Ford (and everybody else) is losing a lot of money, Big Oil’s production cut is basically meaningless, and it’s going to be rough for electric cars for awhile. That and more in The Morning Shift for April 14, 2020.
1st Gear: Putting A Price On The Virus
Ford came right out with it and announced it expects a pretax loss of $600 million amid the recent economic crash and coronavirus outbreak.
From Automotive News:
Ford Motor Co. said on Monday it expects to post a pretax loss of about $600 million for the first quarter as the coronavirus pandemic pummeled its operations, resulting in a 21 percent drop in vehicle sales to dealers versus the same quarter in 2019.
The automaker said it also is considering additional financing actions.
Only Ford’s joint ventures in China, where the coronavirus pandemic has been receding, are currently producing vehicles. The automaker said it is working on a scenario for a phased restart of its manufacturing plants beginning in the second quarter.
“However, we believe we have sufficient cash today to get us through at least the end of the third quarter with no incremental vehicle production and wholesales or financing actions,” CFO Tim Stone said in a statement.
The good news is Ford has a lot, a lot of cash and they think they can float this for at least another quarter on their current credit lines, which sounds bad but apparently isn’t as bad as it could be.
2nd Gear: Big Oil’s Production Cuts No Big Deal
Big Oil made a big deal last week over finally coming together for a record global production throttling. It was an effort to curb the oil pouring into an already over-saturated market, where supply currently vastly outweighs demand, driving prices and profits down for just about everybody.
Remember, this all started when the U.S. began producing more oil from fracking, and Russian and Middle-Eastern suppliers didn’t want to cut back their own production.
This big throttling of production was meant to help the situation, but because of the vast impact of the coronavirus shutdown globally, the demand drought was too much for the current production cut to even make a dent.
From Bloomberg:
This weekend’s OPEC+ agreement to slash production by 9.7 million barrels a day amounts to the largest coordinated cut in history, but is still dwarfed by the decline in oil consumption. Though estimates vary, leading trader Vitol Group expects demand to be down by 30 million barrels a day this month. Meanwhile, physical crude prices are trading far below futures contracts.
“The agreement of this weekend does not change anything with the very prompt supply and demand,” said Petromatrix GmbH Managing Director Olivier Jakob. “Stocks are building, so at the front of the curve, demand destruction is much bigger than supply destruction. There is only one place for crude oil to go and that is in storage.”
And dumping oil into storage is exactly what the traders are doing, buying out oil tankers and parking them, which is not uncommon but very unusual on the current scale. Oil is sold in the futures market. That means they’re selling the stock they have now to be used later, say in six months from now at the projected future price. They make their money on their cheap stock now, but traders have to find somewhere to put it until it’s needed.
Anyway, gas will continue to be cheap as the market continues to be flooded. We’ll see if they make more production cuts.
3rd Gear: Renault Pulls Back In China
Renault is divorcing its Chinese joint venture partner Dongfeng, which it needed for the government to allow it to sell passenger vehicles in the country.
From Auto News:
Renault Group said it will stop selling Renault brand passenger cars in China and will focus on light commercial vehicles and electric vehicles in the market.
The automaker will transfer its shares in the Dongfeng Renault Automotive Company joint venture to Dongfeng Motor, Renault said Tuesday. Dongfeng will stop Renault brand-related activities, the companies said.
Renault’s joint venture with Dongfeng in Wuhan builds the Renault Captur, Kadjar and Koleos crossovers as well as powertrains.
Renault’s LCV business in China will continue to be operated through Renault Brilliance Jinbei Automotive. Its EV business will be developed through the two existing joint ventures: eGT New Energy Automotive and Jiangxi Jiangling Group Electric Vehicle.
Servicing for its estimated 300,000 vehicles sold in China will be done through the automaker’s Nissan partnership, and Nissan will be used to continue to supply Dongfeng with engine components and licensed parts.
I wouldn’t be surprised if this economic downturn sees more automakers abandon China, at least for traditional passenger vehicles. Companies like Jaguar Land Rover have struggled to gain the sales they expected in the market when the economy was good, so a downturn is only going to make being there harder to justify.
4th Gear: Outlook Not So Good For China’s EVs
Speaking of downturn, China’s big 2020 electric vehicle party is crashing. This year was supposed to be big for the country’s electric vehicle market with new offerings expected from BMW, GM, Mercedes-Benz, Tesla, and more.
While most of those global players may be able to weather the storm, at least for a year, it’s the startups seeking constant cash investments to get off the ground that face the most risk.
From Bloomberg:
The outlook is particularly clouded for local EV makers, which have most of their sales in China. Warren Buffett-backed BYD Co.’s earnings plunged more than 90% in the last six months of 2019 vs. a year earlier—before the impact of the coronavirus hit. NIO, WM Motor, and Xpeng Motors—startups with backing from technology behemoths Alibaba Group Holding, Tencent, and Baidu—may struggle to survive as their funding lifelines run out. And things could be even more dire for the scores of Chinese EV startups that lack the backing of a high-profile investor or partner.
“An EV shakeout is inevitable,” says Michael Dunne, chief executive officer of ZoZo Go, an industry consultant based in Hong Kong. “The coronavirus shock has driven investor appetite to nothing, so all EV startups are scrambling for cash.”
5th Gear: EV Startups In For A Shock
It won’t be any different in the U.S., either. Startups like Faraday Future (can we still call them a startup?), Fisker, Bollinger, Lordstown, and Rivian of course that may have been looking for more cash influx this year are in for pain, though those focused on utility offerings likely have less to worry about.
From The Detroit News:
Most of the establishment industry’s assembly plants are idled; line workers are mostly sitting at home as their salaried counterparts continue to work remotely; and hundreds of dealerships have been severely impacted. J.D. Power estimates sales might be off 80% in April.
“It’s going to be tough for established companies to survive this,” said Navigant Research auto analyst Sam Abuelsamid. “For any startup that is still going to be relying on raising more capital, this is going to be an extraordinarily difficult environment to do that.”
Business models vary widely. Lucid, Faraday Motors and Fisker are focused, like Tesla, on retail sales with luxury, battery-powered products. As affluent buyers see their investment accounts swoon, they might put off disposable income purchases. Truckmakers like Rivian, Bollinger, and Lordstown, on the other hand, can bank commercial orders in addition to retail sales. Those fleet customers could put them in a more secure position.
Sorry to inform you that America’s fabricated “dependence” on utility vehicles like pickups, SUVs and fleet vans means that, even in the electric revolution, that’s all anybody is going to genuinely care about offering if it means survival.
Reverse: What Goes Up Must Come Down
From History:
Six days after being assigned for the first time to the western front, two American pilots from the U.S. First Aero Squadron engage in America’s first aerial dogfight with enemy aircraft. In a battle fought almost directly over the Allied Squadron Aerodome at Toul, France, U.S. fliers Douglas Campbell and Alan Winslow succeeded in shooting down two German two-seaters. By the end of May, Campbell had shot down five enemy aircraft, making him the first American to qualify as a “flying ace” in World War I.
Neutral: Tears For Lower-Tiered Startups?
Do you feel any sorrow or empathy for the EV startups at the highest risk of trouble in a bad economy? I’m thinking Lordstown is steady but teetering, Fisker has been suspicious from the start but seems to have a product, Bollinger is small enough to worry about, and of course there’s Faraday Future suffering in its very own Ninth Circle of Hell. Do you care about any of them?
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