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Breakingviews

Breakingviews - Carmakers head towards Wile E. Coyote moment

A car salesman looks at his mobile phone at a Toyota dealership in Johannesburg, South Africa October 9, 2018.

LONDON (Reuters Breakingviews) - When cartoon character Wile E. Coyote runs off a cliff, there’s always a brief moment before the Looney Tunes stalwart heads earthwards. That moment is roughly where the market in second-hand cars is now. A pandemic-led boom in used-auto sales has held values up, but can do so only so long.

Car manufacturing slowed during lockdowns, but the desire to avoid public transport drove demand for cheaper second-hand cars. Year-on-year sales increased 22% in the United States in June, according to auto industry analyst site Edmunds. In Britain they rose nearly 50% in August compared to the same period last year, according to Big Motoring World, a British used-car market. Carvana, the so-called eBay of used cars, saw third-quarter sales rise 41% year-on-year to $1.5 billion. Second-hand U.S. car prices rose 26% from April to June, Moody’s says.

Still, car sales have been enabled by governments paying worker wages. Poorer U.S. buyers funded down payments with their $1,200 federal relief money, UK car loan holidays have prevented defaults on car credit, and the British government’s furlough scheme has just been extended. But the latter will end at some point, and a new relief bill is facing delays in the United States. Wells Fargo was sufficiently worried about unemployment-led defaults to have stopped offering credit to most independent car dealers in June.

A glut of supply is already building up. In the United States, more than 4 million vehicles with leases expiring are due to return to the market this year – around 340,000 per month. If car owners’ income dramatically falls it is likely to lead to repossessions, which would ramp up supply even further.

A fall in second-hand values could be dire for car manufacturers. Leasing books of BMW, Daimler, Renault and Volkswagen represent 60%-150% of their current stock market values, UBS reckons. VW said in June that it loses over 350 million euros every time the price of used cars falls 10%, because it can force a write-down on vehicle values. A 30% fall would therefore mean a 1.1 billion euro hit, more than doubling the loss the German carmaker booked in the first half of the year. And there isn’t much car companies can do to avoid it.

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