December 2023 – 0% Financing is Back: Is the Automotive Industry (and Broader US Manufacturing) in Trouble?

If you’ve tried to buy a new car or truck recently, you’ve likely encountered (even with good credit) interest rates in the neighborhood of 9-10%. For someone borrowing $50K for a modestly optioned Ford F150 (including taxes, registration, and fees), current monthly payments at these rates approach $1,100 over a 60-month term. That’s in the ballpark of $250 per month more than they would be at the 0% (or .9%) financing costs!

Which, of course, helps explain why car sales are slumping and why both new and used cars are piling up on dealer lots. This is only part of the picture. Major manufacturers have spent 2023 producing cars that consumers don’t actually want: namely EVs. In fact, according to Copilot, dealers had (as of November 2023) over 253 days of supply for the Ford Mustang Mach-E sitting on lots. Chevy had 221 days of supply gathering dealer dust for the Blazer EV. And even Porsche had 176 days of inventory for the Taycan (among dozens of other EVs sitting on lots for many months in search of a new home).

Moreover, inventory for these vehicles, including gasoline-powered cars, grew during the UAW strikes despite production cuts! The overall sales trendline does not look good. In June of 2023, monthly vehicle sales topped 16.6 million units. This fell to 16.18 million units in September, and further declined to 15.97 million units in October while dealer inventories increased in a supply (labor) constrained environment.

As a result, dealers, even with popular models, are resorting to 0% financing offers to move units — which is unprecedented in such a high-interest-rate environment given the cost to the financing arm of manufacturers to absorb their own borrowing costs. According to Realcartips.com, and @cardealershipguy on Twitter, Ford is now currently offering 0% financing on the Edge, Expedition, and Escape models (and Lincoln Nautilus). Nissan is offering it for the Titan, Murano, Altima, and Rogue. Hyundai is also offering 0% financing for the Sante Fe and Tucson. And even Subaru is offering %0 financing for at least one model.

Consumers are also failing to make payments. Automotive subprime default rates have spiked above 6% in October, marking a roughly 250% increase since 2021.

Businesses are also defaulting. This suggests increasing supply chain risk, as evidenced by the 60% rise in business Chapter 11 business filings in 2023. The situation is becoming acute from where we sit as procurement and supply chain advisors in the market.

All of this spells trouble for automotive companies (and their extended supply chain, especially smaller manufacturers who do not have the same balance sheet strength and lower borrowing costs of OEMs and are facing declining order books in many cases). Here, it is important to remember that lower-tier manufacturers within automotive, general/industrial and A&D overlap materially. For instance, a metal fabricator or injection molder supplying parts that end up (eventually) in a Ford might also supply John Deere or its suppliers.

But what should manufacturers do? We typically recommend that companies start by mapping and understanding not only their tier 1 supplier exposure, but also tier 2 and tier 3 risk. Then, it is important to understand vendor (and customer) balance sheet health using methodologies such as Altman Z scoring or that provided by technology and data providers such as D&B, RapidRatings, or Credit Risk Monitor (disclosure: one of the authors sits on the board of Credit Risk Monitor). Visibility into multiple supplier tiers can also enable larger manufacturers to purchase materials on behalf of suppliers, often at more attractive prices due to volume discounts.

Once a firm understands its multi-tier supplier network, it’s crucial for business owners and professionals in finance, procurement, and supply chain management to immediately develop plans for at-risk suppliers to ensure they can continue to deliver — given the cost of potential disruption to production should a supplier become insolvent.

But at least after work is done proactively figuring out which suppliers could shut down your production line, you can at least enjoy the benefit of purchasing that Ford Expedition you’ve had your eye on for years with 0% interest.