“An Unpleasant Truth”: Used Auto Market On Verge Of Collapse That Could Cost Companies Billions

As if we weren’t getting a clear enough picture of the auto industry imploding as a result of new car sales plunging, the industry is now warning about a used-car price collapse. 

The collapse is coming as a result of used vehicle auctions grinding to a halt – along with the rest of the country – and vehicles piling up at places where buyers and sellers transact secondhand cars, according to Bloomberg.

A price drop in used vehicles could be another headwind for automakers and their lending units, which could be forced to write down the value of lease contracts that had previously assumed vehicles would retain more value. GM, for example, has $30.4 billion worth of leased vehicles on its books at the end of last year. Every 100 bps it has to raise its estimate for depreciation costs the company $304 million.

Joel Levington, a credit analyst with Bloomberg Intelligence said:

“GM assumed a 4% decline in residual values this year. If the 10% drop Manheim has seen recently persists, depreciation expense could counter the $1.9 billion that GM Financial earned in pretax profit last year.”

A similar headwind could be felt by rental car companies, who would likely get less money from selling their used fleet of vehicles, which are also sitting idly by as the pandemic paralyzes the nation. 

Hertz, Avis and Enterprise have all sought help from the Treasury Department for loans, tax breaks and other types of support.

Hamzah Mazari, a Jefferies analyst, said:

“For Hertz and Avis, every 1% increase in fleet costs saps about $20 million from earnings before interest, taxes, depreciation and amortization.”

Dale Pollak, an executive vice president of Cox Automotive said: 

“Six months from now, there will be huge, if not unprecedented, levels of wholesale supply in the market. 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.”

Automakers are already offering customers one-month lease extensions, which could help delay the number of vehicles heading to auction. But these efforts are unlikely to make a material impact, especially given that 17 million people filed for unemployment over the last three weeks. 

Maryann Keller, a former Wall Street analyst who’s now an auto-industry consultant said: “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.”

Used car sales plunged 64% in the last week of March and its estimates that prices have fallen about 10% in recent weeks. 

Pollak noted: “It’s critical for dealers to recognize what may be an unpleasant truth. It might take all the cash you can gather to sustain your business today and put it in a position to be viable when the market comes back.”

Numbers out of major automakers last week confirmed a worst case scenario: that the global pandemic is doing severe (and potentially irreversible) damage to an industry that was in ugly shape even before the coronavirus outbreak began.

GM saw sales plunge 7.1% and Fiat saw sales drop 10% for the first quarter of 2020, both larger than expected declines. 

Toyota’s sales fell 37% in March, with even its best-selling RAV4 dropping 25%. Nissan had the weakest quarterly results, posting a 30% drop in sales for the first three months of the year. More than 25% of Nissan’s dealers are being negatively affected by state ordinances limiting sales.

Finally, just days ago, we noted that May is being considered a “make it or break it” month for auto suppliers.