Shortage of new cars triggers crisis for rental companies in Brazil

RIO DE JANEIRO, BRAZIL – Car rental companies are experiencing a more difficult year than imagined. Due to delays in deliveries from automakers, revenue from sales of used cars will drop in coming months, with maintenance costs growing in parallel, due to the fleet’s increased age.

To preserve cash, rental companies have readjusted long-term contracts, but the sustainability of this pricing policy should be limited.

Since last year, the automotive industry has been facing parts shortage issues due to the severity of the Covid-19 pandemic. As a consequence, automakers have been delaying deliveries of retail and wholesale orders, leading to significant price increases for new vehicles in the market. According to the vehicle pricing platform Checkprice, the average price of a brand new car will rise by 20% to 25% in 2021.

For now, rental companies have been benefiting from these increases, because when the price of new cars rises, used cars also appreciate in value. In a Bradesco BBI report last Friday, analysts Victor Mizusaki and Pedro Fontana highlighted the “high margins” of rental companies in the business of used cars, which should “sustain growth in the first quarter.”

However, they warned about the drop in sales of used cars due to the disruption in the automotive industry. Unable to buy cars, rental companies can not renew their fleet. In addition to the loss of margins with the sale of used cars, maintenance costs grow significantly.

“Rental companies are expecting deliveries from automakers to stabilize only in the last quarter this year or by the start of 2022,” says a source in the chain, who prefers not to be identified.

In this scenario, rental companies have been preparing for a difficult year. Early this month, Localiza announced a debenture issue in the amount of R$1.2 billion, resources that according to the company should be destined to cash recomposition. In February this year, Unidas approved an issue of R$450 million in debentures also to strengthen cash.

Suspended orders

At the end of March, the Brazilian Association of Car Rentals (ABLA) reported that the order backlog in the automotive industry totals about 100,000 units. The delays may exceed 180 days, and automakers such as Volkswagen have temporarily suspended new orders from fleet owners.

To face a period of pressure, car rental companies are readjusting long-term contracts for individuals (also known as “car for hire”) and fleet outsourcing. Companies have applied readjustment clauses halfway into the contract term due to inflation in the sector, which had never happened before.

“Car rental companies are doing their best to preserve cash this year, but the readjustments have a limit of application because customers will only absorb what they can,” says a source linked to automakers.

In a note, Localiza informs that “there was no change in the company’s pricing model” and that long-term contracts, both for individuals and companies, “are drawn according to specific conditions, designed according to the demands and mobility needs of customers, including mileage traveled and term that usually varies between 24 and 48 months.”

The company also adds that “lease prices for new hires may vary according to the buying and selling conditions of each car and economic scenario, especially future interest rates.”

Direct leasing by automakers exacerbates the sector’s problems

The pressure on rental companies is also growing due to a recent phenomenon: the entry of car manufacturers in the rental business. Volkswagen, Fiat, Jeep, Toyota and Caoa Chery started to offer subscription car plans and fleet management directly to businesses. In addition to fighting for market shares, automakers will have more bargaining power to negotiate with fleet owners.

The interdependent relationship between the two sectors has had moments of advantage for the rental companies, which have historically helped to increase the scale of production of the automakers, and of increased bargaining power for the industry. The president of the Brazilian Association of Car Rental Companies (ABLA), Paulo Miguel Jr., stated last month that the readjustments for the rental companies will reach 30% by 2020.

“It is difficult to negotiate when the automaker has sold all of its production. We will keep fighting to maintain discounts, but this will be a year of challenges,” he said.

Consultant Milad Kalume Neto, of Jato Dynamics, says that in a scenario of production constraints, automakers will have to balance sales to rental companies and their leasing arms: “The automakers should practice lower discounts.”

Source: Infomoney