The rapid spread of COVID-19 has caught most of the auto industry on the back foot. With potential customers suddenly stuck in lockdown all around the world, some OEMs may see months without meaningful sales volume and suffer a subsequent hit to revenue and profitability. In addition, automakers are bearing the financial burden of supporting furloughed workforces and, in some cases, re-purposing factories and supply chains to provide much needed ventilators and medical equipment.
These extreme circumstances have pushed some automakers to access sizeable credit facilities to shore up their financial positions. Most recently, Japanese giant Toyota announced it was seeking a JPY1 trillion ($9 billion) line of credit from Sumitomo Mitsui Banking Corp. and MUFG Bank Ltd. Of all the major Japanese OEMs, Toyota is the largest and has the best credit rating – Moody’s Investors Service previously held it at an A1 grade – but, with the virus placing incredible pressure on the auto industry’s earnings, it has since dropped Toyota’s grade to Aa3.
Across the Pacific, US automaker General Motors also announced it would tap its credit lines to access an additional $16 billion in funding to respond to COVID-19. The OEM will combine the credit with its cash reserves and aggressive austerity measures to ensure it remains funded during the outbreak. GM was gearing up to build ventilators with Ventec Life Systems but confusion from the Trump administration led to the project being briefly cancelled after the White House implied the machines were too expensive – GM said it would not make any profit on the machines. The President then signed an order forcing GM to build the ventilators, despite the fact it was already preparing to do so.
In Europe, Volkswagen has stated that it is currently spending around EUR2 billion ($2.2 billion) per week to remain afloat. The group’s Chief Financial Officer, Frank Witter revealed that it had access to credit lines worth around EUR20 billion ($22 billion), but that it would only use those as a matter of last resort. Witter went on to call on the European Central Bank (ECB) to begin purchasing short-term debt as quickly as possible to avoid having to take more drastic measures to keep the automaker funded.
Renault chairman, Jean-Dominique Senard said that, while the automaker may have to seek help from the French government – which announced a EUR300 billion package ($330 billion) of loan guarantees – it would not need to be renationalized like it was in the aftermath of World War Two. It pointed to its previous performance during the 2008 financial crisis where it was able to access EUR 3 billion ($3.3 billion) in government help without the need to renationalize.
The fact that these huge business enterprises are seeking to open new credit lines at this stage in the crisis adds to its gravity and a growing sense that even when recovery arrives, the financial consequences will be felt for some time to come.