The Effects of Interest Rate Cuts on the Automotive Industry

Impact of Interest Rate Cuts on Consumer Financing

Interest rate cuts can significantly enhance consumer financing in the automotive industry. Companies like Tesla are already responding to high rates by offering attractive financing options, while Ford's increased net receivables indicate a positive trend in consumer financing, suggesting that lower rates could further stimulate demand.

"In the six months ended June 30, 2024, total revenue increased primarily due to: (1) increased finance charge income of $0.8 billion primarily due to an increase in the effective yield resulting from higher average interest rates on new loans and growth in the size of the portfolio; and (2) increased investment income of $0.1 billion primarily due to an increase in the average investment balance and higher benchmark interest rates." --- (GM, sec filing, 2024/Q2)

"I would like to thank the entire Tesla team for their efforts in delivering a great quarter. On the auto business front, affordability remains a top of mind for customers, and in response in Q2, we offer deducting financing options to offset sustained high interest rates." --- (TSLA, earning call, 2024/Q2)

"(b) U.S. 36-month off-lease first quarter auction values at Q1 2024 mix. Change in EBT by Causal Factor (in millions) First Quarter 2023 EBT $ 303 Volume / Mix 34 Financing Margin 125 Credit Loss (10) Lease Residual (126) Exchange 8 Other (8) First Quarter 2024 EBT $ 326   Ford Credit’s total net receivables of $136 billion were 10% higher than a year ago, reflecting the impact of increased consumer and non-consumer financing, offset partially by a smaller lease portfolio." --- (F, sec filing, 2024/Q1)

"GM Financial Three Months Ended Increase/ (Decrease) % Six Months Ended Increase/ (Decrease) % June 30, 2024 June 30, 2023 Total revenue $ 3,918 $ 3,498 $ 420 12.0 % $ 7,730 $ 6,841 $ 889 13.0 % Provision for loan losses $ 174 $ 167 $ 7 4.2 % $ 378 $ 298 $ 80 26.8 % EBT-adjusted $ 822 $ 766 $ 56 7.3 % $ 1,559 $ 1,537 $ 22 1.4 % Average debt outstanding (dollars in billions) $ 107.7 $ 99.7 $ 8.0 8.0 % $ 106.5 $ 98.3 $ 8.2 8.3 % Effective rate of interest paid 5.5 % 4.6 % 0.9 % 5.4 % 4.4 % 1.0 %" --- (GM, sec filing, 2024/Q2)

"On the demand front, we've undertaken a variety of initiatives, including lowering the price of both the purchase and subscription options for FSD launching extremely attractive leasing specials for the Model 3 in the U.S. for $299 a month and offering attractive financing options in certain markets." --- (TSLA, earning call, 2024/Q1)

Consumer Sentiment and Vehicle Sales Trends

Interest rate cuts are expected to enhance consumer sentiment and vehicle sales trends, particularly through improved product offerings and affordability in the EV market. Companies like Stellantis and GM emphasize strong portfolios and consumer preferences, while Ford highlights the cost benefits of electric vehicles, suggesting a positive outlook for sales.

"And so, there's certainly potential that can come there. The other part just on the macro side that's very positive from the industry side is, while I think we've got definitely the best product portfolio of things coming to market in the rest of the year, there are a lot of people out there with product stories that are coming in specific categories and this is a spot, where I do think that has an opportunity to lift the industry and consumer sentiment, as we move into the second half." --- (STLA, earning call, 2024/Q1)

"And so we do think the market for EVs will continue to grow and we've got the performance, the technology and the range that customers want, especially when you look at our portfolio with the Equinox coming out right now, the affordability of that vehicle along with when we have the Bolt next year, if we're giving consumers that choice. And as I've said, EVs are fun to drive, instant torque." --- (GM, earning call, 2024/Q2)

"Automotive sales revenue decreased $4.31 billion, or 11%, in the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, primarily due to lower average selling price on our vehicles driven by overall price reductions and attractive financing options provided year over year." --- (TSLA, sec filing, 2024/Q2)

"We really believe what I said, which is that many Americans would find an electric vehicle lowering their cost, not everyone, but a high percent. And we believe that to be fully fit globally, whether it's our Ranger business, our commercial business, anything really, we have to find a way inside the company to be fully fit with lots of partnerships on the supply chain side. And so this is a kind of enduring strategy at the company." --- (F, earning call, 2024/Q2)

"Vehicle Sales The principal factors that determine consumer vehicle preferences in the markets in which we operate include overall vehicle design, price, quality, available options, safety, reliability, fuel economy or range and functionality." --- (GM, sec filing, 2024/Q1)

Effects on Production Costs and Financing

Interest rate cuts are enabling automotive companies like GM to implement cost-reduction strategies, including a $2 billion fixed cost reduction and inventory management. These measures help align production with demand and protect pricing, ultimately lowering production costs and improving financing conditions.

"The work is helping us meet our $2 billion fixed cost reduction program this year and the savings will be even greater in the future. As I said before our EV portfolio is growing faster than the market now that our module issues are resolved and we are scaling production." --- (GM, earning call, 2024/Q2)

"We have been taking steps to reduce our inventory, align our production to demand, protect our pricing and reduce fixed costs." --- (GM, earning call, 2024/Q2)

Investment in Innovation and Technology

Interest rate cuts are prompting automotive companies to enhance their investments in innovation and technology. Firms like NIO and Rivian emphasize balancing investment scale with efficiency, while Ford focuses on leveraging partnerships for technological advancements. Tesla is committed to developing its hardware and software ecosystems, and GM's strategic decisions on resource sourcing could drive innovation in battery technology.

"But in the meantime, we will also need to keep a good balance between our investment scale and the efficiency to make sure that we enter into the global market in a smarter and more efficient way. Thank" --- (NIO, earning call, 2024/Q2)

"To this end, we intend to continue making investments, including technology updates, to drive growth as we scale vehicle production and deliveries, expand our offerings, and strengthen our core capabilities." --- (RIVN, sec filing, 2024/Q1)

"And so we're going to continue to leverage partnerships in ways like that. And then when it comes to technology, we'll leverage those partnerships as well to make sure that we're at the forefront of being cost competitive." --- (F, conference, 2024/06/11)

"We have made and plan to make further investments in hardware and software ecosystem But sustainability is not just about avoiding emissions. It needs to take into account the whole life cycle from to use less water per vehicle than the industry average." --- (TSLA, event transcript, 2024/06/13)

"GM's public stance on deep sea mining matters. Given GM is the largest U. S. Automaker, the company's failure to establish a position could drive investment in this controversial industry. Conversely, a clear stance restricting its use of deep sea minerals could drive innovation in battery mineral tech, recycling and circularity." --- (GM, event transcript, 2024/06/04)

Competitive Responses to Interest Rate Changes

Automotive companies are responding to interest rate changes by enhancing cost competitiveness and performance. Stellantis acknowledges a 30% cost edge against competitors, while Honda emphasizes the need to improve both cost and performance to remain competitive. General Motors focuses on restoring profitability amid these pressures.

"Addition to the increase of 50% of the rail capacity, we will have in H2 this year our outbound logistic costs in Europe down 25% compared to the H2 2023. All those actions are leading to Stellantis supply chain new paradigm. Flexibility, resilience, cost competitiveness. Thank you" --- (STLA, investor day, 2024/06/13)

"And then in the second half, JPY 135 because of the interest rate changes and so on, that is expectations." --- (HMC, earning call, 2024/Q2)

"So we've got to remain competitive and that means that we've got to take a look at the business with our partner to ensure that we can restore it to profitability and that we can restore it to self sustaining cash flow going forward." --- (GM, conference, 2024/08/08)

"And this is exactly what we have done. We recognize that they have a 30% cost competitive edge against the Western world." --- (STLA, investor day, 2024/06/13)

"But here, again, we want to increase our competitiveness, not just in terms of cost but also in terms of performance." --- (HMC, earning call, 2024/Q2)

Long-term Effects on Automotive Market Dynamics

Long-term effects of interest rate cuts on the automotive market include potential shifts in market share and pricing dynamics, as highlighted by Stellantis and Ford. Tesla notes that changes will take years to reflect in volume, while GM emphasizes growth potential in China, indicating varied regional impacts.

"Could you help us think about the impact of these launches on market share and relative pricing as we move through the year, and then longer term, as we've seen this general downward trend in market share, especially in North America." --- (STLA, earning call, 2024/Q1)

"So you are correct in saying so. But in the mid- to long term, we think that the Japanese automotive market is declining." --- (HMC, earning call, 2024/Q2)

"But this will -- given the speed at which, the auto industry moves, it would be several years before you would see this in volume." --- (TSLA, earning call, 2024/Q2)

"But, Jim, as you think about this, as the market is shifting towards hybrids at least in the near term, I'm just curious what kind of capacity you have to ramp up significantly in hybrids if the demand really is there." --- (F, earning call, 2024/Q1)

"But over the long-term, we're committed to China. We believe that it's a market that, over the medium term, will have substantial growth." --- (GM, earning call, 2024/Q1)