Friday, May 8, 2020


As the realities of COVID19 strike at every element of our financial and capital sector, spare a thought for those companies holding massive debt on their books from borrowings made when times were better.

Funds borrowed for expansion, new investments and boosting sales to crack the mysteries of the right economy of scale – those plans are now yesterday’s news, and it’s simply not clear what tomorrow will bring.

I wrote recently about the financial turmoil at Aston Martin, and it’s a good example, to highlight both the fight to survive, and the folly of taking on debt in uncertain times. And it's not just Aston Martin, it's happening across the whole automotive industry regardless of the brand.

In a recent interview with my friend Steve Cropley at AUTOCAR, Aston Martin’s COO Andy Palmer talked about big changes needed to Aston Martin’s business model, especially in light of billionaire Lawrence Stroll moving into the Chairman’s role at the troubled sports car maker.

As Palmer pointed out, Stroll has been the Canadian Ferrari importer for a long time, and he understands Ferrari’s business model – which, effectively, means building cars to a specific order – not just churning out cars for dealer stock. You order and spec a Ferrari, then you wait until it’s built.

Palmer highlighted Aston Martin’s difficulties in moving to the Build-to-Order model, because there is simply too much unsold stock in the Aston Martin pipeline.

Whether it’s company inventory, or in dealer stock. That stock must be sold down, before moving on to a B-t-O model.

Herein lies Aston Martin’s dilemma. The company is knee deep in both debt and excess stock. It must generate revenue to pay down debt, and shift stock. Its current revenue flow is pathetic, and despite Stroll’s consortium pitching in £182million; and launching a rights issue valued at £318 million, current cars in inventory have to be moved by ‘dealing’ and that costs money; and then there’s the ‘sunk cost’ in investments like the Gaydon facility and the new St Athan factory to build the DBX.

Even if you're not an analyst, this Bloomberg graph says it all

It is almost a no-win situation for this great company, cash to survive (both its current stock problem, and COVID19) is in short supply, creditors to be pacified and satisfied, and its investors are looking for a return on every dollar they have sunk in the company.

Dream cars, or just dreams? Valkyrie and Valhalla
In Palmer’s own words, “We’ll have to swallow hard, change how we operate, get stock out of the system and make a good try at becoming the British Ferrari. It’s going to hurt.”

It sure is. The graphic reality is that when you become a public company, your shareholders want a return on the shares they’ve bought. They invested because it seemed like a good idea at the time, and they want to see the share price grow, and dividends paid – but when you’re in Aston Martin’s position that outcome is going to require a huge amount of patience from both creditors and shareholders – I wouldn’t like to be either Andy Palmer or Lawrence Stroll right now.

Could Aston Martin disappear? No, I don't think so. There is huge residual affection and support for the brand, and it's a valuable name. However, my only concern is that holding massive debt, and downgrading production from the dream of 7,000 cars a year, to around 5,000 takes a big chunk out of revenue flow and profit margins.

Aston Martin’s position is already fragile, before COVID19 burst in on the scene, and Aston Martin is unfortunately just a microcosm of what’s happening across the global automotive industry.

Times are tough, and they’re going to get tougher. Hang on!

John Crawford


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