The end of the “easy money” era is punishing the car industry…
When loans were cheap, buying an overpriced car didn’t seem so bad to most folks. After all, low interest rates made for low monthly payments.
But the current environment is a lot different…
Like anything else these days, interest rates for car loans are soaring. For a new car, the average interest rate is a whopping 6.4%. And it’s more than 9% for used cars.
That’s for prime borrowers, too. Subprime borrowers are paying nearly 12% for a new car.
Not surprisingly, defaults are soaring…
In fact, more than 6% of subprime borrowers are now at least 60 days past due on their car payments. That’s the highest percentage since 1994, according to Fitch Ratings.
This situation is a catastrophe in the making for consumer credit. And it gets worse…
In short, it’s creating a wipeout in the electric-vehicle (“EV”) market.
Ford Motor (F) announced last week that it will cut more than $12 billion in EV investment. According to the company, U.S. consumers don’t want to pay a premium for these vehicles.
Ford’s EV unit lost roughly $1.3 billion in the third quarter. Those losses wiped out nearly all the earnings from the company’s Ford Pro commercial segment (more than $1.6 billion).
And Ford isn’t the only carmaker struggling with EVs…
General Motors (GM) said a couple years ago that it would only sell EVs by 2035. But now, it’s scrapping self-imposed, near-term EV targets. And it’s scaling back investments as well.
In fact, General Motors just threw a $5 billion deal with Honda Motor (HMC) in the trash bin. The two carmakers released a joint statement last week…
After extensive studies and analysis, we have come to a mutual decision to discontinue the program. Each company remains committed to affordability in the EV market.
They’re committed to selling cars they can’t figure out how to make money on.
On the flip side, Toyota Motor (TM) has publicly expressed skepticism of the EV push from the start. The company was always a fan of “hybrid” engines. That’s still the case today.
Now, as the industry-focused publication Jalopnik noted last week…
Put simply, it’s easy to dream big when money is cheap. But now, the easy-money era is over. And an extended stretch of higher interest rates caused all those EV dreams to end.
When the monthly payments were next to nothing, U.S. consumers looked past all the current flaws of EVs. They didn’t care that EVs are hard to charge and have short life spans.
But with interest rates at multiyear highs, that’s now an obvious bad deal.
Carmakers are feeling the heat, too. When demand for EVs felt endless, they went all-in on the trend. And they collectively decided to figure out the profitability problem later.
But in a world of expensive debt, that kind of game can drive a business to bankruptcy. And now, as I showed you today, the major carmakers are backing away from this losing game.
Do I believe this is the end of EVs? No.
But it’s a major wipeout for the industry. And more importantly, we’ll see this kind of reality check in other industries as the reality of hard money percolates through the economy.
Good investing,
Vic Lederman
