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Thinking differently: which way do the hands of a clock turn?

on May 1 2020 | in Highlights, Industry news, Latest news | by | with Comments Off

Code-breakers at Bletchley Park, the British World War II facility tasked with cracking Nazi Germany’s Enigma system, encouraged new recruits to think differently.

One senior man always asked the question: ‘Which way do the hands of a clock turn?’ The answers always came back ‘clockwise’ or ‘right to left.’

The instructor would pause for effect: ‘Not if you’re the clock,’ he’d say. The hands would then of course turn the other way, left to right. The lesson was never lost.

Covid-19 has forced everyone to think differently. So how’s the motoring industry going to adapt? Is it time for an entirely new model – a business model?

They have been references in past days to what then Nissan/Renault chief Carlos Ghosn told reporters at the Los Angeles motor show in 2008, after the US banking crisis had become the Global Financial Crisis (GFC) and carmakers everywhere were hurting.

“The usual rules of business are up in the air,” said Ghosn. “Everyone is hoping pent-up demand is building, but no one has a clue how long it will last – one year, two years, three years?

“All companies are paying attention to short-term objectives. In other words, don’t burn cash.”

Carmakers might have more cash than they had in 2007/2008, thanks largely to record sales years over most of the past decade.

But with a devastating halt in production – and after many months of falling demand for new models – they are burning through billions of dollars in cash, say analysts. And things aren’t about to turn around any time soon,

Said US auto-industry consultant Maryann Keller, a former Wall Street analyst: “There aren’t a lot of people in gloves and masks running out to buy cars.”

New York-based International equity research company Jefferies said in its latest auto-industry analysis: “At zero production, the clock has started ticking. No balance sheet is immune.”

Carmakers’ stocks have halved in value since the start of the year and the cost of insuring their debt against default has rocketed.

In 2008, for example, BMW had to take out 2 billion euros insurance against loans going sour and the values of its used vehicles falling.

What follows is a random summary of what’s been happening in the automotive industry, according to international analysts, news agencies, and regulatory bodies

  • European carmakers are starting production again
  • America’s United Auto Workers union has warned against restarting US car production during the pandemic. Ford, General Motors, Fiat Chrysler, Toyota and Honda were due to begin again on May 4, but that date has since been rescinded
  • used car sales in the US have fallen by more 60 per cent
  • used car auction sites in the US say prices have fallen by 10 per cent and are falling further
  • if that level of decline lasts or worsens, it could have huge implications for GM, among others, whose financial unit had $US30.4bn worth of vehicles leased to customers at the end of last year
  • further, if GM financial needs to boost its estimate of how much those vehicles are going to depreciate in value, each percentage point increases GM financial’s expenses by $US304m
  • Ford, which posted a $US2 billion first-quarter net loss that it blamed on the virus, used roughly $US3 billion to get from January through March. But the cash burn accelerated to $US7.7 billion during the first 24 days of April when nearly all of Ford’s factories were shut down and little revenue was coming in.
  • Ford chief financial officer Tim Stone said the company expects a pretax loss of $US5bn in the second quarter. Ford earlier withdrew its full-year guidance for 2020 – Stone said the situation is too uncertain to make any predictions.
  • the market capitalisation of Renault SA, which struggled to generate positive free cash even before the virus showed up, has shrunk to less than 5 billion euros. Adjusted for the 43 per cent stake Renault owns in alliance partner Nissan Motor Co, the equity value is negative
  • Jaguar Land Rover’s 650 million euros of senior unsecured debt due in 2024 has tumbled to 60 per cent of face value, yielding 17 per cent — signalling concerns credit investors might not get all their money back.

 

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