Automotive Blog

Disruptive Change and Asset Values

NY Cabs

The Financial Times reported recently that lenders to taxi owners in New York and Chicago were under investigation by financial regulators.  The reason for this was unrelated to sub-prime lending, rogue traders or any of the other ills that have affected the banking sector over the last eight years.  What has raised concern is that the so-called medallions that are issued by the city authorities in limited numbers, and give the taxi driver the right to trade, are rapidly falling in value.  Would-be taxi drivers took out loans of up to $1 million to buy the medallions, but in the face of competition from Uber, Lyft and other disruptive players, the value of medallions has plummeted by over 50%.  Now the lenders are facing huge write-downs on loans, and one is suing the New York city authorities, blaming them for allowing the newcomers to compete unfairly.  The market capitalisation of one lender has fallen by more than half from its peak in 2013.

We have an interest in players like Uber and Lyft due to their role in moving consumers towards a society based on mobility rather than ownership.  However, a potentially more significant point from this story is that it is not only taxi drivers who face disruptive change in the automotive sector.  Dealers are heavily invested in expensive property at the same time that customers are doing more of their car shopping on the internet, making fewer visits to traditional dealerships.  OEMs are asking dealers to make further investments, and these need to be financed.  Dealer sites in prime locations are currently still going up in value, but that was also true of taxi medallions in New York, which rose in value from $600,000 to over $1 million between 2010 and 2013.  It is not in anyone’s interests for the FT to be reporting in 3 years times that lenders on dealer property are under investigation, or for dealers themselves to face asset write downs and weakened balance sheets.  There is still time to adapt investment strategies in anticipation of the impending changes to the distribution business model, but in three years time, the problem may be very real for OEMs, dealers and lenders.

 

Written by Steve Young

Post a comment

Blog view options

Archive