Ford, Rivian, GM: Concern About Outlook for Carmakers Piles Up

Amid economic weakness, the outlook for the carmakers is uncertain, maybe bleak.

Life for the car manufacturers is becoming tougher as the economic slowdown worsens. A perfect storm of prepandemic difficulties made worse by covid-19 appears to be forming. 

Demand for cars is likely to sharply slow as consumers delay buying a new vehicles. At the same time, producing the vehicles is expected to rise further as supply-chains remain disrupted. The parts shortage remains a huge headache.

These issues and others have prompted Moody’s to lower its forecasts for the automotive sector. The credit-rating provider now estimates that 2022 light-vehicle sales globally should dip 0.7% from 2021. This will bring sales to about 85.5 million units, 10% below the prepandemic level of 95 million units.

“This is in keeping with our macroeconomic board’s reduced forecast for 2.5% global GDP growth this year and 2.1% in 2023 … on the back of substantial inflation, and higher interest rates meant to tame it,” Moody’s explained. Both inflation and higher rates “eat into consumers’ purchasing power.”

Car Stocks See a Massive Selloff

These factors contributed to a selloff in the shares of automotive groups on Wall Street on Sept. 29, the penultimate day of the third quarter. General Motors  (GM) – Get General Motors Company Report lost 5.7%. Rivian  (RIVN) – Get Rivian Automotive Inc. Report fell 7.9%, Ford  (F) – Get Ford Motor Company Report gave up 5.8%, Lucid Group  (LCID) – Get Lucid Group Inc. Report dropped 7% and Stellantis  (STLA) – Get Stellantis N.V. Report, formerly Fiat Chrysler, declined 5%. Much of the sector continued lower on Friday.

GM, Ford, Rivian and Lucid have lost a total of about $183 billion in market capitalization this year. GM’s market value has fallen to $48.5 billion from $88 billion, while Rivian saw its market value drop 69% to $28.5 billion. Ford saw its market value drop to $46.1 billion from $85.6 billion. 

The Blue Oval brand recently warned that due to a lack of parts, it was unable to finish assembling between 40,000 and 45,000 vehicles that it had promised to dealers before the end of September. Ford, Dearborn, Mich., also said some of its suppliers had raised prices, which will cut into its third-quarter profit.

Moody’s confirmed the issues raised by Ford. The credit rater says inventories will remain low as the microchip shortage remains unresolved, stifling vehicle production. 

And new uncertainty is hovering over vehicle production, especially in Europe. That’s linked to the probability that Russia may cut off natural-gas supplies to Europe, which risks driving up energy prices and adding an additional constraint to vehicle manufacturing.

Moody’s Expects Thinner Auto Margins

No surprise, then, that Moody’s expects automakers’ profit margins to thin out over the next 12 to 18 months. 

Moody’s underlines that even if things were to improve at the production level, the automakers will suffer on the demand side because consumers will face higher financing costs. That’s because the Federal Reserve has been cranking up interest rates to fight an inflation rate at its highest in 40 years.

Auto loans will become more expensive for consumers, who will start looking for cheaper vehicles when renewing their leases. When they buy, consumers are likely to add fewer features — but it is on just those features that car manufacturers make significant margins. And CNN reports that used-car prices are putting many vehicles out of reach as well.

Rising raw-materials prices also remain a big problem, especially if contracts with suppliers don’t include clauses on pass-through provisions or unfavorable currency effects, Moody’s warned. 

Contracts between car manufacturers and their suppliers usually have pass-throughs for raw materials like steel, copper, aluminum and nickel. Pass-throughs are adjustments to payment terms to account for higher commodity costs. Those adjustments are usually made quarterly or annually, so the price rises of recent months may not have been fully reflected in carmakers’ accounts. 

It’s the suppliers that have suffered so far, but now this will change because, Moody’s says, contracts with vehicle manufacturers now contain pain-sharing clauses. Essentially, this means that when raw-materials prices go up, suppliers and carmakers share those additional costs, and when prices go down, vehicle manufacturers benefit.