaged by a tornado on April 13, the company said.

“We have teams on-site working on necessary repairs to the facility to make this happen in a safe and efficient way,” BorgWarner spokeswoman Michelle Collins said Wednesday. “We appreciate the support of the Oconee community and the state of South Carolina, our neighbors and our customers during this time.”

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The story continues:

BorgWarner is telling employees that some workers will begin returning to work next week.

“Hello friends! The rumors are true ... we are officially restarting next week with LIMITED PRODUCTION,” a message to employees on Facebook said on Wednesday. “Those who will be needed for next week, we will make sure you have that information no later than Thursday morning.”

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Reverse: 2009: Chrysler Files For Bankruptcy

Via Time:

The 2008 recession took a severe toll on the U.S. auto industry, and of the Big Three manufacturers, Chrysler was the first to fall. Even a $4 billion government bailout wasn’t enough to save the 84-year-old company, reeling from a 30% decline in auto sales in 2008. Chrysler filed for bankruptcy on April 30, 2009, and announced a partnership with Italian carmaker Fiat. Its coming reorganization (which includes another $8 billion from the government) will result in lower labor costs and less debt, but the company’s sales are still down. In June 2009, Chrysler plans to close down 789 of its car dealerships — nearly 1 in 4.

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Neutral: How Do You See This Auto Industry Restart Working?

What are your concerns as the industry prepares to fire up its furnaces?

Sr. Technical Editor, Jalopnik. Always interested in hearing from auto engineers—email me. Cars: Willys CJ-2A ('48), Jeep J10 ('85), Jeep Cherokee ('79, '91, '92, '00), Jeep Grand Cherokee 5spd ('94).

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DISCUSSION

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Neutral:

The concern is that nobody wants to (or can) buy a car. The fuck does it matter if the assembly lines are cranking them out, if they’re just going to sit at a dealer and collect dust?