The automotive ecosystem has been in considerable turmoil for some time, but in September the pressure and urgency of action have reached a new peak. Players like VW Group, Renault, Stellantis, Mercedes, BMW... are finding that their current transformation speed and amplitude are not sufficient. China is currently the most burning platform, but OEMs are also feeling the heat in Europe (and in the US), even before CO2 regulation massively increases pressure in 2025. As an example of disruptive moves, VW Credit US is handing over the vehicle loan business to Wells Fargo, keeping their growing leasing business. This shows a willingness to outsource key functions like Captive Finance in a core market to increase efficiency and reallocate capital. The fact that VW Credit maintains leasing / mobility capabilities also shows the strategic importance that VW Group attributes to asset management in the upcoming EV world. On the vehicle topline side in Europe, the tightening CO2 regulations in 2025 are already prompting some repositioning... Besides numerous announcements of new, "more affordable" models, manufacturers count on fully monetizing the ICE vehicles they are allowed to sell, without incurring fleet emission penalties, by increasing ICE prices. If such a collective "value approach" holds, this would generate excess demand and higher margins not unlike the Covid / Chip period. Despite pressure on New- and hence also Used-Car sales - the first positive net-income quarter from Auto1 rather confirms its integrated model. The future is likely to test its robustness vs lower Used Car volumes in the market.
While digital vehicle traders with short vehicle holding periods are somewhat independent from price movements, the continued fall in used EV prices poses a high risk to asset owners. We are taking up "Residual Values" in our next Qorus webinar. Sign up for free at the end of this newsletter!
Auto 1 - Break-even in Q2/2024
After having reached a first break-even on EBITDA level in Q3/2023, Auto 1 has now achieved a new milestone. In Q2/2024 a positive net result of € 1.8m was earned on record revenues of €1.52bn. Although this represents a net margin of only slightly above 0.1% the trend is supported by a clear growth and profitability path. The number of transacted units has increased by ~17% yoy for the B2B merchant business and by ~23% in the significantly higher margin Retail business.
Furthermore, the Gross Margin per Unit could also be increased for both segments. (23% - Retail & 13% Merchant). With a 12.8% GPU margin in Retail (on an average vehicle price of 16.260€) Auto 1 has now reached a comparable level with PoS dealers. This however is achieved on a significantly lower avg. vehicle price compared to brand dealers (~25k€). Lastly the gap between the average merchant channel vehicle at 8.150€ and the average Retail sale vehicle (16.260€) has increased further. This was caused by a lower avg. merchant price (in line with used car market price developments) and a slight increase in the avg. retail price (due to a strategic focus on the sale of higher-value vehicles).
CVA perspective:
Based on the reported numbers, the evolution of most of Auto1's key indicators point into the right direction. The Auto1 business model (especially the retail part) has significant opportunities for growth, not only in scale but also in terms of transactional potential for financing & leasing. However, before becoming the next Carvana (with its impressive stock price evolution and valuation) Auto1 still has various open tasks: The large difference between B2B and B2C vehicle price tag shows that a large part of vehicles can only be sold B2B, limiting retail share. The B2C brand awareness of autohero remains significantly behind other European used car portals (Mobile.de, LeBonCoin, Autoscout24, Autotrader, etc.). Of slightly below 6.000 vehicles online on autohero.com zero vehicles are electric (Mobile.de 1.5m lisitings, 17k direct sale, also 0 electric). And while more and more established used-car players are actively integrating transactional sales models, autohero needs to rapidly scale to keep its head start. With a large question mark on whether this can be financed out of the existing business.
Independent from the short-term evolution of Auto1 and transactional pilots of large UC portals, we have no doubt that transactional digital used car sales can be profitable - posing a real threat to traditional PoS used car dealers.
ICE prices soar: Is the market leaving consumers behind?
The automotive industry is experiencing a notable surge in prices for internal combustion engine (ICE) vehicles, influenced by a mix of stringent EU emissions regulations and escalating costs of raw materials and labor. Leading manufacturers like Volkswagen have announced price hikes of up to 3.2% for certain models. This strategic move not only boosts OEMs' profit margins per vehicle but helps selling fewer CO2 emitting vehicles, hence aligning with EU’s 2025 CO2 emissions targets. To meet these goals, automakers are compelled to significantly cut CO2 emissions, achievable by shifting focus from ICE vehicles to battery electric vehicles (BEVs). Meanwhile, the competition in the BEV market is putting pressure on prices.
CVA perspective:
In 2025, the European vehicle market will face significant changes due to stricter CO2 emission regulations. To avoid hefty fines, OEMs are forced to increase BEV sales while limiting their ICE offer. This requires new solutions to tackle the continuing failure to ignite widespread consumer interest in new BEV models across Europe, caused e.g. by a disconnect between the premium vehicles currently available and the scarcity of affordable options under €25k. While a range of these budget-friendly vehicles is planned for release in 2025 and 2026, this timeline may be insufficient to meet the stringent CO2 emission targets set for 2025.
To optimize margins within these boundary conditions, OEMs will likely increase prices for ICE vehicles, leading to reduced demand and volumes, helping them to avoid CO2 penalties and earn some extra margins on ICE. BEV sales of OEMs need to increase but will be limited by weak EV demand, which will require aggressive prices to increase volumes. The question is how many BEV volumes OEMs will be able to push before negative margins eat up the extra ICE margins. In any case, the introduction of more affordable BEV models and increased cross-subsidization by high-priced ICE vehicles will severely decrease BEV prices. This "ICE Value Scenario" may have a flavor of the excessively profitable Covid era for manufacturers, where chip supply shortages drastically limited available volumes for all OEMs. A similar situation may arrive in 2025...26 for ICE vehicles, with regulatory limitations replacing chip shortages.
VW FS & Wells Fargo team up for US financing market
VW-FS US has announced a strategic multi-year cooperation agreement with Wells Fargo to take over the vehicle purchase financing activity in the United States. This agreement affects all VW, Audi and Ducati sales via dealerships and applies for new business as off April 2025, making Wells Fargo the preferred vehicle purchase loan provider. VW-FS US will keep the significantly smaller leasing business which is in line with the globally announced asset ownership strategy of VW. With the cooperation both partners mention the respective focus on their core-business as one rationale – which will lead to a superior customer experience.
CVA perspective:
Financial services have long been a strategic key priority for VW. The present strategic shift of the US division to partner with Wells Fargo is hence noteworthy and highlights the inherent challenges in capital allocation, funding capacity and operational complexity, even for industry giants. With 50 states each having distinct regulations, managing the financing of annually ~570,000 vehicle sales (~55% of which are loan financed but only ~10% via the Captive) can be more efficiently handled by a specialized banking partner. This move not only liberates capital for VW to invest in its growing leasing business but also aligns with their asset ownership strategy.
Although the US is lagging behind Europe in terms of EV penentration, the management of electric vehicle assets remains a key priority. A significant catalyst for this change is the rising trend in Battery Electric Vehicle (BEV) sales, with 46% of BEVs in the US being leased, compared to just 25% across the broader market.
We anticipate that while loan activity will continue to play a crucial role in supporting vehicle sales, the strategic focus and increasing resource constraints will drive more Manufacturers to explore new banking partnerships for decreasing volumes of vehicle loans. This approach will enable them to unlock capital, enhance customer experiences, and concentrate on the more strategically vital leasing operations.
Qorus webinar announcement on residual values!
The rise of electric vehicles is reshaping the automotive and financial landscape, but this shift introduces new risks and complexities that directly impact vehicle leasing, financing, and insurance portfolios. Unlike traditional vehicles, EVs present unique challenges, such as rapidly evolving technology, fluctuating battery performance, and unpredictable future demand. For financial institutions, understanding how to forecast, mitigate, and strategize around EV residual values will be critical to maintaining profitability and managing risk in this new era of mobility.
The webinar takes place on: October 8th 2024 from 10:00 to 11:30 CEST and will feature prominent guest speakers including: Dr. Christof Engelskirchen (Chief Economist @Autovista Group); Ian Plummer (Commercial Director @AutoTrader) and Sam Heymans (CEO @Lizy - a leading used car leasing company). Together with our guest speakers, we will explore how financial institutions can manage the risks and capitalize on the opportunities surrounding EV residual values.
Register now for free and feel free to forward this invitation to your colleagues!
