Hybrid Cars and The Credit Crisis
The current credit crisis—with or without a $700 billion bailout—has already spread from Wall Street to commercial banks, and from the financial sector to other parts of the economy, including to the auto industry. Here’s how the credit crunch is impacting key players in the hybrid vehicle market.
Consumers Are Staying Home
While demand for hybrids remains strong, the overall vehicle market is shrinking. Some analysts are predicting that this month’s sales will be off as much as 25 percent from last year. One of the biggest issues is tighter credit and lending standards. Many buyers can’t qualify for financing, or must pay more for their car loans; in addition, leasing has been discontinued for many domestic models.
The result is that it is more difficult and costly to get consumers into new vehicles. To make matters worse, fewer people are shopping. Some buyers are postponing big purchases in anticipation of an economic downturn, while others have lost jobs or homes and are struggling just to make the payments on vehicles they already own. In this climate, hybrid sales could suffer if consumers continue staying home—or if they opt for cheaper, no-frills vehicles rather than cutting-edge technology.
Dealers Are Getting Squeezed
Many car dealers were already suffering before the recent market downturn. With fewer shoppers on their lots, things have gone from bad to worse. To compound the problem, dealers are now struggling to maintain their own credit. Dealerships use what is called “floorplanning” financing: they buy vehicles for their inventories using credit from banks or captive finance companies. Recently GMAC, Chrysler Financial, and others began raising floorplanning interest rates, a move that squeezes dealer profits and makes sellers think twice about stocking expensive vehicles.
In the future, expect to see dealers use more caution in ordering new, unproven hybrid, electric and alternative fuel models. You can also expect to see more dealers throwing in the towel. The country’s largest volume Chevrolet dealer—Columbus, Ga.-based Bill Heard Enterprises, founded in 1919—shut its doors last week as rising floorplanning costs and falling sales eroded profits on the 88,000 vehicles it sold each year.
Manufacturers Lack Investment Funds
Auto companies live on credit, both in the short-term to sustain operations and in the long-term to invest in new vehicles and manufacturing facilities. For some, that credit has nearly dried up. Two weeks ago, General Motors made a $3.5 billion withdrawal from an existing credit line, raising concerns about the company’s long-term liquidity.
While GM still has billions in the bank, the company burned through more than $7 billion in the first half of the year. And the spending isn’t scheduled to stop. GM will spend nearly $400 million on a new plant to make small engines for the Chevrolet Volt plug-in hybrid and other vehicles. GM, Ford, and Chrysler—with its big plans for electric cars—are hoping that loans from the federal government will replace some of the financing that’s been lost from private sector banks. But if federal loans don’t come through in a timely manner, some new vehicles requiring a lot of R & D spending could be in jeopardy.
Battery Manufacturers Lack Access to Credit
Batteries are a key component in hybrid and plug-in hybrid vehicles, but developing new battery technologies and manufacturing them on a large scale is capital-intensive. A single manufacturing facility can cost $150 to $300 million, and that’s after a company has spent millions to create a viable product. Like the automakers, battery companies now have less access to credit, which means it’s harder for them to invest in new facilities or expand existing plants. The challenge is greatest for smaller companies such as A123 Systems. While their innovative battery designs may hold the most promise for making plug-in hybrids a reality, small battery companies cannot be successful unless they can build the facilities needed to guarantee a reliable supply to large OEMs.
In contrast, large battery makers such as Panasonic EV (a joint venture between Toyota and Matsushita) may have an advantage in the current era. With access to capital from large corporate parents, these firms are better positioned to make new investments in production, allowing them to continue their dominance of hybrid battery markets.
After the Storm Clears
Fear of economic recession has brought oil prices back to earth. Although crude remains above $100 per barrel, US gas prices have settled at under $4 a gallon. While consumers are not likely to forget this summer’s pain at the pump, interest in fuel-saving technologies like hybrids will ride up and down with gas prices. Yet, the long-term forecast is for sustained and consistently rising gas prices.
So the looming question is which auto companies will best be able to weather the storm—and to emerge ready to deliver hybrids and other advanced fuel-saving vehicles when consumers return to dealerships demanding high-mpg vehicles.