Automotive News Europe - April 2020 - 7

AUTOMOTIVE NEWS EUROPE

COVER STORY

recalled Pelata, now a consultant and
a board member of several prominent
French companies. "Starting in midOctober, the banks didn't want to loan
us any money. Then we started to have
cash management committee meetings
every week, and we ran simulations on
sales to see when we would be short on
cash. Our simulations started showing
that we would have cash problems in the
summer of 2009, so we had nine to 10
months ahead of us," he said.
In the U.S., General Motors and Chrysler
were teetering on the edge of bankruptcy,
and Europe's automakers were facing their
own liquidity issues as global equities markets plunged to lows not seen in five years
or more. Political and financial leaders
shuttled between meetings and teleconferences in an effort to halt the bleeding. A
hastily convened task force in the U.S. recommended that the government take control of GM and Chrysler, at a final cost of
$80 billion. "There was no other option for
the government other than to take them to
bankruptcy and to refinance the companies," said Xavier Mosquet, a senior partner at Boston Consulting Group in Detroit,
who led a team of consultants advising the
U.S. task force (see interview, Page 8).

Cash becomes king
Mosquet and other experts say automakers have taken steps to "crisis proof"
their businesses since 2008. Most notably, they have much more cash and
available credit on their balance sheets
(see chart, Page 9). And if automakers
need to tap credit lines, they will have an
easier time now, executives said. "Since
that time all car manufacturers have gotten more rigorous about capital allocation and trying not to spend more than
required, and also about having sufficient
cash reserves in case they face a similar
crisis," Mosquet said. Philippe Houchois,
an automotive analyst at Jefferies, said:
"At the end of 2007 the amount of cash
in the European auto balance sheet was
a fraction of what it is today. Pretty much
all the automakers looked death in the
face in 2009, so they have been paranoid
ever since and retained a lot of liquidity."
Companies including Ford, GM and Aptiv
in March moved to bolster their cash reserves by suspending dividends and drawing down billions from credit lines. "The
big advantage between the crisis now and
10 years ago is that capital markets are
very liquid and interest rates are very low,

APRIL 2020

so I am pretty certain we won't see a cash
crunch," Porsche Chief Financial Officer
Lutz Meschke said.
BMW CFO Nicolas Peter said the automaker's risk management was prepared for
another crisis. "Compared with the financial crisis [of 2008-09], we have increased
our backup line of credit to 8 billion euros
from 6 billion and we have over 40 global
banks included in this," he said. Daimler
CFO Harald Wilhelm told Automotive News
Europe that he aims to maintain net industrial cash at no less than 10 billion euros
to cope with unforeseen events. "We have
to juggle our cash flow, investments, dividends and some one-off charges that become cash effective," so that cash remains
above that figure, Wilhelm added.
With all European production halted -- a "totally unprecedented situation," Houchois
said -- and showrooms shut, essentially
reducing revenues to a trickle, that cash is
desperately needed to ensure orders and
invoices filed before the coronavirus crisis
hit are paid, he said. For example, dealers
are sitting on billions of euros worth of inventory that can't be sold. "What matters
is how much money is due to you and how
quickly you get it, and, of course, what you
owe suppliers and how quickly you have to
pay them," Houchois said. "Keep in mind
that everyone has an incentive not to pay.
So, you might have a hard time collecting
what is due to you, and then you play a
game of trying to delay payments."
And fixed costs do not fall to zero if production stops, analysts noted. Even in a total
production halt, at least 15 percent of such
costs still must be borne, and salaries, normally a variable cost, will become fixed if
automakers need to pay a certain amount
to avoid mass layoffs.

Helping hand
But if every industrial company drew on
credit lines, it could severely stress the
banking system, Houchois said, noting
that the eight volume automakers he covers alone have 90 billion euros available
to them. He said that to some extent the
financial system is now shielded by the European Central Bank, which after the 2008
crisis developed and implemented tools
such as quantitative easing.
In addition, automakers' captive finance
arms such as Renault's RCI Bank or Volkswagen Financial Services are now registered as banks, allowing those units access to ECB loans.

Cash for clunkers
During the Great Recession European governments propped up vehicle sales by offering
scrapping incentives to buyers who traded in
older cars. Below is a breakdown of how each
program worked.

France

THE PLAN: Launched at the end of 2008, the
program offered 1,000 euros for scrapping
cars that produced more than 160g/km of
CO2. It was extended until the end of 2009,
and the bonus was eventually cut to 500 euros.
THE RESULT: 1.1 million vehicles were sold
under the plan, mostly small cars such as
the Peugeot 107. However, many were built
at plants outside of France, raising an outcry
among workers.

Germany

THE PLAN: Starting in February 2009, buyers
could get 2,500 euros for each car at least
9 years old that was certified as scrapped. It
was such a success that the initial 1.5 billion
euros earmarked for the program was exhausted within weeks. The government boosted the subsidies total to 5 billion euros in April.
By early September all the funds were used.
THE RESULT: Registrations soared to 3.81 million in 2009, a gain of 23 percent and the thirdhighest level ever recorded in the country. In
2010, however, demand plunged back below
the 2008 level. It took until 2011 for the market to return to normal.

Italy

THE PLAN: A program put in place in October
2006 offering 800-euro bonuses for cars emitting less than 140g/km of CO2 was extended
after the crisis. By the time the plan ended in
December 2009, the bonus was 1,500 euros for cars emitting less than 120 g/km.
THE RESULT: Car sales in Italy reached an
all-time high of 2.49 million units in 2007.
The Italian market suffered drops in 2008
and 2009, with sales declining 13 percent to
2.16 million in 2008 and slipping to 2.159 million in 2009.

THE PLAN: Starting in May 2009, car buyers
in Britain could get 2,000 pounds toward a
new car if they turned in one that was more
than 10 years old. The government put in
half, amounting to 400 million pounds in total, while manufacturers contributed the rest.
THE RESULT: The program helped to fund the
purchase of 400,000 cars over a 10-month period.

Captive financial services businesses
could be a potential source of distress
this time around. GM collapsed a decade
ago in part because its GMAC unit had
expanded into noncore businesses such
as residential mortgages. VW Financial
Services may not have dodgy home

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Automotive News Europe - April 2020

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