David Hannah, the chief risk officer of Allied Credit, told GoAutoNews Premium in an exclusive interview that the automotive sector is facing a number of risks that it has not seen for many years.
“The last time auto businesses faced the kind of risks that appear to be looming within the economy now was likely to be when current senior people in companies were junior or middle managers” he said.
“One of the consequences of this is a lack of “corporate memory” of leading and managing in tougher times. Dealers should ensure those in their business who were around in tougher times are engaged and their lived experience is sought out and valued.”
Mr Hannah said that Allied Credit was suggesting to its dealer clients that they should tap into “their benefit of hindsight” on what steps guided the businesses through that period and what mistakes might have been made that should not be repeated.
He said that after a very long period of macroeconomic stability, the world economy has changed very quickly in the wake of the pandemic.
Interest rates are rising rapidly with typical car loans now around 10 to 12 per cent and sometimes higher for riskier segments such as young renters, for example.
He said that risk premiums for core capital that is needed for lending to car buyers are rising as monetary and fiscal policy tighten in many large, developed economies.
“We are also seeing geopolitical uncertainty (Ukraine and Taiwan for example) for the first time in a generation,” he said.
“This is flowing through to consumer confidence, which is falling as the cost-of-living increases and some asset prices fall, most notably residential property.
Mr Hannah said that declining confidence was likely to become more pronounced in the months ahead as cost-of-living pressures increase and this would have a flow-on effect on business confidence.
Businesses are seeing operating costs increase, including the cost of servicing debt and a very tight labour market which is seeing people costs increase, not only to retain staff but also to recruit them, he said.
“It is critical in times of heightened risk and increased uncertainty that there is clarity on who is taking the lead on managing this. While most dealers don’t have a separate chief risk officer or a separate risk function, all dealers have an accountant/CFO who, I suggest, is the best placed to take on this responsibility.
“The best thing to do is assess the risks, adjust business plans and budgets as required, and take action based on the revised plans.
“The worst thing any business can do is ignore the risks facing it – that’s a recipe for disaster.
“So you need to look to someone with the experience who can bring their knowledge to bear. And don’t tack it on and don’t just give it five minutes. When we are facing such a steep change, we really have to set aside some time to sit down and talk about this. Nobody’s got a crystal ball, but the message is very much: take time to talk about the potential impacts of the changing business environment.
“What do you think the next year might look like? Think about it, and come up with some realistic estimates.
“What do you think floorplan is going to be costing in six months if, as predicted, the Reserve Bank continues to increase the official cash rate into 2023? If floorplan is going to be costing us A then this is what we do. If it’s going to be B, this is what we’re going to do and if it’s going to be C this is what we’re going to do.”
“Dealers should also model what the impact might be on their stocking costs and new vehicle sales margins if supply and demand come back into more of a historical balance. Dust off the records from 2015-2019 to see what stock turnover and new vehicle margins were then and what the bailment balance and costs would be if that scenario returned.”
“Used car prices are another area to consider, given the significant increase we’ve seen following the pandemic. What would the impact be on the dealer business if they dropped by 10 or 15 per cent over the next six months?” Mr Hannah said.
“Come up with scenarios so that you can be in a position to move to the solutions very quickly.
“Dealers should be setting up time for their leadership groups to meet, consider and discuss the risks realistically and pragmatically, then decide on strategies and execute the plans to mitigate them. This should be done as a separate, focused exercise, and not just bolted on to the end of routine management meetings and discussions. As always, it pays to be prepared”
By John Mellor