Used Car Values Poised For Big Drop

Negative equity looms for those with used car loans, there is a leadership shake-up at Ferrari, and Nikola. All that and more in The Morning Shift for December 21, 2021.

1st Gear: Used Cars

Used car prices have spiked for months because of low new car inventories, itself because of the chip shortage that has gripped the industry. This is not news, though the accounting firm KPMG said in a new report that prices have gotten so far out of whack that negative equity is now an issue, and likely will be in the future, too. Basically, if you took out a loan to buy a used car in the past year or so, you might owe more than your car is worth.

From Automotive News:

The used-car market has historically been closely correlated with the new-car market, KPMG global head of automotive Gary Silberg told Automotive News on Monday. But used-vehicle prices are up 42 percent over January 2020 levels, while new-vehicle prices have only risen about 12 percent, KPMG said in a white paper released Tuesday.

“Whatever path the new-car market takes to a ‘new normal,’ used-car prices will eventually return to the traditional relationship with new-vehicle prices,” KPMG wrote in the white paper. “In other words, a 20 to 30 percent plunge in used-vehicle prices is in the cards.”

[…]

KPMG estimated vehicle supply and demand would achieve equilibrium sometime between October 2022 and 2023, but used-vehicle prices would begin to fall before that point.

“In every scenario, we expect the market to anticipate the turnaround in the new-car supply situation ahead of time and begin repricing used cars before new-car lots are full and used-car demand returns to normal,” KPMG wrote.

This is all a bit worrying, to be honest, as most people in this country don’t take out loans to buy used cars because they want to, but because they need to.

Too sharp a decline could leave lenders and others “stuck with overvalued assets,” according to KPMG.

Citing Edmunds data, KPMG said 44 percent of trade-ins carried negative equity in April 2020, more than double the proportion seen a decade earlier. The average customer with negative equity was underwater by $5,571 last April.

Though the average amount of negative equity had fallen more than $1,000 by April 2021, the proportion of trade-ins with negative equity held relatively constant, according to KPMG.

“Even with used-car values soaring, a large percentage of pre-COVID-19 vehicle loans remain underwater,” KPMG wrote.

Those of us of a certain age might remember a similar phenomenon happening during the housing crisis a decade ago, when a lot of people found themselves underwater with their mortgages. That was a little bit different, as homes are usually appreciating assets, whereas cars are usually depreciating. Still, there is a similar reliance on credit in America for both.

2nd Gear: Nikola Settles With The Securities And Exchange Commission

Trevor Milton, the electric truck startup’s founder was indicted in July on fraud charges by federal authorities in Manhattan, while Nikola has been trying to clean up the mess Milton made ever since he left the company over a year ago.

On Tuesday, as part of that, the SEC announced that it had reached a settlement with the startup, requiring it to pay $125 million.

From The New York Times:

“Nikola Corporation is responsible both for Milton’s allegedly misleading statements and for other alleged deceptions, all of which falsely portrayed the true state of the company’s business and technology,” Gurbir Grewal, director of the S.E.C.’s enforcement division, said in a statement.

The S.E.C., in a civil order resolving the investigation, found that Mr. Milton embarked on a campaign on Twitter and in news releases to pump up the price of Nikola’s shares with a series of misleading statements. The regulator said Nikola compounded that by making its own misleading statements about the refueling times for its planned products.

The company, which neither admitted nor denied the allegations in the civil order, said in a statement: “We are pleased to bring this chapter to a close as the company has now resolved all government investigations.”

The S.E.C. said Nikola was continuing to cooperate with its open investigation, a reference to the case against Mr. Milton.

Last month, the company said it expected to reach a $125 million settlement with the S.E.C. and would “seek reimbursement” from Mr. Milton for any costs associated with the investigation.

Nikola was one of the more brazen (alleged) frauds we’ve seen in the automaker space, though the story is always the same. If it looks like shit and smells like shit, it is probably shit.

3rd Gear: Cruise’s CEO Left After Beefing With GM CEO Mary Barra

On Friday, we got news that Cruise CEO Dan Ammann was out, for reasons that were mysterious. Now, via Bloomberg’s sources, we have some of those reasons.

Cruise LLC Chief Executive Officer Dan Ammann had a slate of meetings on Dec. 16 when he got an early afternoon call from General Motors Co. CEO Mary Barra. She told Ammann he was being dismissed from the robotaxi startup that GM controls through a majority
stake, say people familiar with the events.

What seemed abrupt to outsiders and people working at Cruise had been building for months. The two executives didn’t agree on how to focus the breakthrough self-driving technology that the Silicon Valley unit is preparing to launch with a taxi service. Barra and GM’s board were pushing a grand vision that included transferring that knowledge to create luxury Cadillacs, self-driving cars sold at retail or delivery vehicles for GM’s new electric-van business. The opportunities, and their potential value, were immense.

Ammann — a star in his own right who once competed with Barra to run GM — was open to all of those things eventually, but he disagreed on some key points. First, he thought Cruise needed to focus on starting its taxi business before spreading its resources. Second, he wanted Barra and GM’s board to take Cruise public sooner rather than later, giving it stock to lure the rare talent that can program cars to drive themselves, said two people familiar with his thinking.

Ultimately, the dispute was about control: In the vision shared by Barra and the board, keeping Cruise in-house gave GM both a high-margin robotaxi business and more direct access to the company’s resources to make other autonomous vehicles and services. Cruise could also enhance GM’s own assisted-driving features. People didn’t think the collaboration was smooth enough. If Ammann prevailed, there would be the further complication of public stakeholders in a new company to consider, not just the strategic interest and shareholder value of GM.

Ammann, 49, discovered the hard way that Barra and her board call the shots, even though Cruise is legally a separate entity with other private shareholders besides GM.

This seems like perhaps a personality clash more than anything. I’m sure Ammann will land softly as a consultant somewhere.

4th Gear: Ferrari

Ferrari got a new CEO in September, a chap named Benedetto Vigna, who is the boring choice it probably needs. And, usually, when a new boss arrives, heads start to roll, because new bosses like to do things different than the old bosses, if for nothing else than to prove that a new sheriff is in town. Vigna is no different, with three top managers at Ferrari on their way out, Reuters reports.

Those who have decided to leave include Chief Technology Officer Michael Leiters, the carmaker said.

The planned reorganisation, to be unveiled in detail on Jan. 10, was consistent with Ferrari’s “strategic goals of exclusivity, excellence and sustainability”, it said.

[…]

The new management structure will “further foster innovation, optimise processes and increase collaboration both internally and with partners”, the carmaker said.

Leiters, a German national who joined Ferrari in 2014, has helped develop Ferrari’s recent most successful models, including the 2019’s SF90 Stradale and this year’s 296 GTB, the house’s first two hybrid electric cars.

Other top managers leaving the company are Chief Manufacturing Officer Vincenzo Regazzoni and Chief Brand Diversification Officer Nicola Boari, who oversaw Ferrari’s push into luxury, with the unveiling in June of its first in-house fashion collection.

Ferrari seems in perpetual churn, though also perpetually printing money. It will probably always be like this.

5th Gear: Geely And Renault Pair Up To Make A New Hybrid Brand

The brand will be for the Asian market, according to Reuters, and offers Renault entry into China.

The joint venture (JV) deal, in the works since early this year and which also involves joint operations in China, will allow Renault (RENA.PA) to shore up its struggling business in South Korea and more broadly its presence in Asia.

Renault, which exited China last year, will gain a way back into the world’s biggest auto market by forming a new, plug-in hybrid-focused brand that will be managed jointly by it and Geely (GEELY.UL), the sources said.

Geely is expected to work with Renault to come up with a new lineup of green cars that use Geely’s so-called Compact Modular Architecture (CMA), a midsize vehicle underbody structure shared by Geely and Volvo (VOLVb.ST), as well as its supply chains and manufacturing facilities in China, the sources added.

Renault will focus on vehicle design, sales and marketing for its newly defined brand in China, the sources said.

For Geely, the deal could mean a production foothold in South Korea and access to Renault’s assembly plant in the country, where the latter has been making and selling cars for over two decades via a local brand with a Samsung Group unit.

Most interesting is that this all might end with Geely’s Lynk & Co coming to the U.S.

The aim is to localise the production of certain Lynk hybrid vehicles in South Korea, the sources said, implying the companies would line up local supply of parts.

Geely might possibly gain a “backdoor entry” into the U.S. market due to the deal, one of the sources said.

The Chinese automaker is looking at the possibility of taking advantage of South Korea’s free-trade agreement with the United States and export its Lynk & Co vehicles to the world’s No.2 auto market, two of the sources said.

I will believe it when I see it, but getting Lynk &amp
; Co here would be cool as hell.

Reverse: Apollo 8