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The auto industry is staring at a crisis, with most manufacturers shutting down production and factories in the face of the coronacrisis. Sales are expected to fall 15 percent to less than 80 million vehicles, according to S&P global ratings. The long-term shutdown will not be kind on the balance sheets of the carmakers, which is a cash incentive industry. The pre-virus sales were already down, and no one is sure how long the pandemic will affect closures.
China may have slowly turned on production, but the supply chain works on credit, which is slowly drying up. The car companies are already drawing on dwindling cash reserve and looking for more credit limits.
One of the hardest-hit automakers is the Japanese car manufacturer Nissan. It has requested a 500 billion yen ($4.6 billion) credit line from lenders. “Given the possibility, the impact of the coronavirus on production and demand could continue for a long period, one of the people in the knowhow said, “ reports Reuters.
Nissan is seeking credit lines from Mizuho Financial and two other major commercial banking groups, as well as from the Development Bank of Japan, according to Nikkei financial daily.
Nissan was already in a vulnerable position before the pandemic due to its aggressive expansion plans and the scandal surrounding its chairman Carlos Ghosn for misappropriation of funds and escape from Tokyo breaking bail.
Nissan’s posted a loss for the first time in a decade in its first quarter of 2020. And its profits for the financial year plunged nearly 80 percent to $450 million, estimates Refinitiv Smarts Estimates.
This is the first time since the 2008-2009 financial crisis that Nissan has posted such poor profits. Reuters reports as of December, Nissan’s automotive operations have a “negative free cash flow of 670.9 billion yen, an increase of nearly 7-fold from a year ago. Net cash for i its automotive business stood at 847.5 billion yen, with Nissan having burned through nearly 40% of net cash over the year.”
Added to the dismal performance in the last one year, the fraudulent and aggressive marketing practices of the ousted chairman Ghosn has added to Nissan’s woes. He pushed for growth at the expense of bottom-lines. So much so that the company executives adopted some questionable practices to gain market share.
“Almost nobody calls now and says, ‘I want to buy a Nissan franchise’,” said Alan Haig, of Hair Partners. According to him, Carlos pushed too hard, driving his managers to achieve impractical numbers of sales. The tactic worked for some time, but as it was based on artificial numbers, the expanded numbers crumbled after some time, he added.
Nissan is not the only one in cash doldrums. Fiat Chrysler and Toyota have also asked for extended credit lines.
Moody’s Investors and S&P have already downgraded auto manufacturers such as Toyota Motors Corp, BMW AG, Ford, and put companies like General Motors on its review list. “Weaknesses in their credit profiles including their exposure to final consumer demand for light vehicles,” is the reason given by the ratings agencies.
The cash crunch is sure to have a cascading effect. Suppliers based all over the world who work on a 30 percent to 50 percent credit will be affected too.
Also, debts taken by most car manufacturers are coming due. According to Bloomberg Intelligence’s Joel Levington, nearly $179 billion of debt taken mainly by the financial arms of most auto manufacturers had a 30%-plus chance of default. Across the sector, more than $100 billion matures this year with almost 40% rated below A, he added in a report for Bloomberg.