The auto industry uses lessons from 2008 recession to survive corona chaos. In the spring of 2008, Renault executives in France started receiving alerts from colleagues at Nissan North America about the health of the U.S. auto market. Auction prices for used cars were falling significantly. Orders were slowing, too. At the same time, cracks were starting to show in the U.S. subprime mortgage market, as securities lost value and adjustable-rate loans began to reset at higher interest.
Renault’s leaders decided to take action. In mid-July, Carlos Ghosn, the CEO at the time, announced that 5 000 European positions would be cut, a total later raised to 6 000, mostly through attrition and severance. Inventory levels would be trimmed, and cash flow and production would be closely monitored. Subcontracting costs were lowered by 98%. Development of a sports car related to the Nissan 350Z was halted and several launches were postponed.
“The crisis started sooner for carmakers in the U.S.,” said Patrick Pelata, who was named Renault’s chief operating officer in mid-October 2008. “We looked to the U.S., and we said it was going to come to Europe.” That happened after giant U.S. investment bank Lehman Brothers filed for bankruptcy on Sept. 15, 2008, setting off a global financial crisis that later became known as the Great Recession.
The European auto market had begun to soften in 2008, and other companies took steps to counter the decline. Fiat Group – that at the time included cars, heavy trucks, farm and construction equipment – in July decided to extend summer vacation closings at manufacturing plants after noticing a global collapse in new orders in all its operating sectors, Ferrari supercars included.
“The second half of this year and the first half of the next could be a true bloodbath,” Fiat and Ferrari Chairman Luca Cordero di Montezemolo told Automotive News Europe in July 2008. “By summer of 2009, we should have a clearer idea of the winners and the losers,” he said. Through government aid and incentives, the European auto industry was able to bounce back. It survived the “double dip” sovereign credit crisis in 2011-12 to post record sales and profits — only to run up against an equally fearsome foe: The COVID-19 outbreak, which has temporarily shuttered factories and showrooms around the world in a cascade of bad news for automakers and suppliers.
Executives, analysts and consultants who witnessed the 2008 crisis say automakers and governments have learned lessons that will help them navigate the unknown impact of the coronavirus pandemic. But back then, many companies were flying blind. “It was moving pretty fast,” recalled Pelata, now a consultant and a board member of several prominent French companies.
“Starting in mid-October, the banks didn’t want to loan us any money. Then we started to have cash management committee meetings every week, and we ran simulations on sales to see when we would be short on cash. Our simulations started showing that we would have cash problems in the summer of 2009, so we had nine to 10 months ahead of us,” he said.
In the U.S., General Motors and Chrysler were teetering on the edge of bankruptcy, and Europe’s automakers were facing their own liquidity issues as global equities markets plunged to lows not seen in five years or more.
Political and financial leaders shuttled between meetings and teleconferences in an effort to halt the bleeding. A hastily convened task force in the U.S. recommended that the government take control of GM and Chrysler, at a final cost of $80 billion. “There was no other option for the government other than to take them to bankruptcy and to refinance the companies,” said Xavier Mosquet, a senior partner at Boston Consulting Group in Detroit, who led a team of consultants advising the U.S. task force.
Cash becomes king
Mosquet and other experts say automakers have taken steps to “crisis proof” their businesses since 2008. Most notably, they have much more cash and available credit on their balance sheets. And if automakers need to tap credit lines, they will have an easier time now, executives said. “Since that time all car manufacturers have gotten more rigorous about capital allocation and trying not to spend more than required, and also about having sufficient cash reserves in case they face a similar crisis,” Mosquet said.
Philippe Houchois, an automotive analyst at Jefferies, said: “At the end of 2007 the amount of cash in the European auto balance sheet was a fraction of what it is today. Pretty much all the automakers looked death in the face in 2009, so they have been paranoid ever since and retained a lot of liquidity.”
Companies including Ford, GM and Aptiv in March moved to bolster their cash reserves by suspending dividends and drawing down billions from credit lines. “The big advantage between the crisis now and 10 years ago is that capital markets are very liquid and interest rates are very low, so I am pretty certain we won’t see a cash crunch,” Porsche Chief Financial Officer Lutz Meschke said.
BMW CFO Nicolas Peter said the automaker’s risk management was prepared for another crisis. “Compared with the financial crisis [of 2008-09], we have increased our backup line of credit to 8 billion euros from 6 billion and we have over 40 global banks included in this,” he said.
Daimler CFO Harald Wilhelm told Automotive News Europe that he aims to maintain net industrial cash at no less than 10 billion euros to cope with unforeseen events. “We have to juggle our cash flow, investments, dividends and some one-off charges that become cash effective,” so that cash remains above that figure, Wilhelm added.
With all European production halted, a “totally unprecedented situation,” Houchois said, and showrooms shut, essentially reducing revenues to a trickle, that cash is desperately needed to ensure orders and invoices filed before the coronavirus crisis hit are paid, he said. For example, dealers are sitting on billions of euros worth of inventory that can’t be sold.
“What matters is how much money is due to you and how quickly you get it, and, of course, what you owe suppliers and how quickly you have to pay them,” Houchois said. “Keep in mind that everyone has an incentive not to pay. So, you might have a hard time collecting what is due to you, and then you play a game of trying to delay payments.” And fixed costs do not fall to zero if production stops, analysts noted. Even in a total production halt, at least 15% of such costs still must be borne, and salaries, normally a variable cost, will become fixed if automakers need to pay a certain amount to avoid mass layoffs.
But if every industrial company drew on credit lines, it could severely stress the banking system, Houchois said, noting that the eight volume automakers he covers alone have 90 billion Euros available to them. He said that to some extent the financial system is now shielded by the European Central Bank, which after the 2008 crisis developed and implemented tools such as quantitative easing. In addition, automakers’ captive finance arms such as Renault’s RCI Bank or Volkswagen Financial Services are now registered as banks, allowing those units access to ECB loans. Captive financial services businesses could be a potential source of distress this time around. GM collapsed a decade ago in part because its GMAC unit had expanded into noncore businesses such as residential mortgages.
VW Financial Services may not have dodgy home loans on its books, but it did have aggregate net debt of 170 billion Euros at the end of last year. An increase in non-performing loans or an unexpected drop in residual values underpinning leasing contracts for even a tiny sliver of its portfolio could mean write-downs in the billions. “The corona crisis represents a challenge for which there is no comparison,” VW Financial Services chief Lars Henner Santelmann said in an emailed response to questions from Automotive News Europe. VW’s financial unit says it has relatively low credit risks and liquidity is “sufficient at present.”
This year, after imposing restrictions on movement and commerce in an effort to slow the spread of the coronavirus, Europe’s national governments pledged they would step in to help automakers again, with loans, direct payments or in a worst-case situation, potentially nationalization, something Jefferies’ Houchois doesn’t favor. “Nationalization is never a good situation,” he said. “Even if you don’t have outright nationalization, once you take public money you give up a lot of your independence.”
As an example, in 2008 the government of French President Nicolas Sarkozy extended 3 billion euro loans in the form of five-year bonds, at a rate of 6 percent, to Renault and PSA Group, in return for a pledge that they close no factories for the duration of the bonds and cut no jobs in France for a year. The government also announced more than 2 billion euros in aid to keep auto workers on payrolls through production stoppages.
Those guarantees prevented the automakers from cutting costs when they may have been most needed. A similar helping hand should be cautiously extended today, analysts said. “An emergency loan program is a good idea,” Mosquet said, because it would help automakers pay the supplier base faster.
Car sales catalyst
In 2008-09, Europe’s four largest markets — Germany, the UK, France and Italy — announced the formation or extension of scrapping incentives, partly or wholly financed by the government. The programs kept vehicle sales from falling off a cliff, although the schemes ran over budget by billions of euros, pulled forward car purchases and skewed sales toward low-margin models.
The incentives had a quick impact, with sales in Europe starting to rise by spring 2009, and monthly volumes hit multiyear highs within months. “Such measures should be implemented with caution,” the ECB said. Despite their downsides, scrapping incentives may be a necessary short-term solution, analysts said.“Without strong, short-term incentives, I’m afraid car sales in Europe could drop 30 % this year,” said Stefano Aversa, Europe Middle East Africa chairman of consultancy AlixPartners.
Pelata, the former Renault COO, agrees. “Even if you do ‘cash for clunkers,’ there is so much uncertainty for so many people right now. It’s very rare that you absolutely need a car.” The introduction of scrapping incentives is also currently complicated by new emissions targets that take effect this year. That means automakers need to sell a much higher percentage of costly electrified vehicles — battery-electric car and plug-in hybrids — to meet their targets or face potential fines in the billions. He suggested, however, that emissions fines might need to be reassessed in light of expected government loans. “There’s no point in trying to support automakers on one side and then fining them for a situation over which they have no control,” he said. Houchois argued that CO2 rules should remain in place. “Changing EU rules would be difficult, because it has to be done by unanimous process,” he said, “In addition, you would be sending the wrong signals to consumers about global warming.”
But in the end, experts say, the coronavirus outbreak’s impact on the auto industry will be largely determined by the length and severity of the health crisis, and to what extent consumers resume spending habits. “In 2009, I was saying, ‘Never again,’” Mosquet said, referring to the magnitude of the Great Recession. “We are now in a comparable situation. Let’s hope it’s shorter than in 2009.”
Story by Peter Sigal, Nick Gibbs, Christiaan Hetzer and Andrea Malan