Jun 12, 2020

Axios Navigate

By Joann Muller
Joann Muller

Happy Friday! Thanks for reading. Today we look at the impact of the pandemic on the auto industry.

  • If you have tips or feedback, email me at joann.muller@axios.com.
  • Today's Smart Brevity count: 1,313 words, a 5-minute read.
1 big thing: Coronavirus could hold back automakers' transformation

Illustration: Aïda Amer/Axios

The coronavirus pandemic has left global automakers and suppliers burdened with debt and in a much weaker position to navigate a historic transformation toward electric, self-driving cars.

Why it matters: The industry was already entering what AlixPartners called a multiyear "profit desert" because of the massive upfront investments they are making in future technologies. Now carmakers will likely be forced to delay or cut spending on many of those innovations as they crawl out of a giant COVID-19 hole.

Details: In just a matter of weeks, automakers and suppliers took on an astonishing $72 billion in new debt to survive the economic jolt from the pandemic, per AlixPartners.

  • Factory production stopped for two months, but automakers still had to pay suppliers for parts already in the pipeline.
  • Meanwhile, revenues plummeted as consumers hunkered down under government stay-at-home orders.
  • The resulting cash squeeze pushed most companies' credit ratings lower, with Ford, Fiat Chrysler and Renault sliding into junk bond territory.
  • S&P now has a negative outlook on almost every major auto company.

Recovery will be slow. Global sales will fall 22% this year and won't likely return to 2017's peak of 94 million vehicles until after 2025, according to AlixPartners' annual global forecast.

  • The hit from COVID-19 "is as if a market the size of all of Europe had vanished for the year,” Stefano Aversa, chairman of the firm's Europe, Middle East and Africa practice, told journalists.
  • China is already bouncing back, and the U.S. is showing some resilience, but the European market will see the slowest recovery, per AlixPartners.
  • While North American factories have resumed operation, production is still about half the usual rate, according to Barclays, and dealers are running short of vehicles in many parts of the U.S.

The good news is that demand is bouncing back, especially for trucks and SUVs.

What to watch: With financial pressures mounting, carmakers will have to slash costs to lower their break-even point and make tough calls on which programs to keep funding.

  • "You still have to invest in the future," Mark Wakefield, global co-leader of AlixPartners’ automotive and industrial practice, told the Detroit News. But, "the cash available for that is just less."
  • So far, companies seem to be protecting their electric vehicle projects — likely because government regulations require them to do so.
  • Still, AlixPartners expects EV spending between now and 2024 to be cut or delayed from $234 billion to about $200 billion.
  • Autonomous vehicles will likely bear the biggest cuts. Prior to COVID-19, the industry was expected to spend about $79 billion on AVs between 2020 and 2025. Now, about $25 billion of that will be delayed or cut, they predict.
2. A modern rail industrialist

The privately owned Brightline train at the new MiamiCentral terminal. Photo: Joe Raedle/Getty Images

As taxpayer-funded public transit systems look for a way out of their coronavirus death spiral, a private equity tycoon is betting on a public-private financing model as a way to fund big transportation projects in the future.

What's happening: Fortress Investment Group's Wes Edens is putting $100 million of his own money into a $9 billion plan to build new light rail systems in Florida and on the West Coast, Forbes writes.

  • His Florida-based Brightline, funded in 2017 with $600 million in private equity and tax-exempt bonds, is the only private passenger train in the U.S., operating a 67-mile rail service between Miami and West Palm Beach.
  • His vision is to expand the line all the way to Orlando, and to run a similar electric passenger train between Las Vegas and a Los Angeles suburb.
  • Funding comes from tax-exempt private-activity bonds issued by state and federal governments, a less expensive option than typical corporate bonds.
  • By 2026, he expects his trains to carry nearly 20 million passengers, generating annual revenue of $1.6 billion and operating profit of almost $1 billion a year, according to Forbes.

Yes, but: Trains aren't exactly a moneymaker. Amtrak has consumed $52 billion of public funds and never made money in its half-century of operation, Forbes points out.

  • And, Edens has had his own financial challenges, as Forbes notes. But he clawed his way back from near-disaster during the Great Recession, selling Fortress to SoftBank in 2017 and pocketing $1.4 billion (pretax) for himself and his partners.
  • “At this point in my life, I’m more of a builder,” Edens tells Forbes. “Upgrading our nation’s infrastructure and building high-speed trains can be this generation’s Hoover Dam and Tennessee Valley Authority.”

My thought bubble: Many public transportation systems were already financially distressed before the coronavirus. Until riders feel it’s safe to return, revenues will continue to suffer. We’re likely to see more of these public-private partnerships as the transportation sector recovers.

3. Hertz wants to sell shares in bankruptcy

Photo: Justin Sullivan/Getty Images

Bankruptcy court Judge Mary Walrath set a hearing for today to determine whether bankrupt rental-car company Hertz can issue nearly 250 million new shares of common stock it hopes will fetch around $1 billion, Axios Markets editor Dion Rabouin writes.

Why it matters: Shares of bankrupt companies are typically worthless, except in rare instances where a company can repay its debt in full and money is left over for equity holders.

  • But Hertz has become a darling of the stock market in recent weeks with its shares rallying from 56 cents on May 26 to $5.53 on Monday (before falling back to $2.06 on Thursday).
  • It may be the finest test of the greater fool theory ever conducted.

What they're saying: “The recent market prices of and the trading volumes in Hertz’s common stock potentially present a unique opportunity," the company’s lawyers said in a filing.

What others are saying: Jared Ellias, a law professor at UC Hastings College of Law, saw things slightly differently.

"This is outrageous. These directors likely know that the stock is worthless and instead of trying to stop uninformed investors from gambling on a dead stock, they are selling into the market."
Jared Ellias on Twitter

Of note: Hertz trades on the New York Stock Exchange, which has moved to delist the company.

4. Driving the news

China's EV onslaught: Renault rattled by threat from Chinese electric cars imports (Tara Patel and Lars Erik Taraldsen — Bloomberg)

  • Quick take: The Chinese government is determined to lead the world in electric vehicle technology, and Europe is racing to keep up, while the U.S. lags.

Testing limits: Cruise is using food bank deliveries as cover to run tests that may violate stay-home orders, drivers say (Andrew J. Hawkins — The Verge)

  • Context: Some drivers say the company is exploiting a loophole in the local stay-at-home orders as a way to continue racking up testing miles on its self-driving vehicles. Not all cars on the road are actually delivering food to people who need it.

Policy needs: Transit is a social justice issue in the 2020 election (John Nichols — The Nation)

  • Why it matters: “When people have to take two, three, four buses to get to the places they need to get to — to work, to school, to care for a family member — that undermines their prospects."
5. What I'm driving

2020 Nissan Murano. Photo courtesy of Nissan

This week I'm driving the 2020 Nissan Murano, an SUV crossover that isn't the newest kid on the block and yet still manages to stand out from the crowd.

The big picture: The Murano is the design halo for Nissan's SUV lineup, even though it's outsold by the smaller Nissan Rogue. The styling is distinctive, with boomerang-shaped LED headlights and its so-called "floating" roof.

What's new: Not much has changed from the refreshed 2019 version, except when it comes to driver-assistance features.

  • Nissan has expanded availability of its safety and driver-assistance features to lower-priced versions.
  • Its "Safety Shield 360" includes automatic emergency braking with pedestrian detection, blind-spot warning, rear cross-traffic alert, lane-departure warning, automatic high beams and rear automatic braking.
  • The technology package is now standard on all but the base model Murano.

My thought bubble: I had some problems with visibility on the Murano. There's a fairly large blind spot in the rear, and at barely over 5-feet-tall, I even had trouble seeing over the hood when cornering in tight spaces.

  • It's why I always tell shoppers to spend plenty of seat time in a car before they buy. A spin around the block near the dealership isn't enough.

The bottom line: Priced between $32,575 and $47,000, the Murano is a stylish crossover, with plenty of high-tech options and a high-grade interior that will make you happy.

Joann Muller