The auto industry is a big part of our economy here in Tennessee and in the southeastern US in general. and there have been some developments that aren’t necessarily new but a lot of people don’t seem to be aware of them so this is an update on the auto industry. For those of you who sell into it or service clients that are in the auto industry somewhere in the supply chain, I hope this will be informative for you.
Like any industry, I get calls from time to time from companies looking for insurance on an account that is already beyond the risk profile that can be insured from a credit insurance standpoint. Whenever I point out some of the points that I’m about to make in this video, people are surprised as if they don’t know this is going on. So be informed!
All of what I’m about to give you is in a paper that has just been published a few weeks ago on the Coface website. To read it for yourself click here.
Last 10 Years Have Been Great
Essentially what’s going on in the auto industry is that since the recession about ten years ago, the auto industry came out of that with so much pent-up demand and was doing incredibly well. They’re still doing OK but are beginning to show signs of weakness.
Environmental Regulations
What you’ll read in this paper is that in Europe, China and in the US, which are the three largest markets for the auto industry worldwide, increasing environmental regulations are starting to push the cost side and the marketing side the car manufacturing companies. They’re beginning with new regulations that limit the amount of CO2 per mile or kilometer that a car can emit and if they don’t hit those standards there are severe penalties. Almost none of the companies meets the standards based on the current regulations. So that’s the first thing.
Price of New Cars Way Up
The second thing is that the price of new vehicles has gone through the roof. I’m sure that if any of you is more than 20 years old, you realize that the last car you bought was probably a good bit more expensive than one you bought 20 years ago. That’s not a surprise to anybody but because the prices continue to go up, the low end of the buying market is pushed further and further down and that’s creating a ripple effect.
Cars as a percentage of vehicle sales is declining in favor of SUV’s and trucks. That’s not a really new trend but it has become more pronounced and the result of that is that trucks and SUV’s are bigger and have a harder time complying with these new environmental regulations first of all. Then secondly, they are the only segments that are profitable right now. Most cars do not turn much of a profit or they have a really low margin.
The good news for the auto industry is that trucks and SUV’s are more profitable but theyre also quite a bit more expensive, which exacerbates point number two a second ago. They’re pushing the lower end of the market out.
Loan Defaults at Record Levels
So to compensate for those higher prices, what you’ve seen in the last several years is that auto financing has gone from what used to be a 24 to 36 month financing term years and years ago to 72 and 84 months and subprime financing has become the way they have run this string out for so far and managed to continue to grow until recently.
With all these subprime loans, anybody with a pulse can just about get financed now. Chances are that as I read somewhere not long ago, if you finance an 80 something thousand dollar Cadillac Escalade over 84 months to somebody with poor credit, sooner or later you’re going to have defaults on loans and that’s what’s beginning to happen. Auto loan defaults are at their highest level in quite, quite, quite a long time and that’s another concern
Because of all of this, the market is moving further away from new vehicles and into the used market. That’s having a ripple effect because it just exacerbates all the problems that I outlined before.
Learn How to Protect Your Cash Flow
You can read this again in the paper on the Coface website – click here. If I can help you understand more about how this could affect your business as an auto industry company or as a supplier to the auto industry, please contact me or visit https://www.tateparker.com/.I’d be happy to see how protecting your company with accounts receivable insurance could help your business.
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