Automotive producers and parts suppliers have been riding high of late after a short-lived, minor slowdown that followed many months of carrying the manufacturing side of global economic growth. There is still plenty of strength in auto, to be sure. However, trade creditors should be aware of emerging problems and closely watch some warning signs that could affect the cash flow of players of various sizes and roles in the industry.
A new U.S. Congressional report released this month focuses on auto as it relates to perhaps the fastest-growing area of concern in business: hacking-based fraud. The report by Sen. Ed Markey (D-MA), Tracking & Hacking: Security & Privacy Gaps Put American Drivers at Risk, notes that newer cars and trucks rely significantly more on data-driven technology and tracking (i.e., Bluetooth, Internet access, etc.) and suggests that auto producers are woefully unprepared for potential hacking attempts. Defenses in that area appear far less developed than most sectors of the business world, according to industry responses received by Markey. While it's not likely to doom any one manufacturer of parts or finished autos, the chances of a hack-based public relations incident similar to Target or Home Depot, or worse, are somewhat high.
"Drivers have come to rely on these new technologies, but unfortunately the automakers haven’t done their part to protect us from cyber-attacks or privacy invasions … Our technology systems and data security remain largely unprotected," said Markey, a member of the Senate Commerce, Science and Transportation Committee. "We need to work with the industry and cyber-security experts to establish clear rules of the road to ensure safety and privacy."
Meanwhile, an increasing number of economists and business analysts in the press are starting to talk about a subprime auto lending "bubble" that could burst in the near future. Remember: a lending bubble in residential real estate caused by excessive risks was among the drivers, if not the primary one, of the market crash nearly a decade ago and the eventual recession. What resulted was tougher credit standards for even fair- to well-rated potential borrowers and an obvious chilling effect on sales that hit materials suppliers hard. Many in the auto industry pointed to the strong historic performance of auto loans and criticized such predictions. Granted, housing industry titans did the same when "hard landing" talk surfaced around 2006 and 2007.
In addition, auto producers based in Europe and those who forged greater market inroads there are facing freefalling sales. The conflict between Ukraine forces and Russian separatists will continue to weigh on confidence and expectations going forward. In addition, as has been often overlooked, the Russian market became an increasingly important area of expansion earlier this decade, when the economy there was humming. New statistics suggest car-buying activity was off by at least 25% in January, according to PricewaterhouseCoopers, and an annual drop of at least 35% through the end of 2015 is expected. Because of the ongoing conflict, newfound foreign exchange (currency) woes and Russian officials' recalcitrance to admonishment regarding its perceived role in the conflict, the auto market is likely to continue shrinking throughout Europe.
- Brian Shappell, CBA, CICP, NACM managing editor