Car companies increased liquid assets by 6% in 2019, margins at their lowest level since 2009

Car companies increased liquid assets by 6% in 2019, margins at their lowest level since 2009

The current Corona crisis is leading to closures of automobile plants around the world and causing new car sales to collapse. The result will be massive drops in sales and profits lasting several months. However, when dealing with the current crisis, the car companies can rely on a large financial cushion: at the end of 2019, the 17 largest car companies in the world had liquid assets amounting to 226 billion euros - almost six percent more than a year earlier. Toyota had the highest liquidity with almost 31 billion euros, followed by Volkswagen with almost 26 billion euros, while Honda and Daimler had 20 and 19 billion euros, respectively.

While liquidity rose overall over the past year, profits fell sharply: the operating profit of the 17 companies analyzed shrank by 13 percent or 13 billion euros to 85 billion euros, the operating margin fell to 4.9 percent, reaching its lowest level since 2009. These are the results of an analysis of the financial indicators of the 17 largest car companies in the world, which the auditing and consulting company EY prepares quarterly.

“The Corona crisis will lead to an unprecedented drop in sales and profits this year, and the automotive industry will slide deep into the red,” says Gerhard Schwartz, Partner and Sector Leader Industrial Products at EY Austria. "And even if the restrictions are relaxed in the coming weeks and months and production and sales start again, the economy will take a long time to reach pre-crisis levels. Significantly increased unemployment, corporate bankruptcies and loss of income will dampen demand. The auto industry will continue to struggle with the after-effects of the crisis long after the restart and government incentives will probably be necessary to attract customers to car dealerships again." However, Schwartz emphasizes that overall the car companies are currently relatively well equipped with liquidity: "The industry can withstand a production break of several weeks - especially since some companies have already taken advantage of the opportunity in recent weeks to stock up on fresh capital and thus create further liquidity buffers."

Achilles heel supply chain
While the stability of the world's largest car companies, according to Schwartz, is likely to be secured for the time being thanks to government support measures, the situation of the smaller market players is becoming increasingly worrying: "The global automotive industry is a highly complex and highly internationalized system with many players - and not all of them are as financially strong as the top companies." Keeping this system viable is now the biggest challenge. In view of border closures and massive economic upheaval, for example in Spain and Italy, this is a Herculean task, says Schwartz: “When production hopefully starts again in a few weeks, it will become clear whether the supply chains have held up.” In the worst case, the automobile plants would come to a standstill a few days after starting up because essential parts are missing. Schwartz fears a wave of bankruptcies among both suppliers and car dealers. "Not everyone will be able to be saved, the trend towards consolidation will accelerate: As soon as the worst is over, we will see takeovers and mergers born out of necessity. The corona pandemic will be a catalyst for a market shakeout in many segments."

Profits fell significantly in 2019
The current crisis is accelerating a downward trend that has been apparent for some time: car companies' profits had already fallen significantly last year - by a total of 13 percent, and profitability had fallen to its lowest level since 2009. “Margins were already under severe pressure before the Corona crisis,” observes Schwartz. Ten of the 17 companies analyzed recorded a decline in profits, and one company was operationally in the red. The reason was often high investments in electrification and digitalization, but also special effects such as legacy issues from the diesel crisis. Accordingly, many companies had already embarked on tough austerity measures before the outbreak of the pandemic, which also included job cuts. “In view of the current slump in sales, everything is being put to the test – costs have to come down,” says Schwartz. However, he points to the experiences from previous crises: "We must not make savings in the wrong places. Strategically important projects, for example in the areas of electrification and digitalization, must continue to have top priority. There will be a time after the crisis - and then the companies that can make attractive and competitive offers will be successful."