Scholz’s response to Ukraine crisis reshapes Germany’s corporate landscape
Chancellor’s reversal of defence and energy policies shifts prospects for arms makers and utility companies
Armin Papperger is not used to being in demand. The head of Germany’s largest listed defence contractor, Rheinmetall, has seen his industry sidelined to such an extent that as recently as last month companies could not get domestic banks to fund their activities.
But German chancellor Olaf Scholz’s decision to inject €100bn into the country’s armed forces and boost defence spending in response to Russia’s invasion of Ukraine has made Papperger among the world’s most sought-after executives.
“Some months ago people wanted to ban us, to say that this industry is a very bad industry, is a harmful industry,” Papperger told the Financial Times. “It’s a totally different world now.”
Berlin’s defence commitment, along with its suspension last week of the Nord Stream 2 pipeline as it seeks to wean itself off Russian gas, has upturned decades-old defence, energy and finance policies, raising the prospect of a dramatically reshaped German corporate landscape.
Armin Papperger: ‘It’s a totally different world now’ © Thilo Schmuelgen/Reuters
As chief executives, including Papperger, on Monday hashed out with the German defence ministry how the new funds should be spent and what weapons were available for immediate aid to Ukraine, shares in the sector soared.
Along with Rheinmetall, investors bought into contractors such as sensor specialist Hensoldt and submarine maker Thyssenkrupp, as well as smaller companies such as Jenoptik, which makes rifle sights.
“Everyone was taken by surprise” by Scholz’s decision, a person close to Hensoldt’s management said, but the chancellor “kind of reiterated what we have been saying for a very long time, that German armed forces need to be properly equipped”.
Three scenarios were discussed on Monday’s call between the German government and defence contractors, according to people involved.
The first was the deployment of equipment to Ukraine, including ammunition and tents, using existing stockpiles. The second was to bring European forces, especially Germany’s, up to scratch in a matter of weeks by supplying munitions and repairing neglected equipment. Lastly, the companies were asked about lead times for new artillery and vehicles.
Rheinmetall said it had certain vehicles and ammunition in stock, which could now be handed over.
Some of the products Hensoldt can supply with short lead times include radar sensors, long-range surveillance cameras and self-protection systems for aircraft and helicopters, which can throw surface-to-air missiles off course by detecting exhaust plumes from launchers and ejecting flares to confuse heat-seeking projectiles.
In the medium term, companies are speeding up planned projects, with Rheinmetall considering fast-tracking a prototype tank with a 130mm gun and a fully digital turret, as installed in the British Challenger, which could be manufactured within two years to replenish the German army’s arsenal.
A next-generation tank was likely to be among the German government’s top priorities, according to Christian Cohrs, an analyst at Warburg Research.
“The chancellor explicitly mentioned joint development projects with France,” Cohrs said. “One of these is the Main Ground Combat System [an updated battle tank], in which Rheinmetall plays a vital role.”
Other manufacturers said they expected up to a 50 per cent increase in orders for products with certification already in place. Germany’s defence ministry declined to comment.
While Germany appears to have found a clear approach for handling its new defence targets, its vision for an energy transformation looks foggier.
The bosses of Germany’s much-maligned nuclear power producers — E.ON, RWE and EnBW — have been left wondering about the future of the country’s last three reactors after Green party economy minister Robert Habeck said on Sunday an extension of their lifespan was under consideration.
On Monday, Habeck appeared to downplay comments that he would not “ideologically oppose” a return to nuclear power, which had been phased out by Angela Merkel, increasing the country’s reliance on imported fuel following Japan’s 2011 Fukushima disaster.
Meanwhile, coal power company Uniper was asked by the government to consider building a liquefied natural gas terminal to help reduce German reliance on Russian fuel.
“It’s not just a question of climate protection now,” Habeck said on Monday. “It’s a question of national security.”
But how the country will attain energy independence stills seems unclear — both to politicians and the companies needed to make the shift happen.
Uniper officials confirmed that they were preparing for talks with the government. The company last year shelved a plan to set up an LNG terminal in Wilhelmshaven, having found there was not enough interest to justify going forward with the project, and switched instead to a focus on a green hydrogen and low-carbon ammonia terminal.
“We are looking into resuming these [LNG] plans,” one official told the FT. “We already did the preliminary research so we would not start at zero . . . but we haven’t talked any details with the government yet and it is still not clear to us how much interest in such a project has really changed with the situation,” the official added.
The person also said that it would be “very ambitious” to assume such a terminal could be ready in time to be used to support Germany through a potential energy crisis caused by the current conflict with Russia.
Claudia Kemfert, an energy expert at the German Institute for Economic Research, bemoaned the fact that the €100bn made available for defence was not matched by a similar commitment to renewables.
Such a sum “would be the sort of man to the moon project funding we really needed so that we could be independent of Putin for our energy by 2030”, she said.
But a pledge by Habeck to cut red tape for renewables, particularly for wind energy, could have a dramatic impact, Kemfert added.
“It currently takes about six to seven years to get all the approvals you need to build a windmill, but it only takes about six to seven months to physically put a windmill up,” she explained, although new procedures could take a while to come into effect.
Germany’s defence industry had been bracing for EU taxonomy rules that could have designated arms manufacturers unsustainable, restricting their access to capital.
Highlight text
But after German finance minister Christian Lindner referred to such proposals with disdain on Sunday and said the war in Ukraine was waking Germany “from a self-righteous dream” such fears have been assuaged.
“Recent developments should lead to banks also understanding the importance of defence industry companies for the country’s security,” a large privately owned German manufacturer told the FT. “The Russian invasion of Ukraine shows that it was wrong to classify the defence industry as socially harmful.”
An executive at another defence company predicted that the industry — often the target of activists who point to some German arms manufacturers’ Nazi past — would now attract talent as well as investment.
“It is very unfortunate,” the person said, “that it took such tragic and brutal events to come to this.”
Iran’s experience signals banning Swift will not work as expected
It was broad financial sanctions and fines, not cutting off access to the messaging network, that had the biggest impact.
Since Russia’s invasion of Ukraine a curious narrative has taken hold: banning Russian banks from the Swift messaging system, a measure announced over this weekend, will somehow freeze the country out of the global financial system. The experience of financial sanctions on Iran suggests otherwise.
The US has applied, and periodically reinforced, economic sanctions on Iran for decades. From 1984 these sanctions largely targeted the Iranian oil industry. However, they were not made comprehensive until 2006, when a series of “targeted financial measures” were introduced to stop foreign banks undertaking financial transactions with Iran.
The US Comprehensive Iran Sanctions, Accountability, and Divestment Act of June 2010 and National Defense Authorization Act of December 2011 banned all US-Iranian financial transactions. The Obama executive order of February 2011, meanwhile, froze the US assets of the Government of Iran, the Central Bank of Iran and of all Iranian financial institutions. The EU, as a somewhat reluctant partner to US financial sanctions, froze the assets of Iran’s central bank in January 2012. Other countries followed suit.
It wasn’t until March 2012 that Iranian financial institutions were kicked out of Swift. That the US waited this long to push for a Swift ban tells us it was simply not a priority. Further indication comes from the fact that it’s given only 11 lines of text in a comprehensive 100-page review of the Iran sanctions put out by the Congressional Office of Research.
The reason ejecting Iran from Swift was never a priority is because, as long as there were third-country banks based outside the US willing to help with workarounds, a ban would have little effect.
Swift is a messaging system, not a payment system. Unlike the payments themselves, messages can be sent by many different routes. In the case of Russia, banks could use its own transfer system, the SPFS (Sistema Peredachi Finansovykh Soobscheniy), which was established after the 2014 invasion of Crimea by the Central Bank of Russia.
This system is increasingly used by domestic banks for cross currency payments within the Eurasian Economic Union — made up of Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan — and Russia claims it accounted for 17 per cent of Russian international payments messages in 2020. It is also used by some Russian bank subsidiaries in Germany and Switzerland. Russia could also use the Cross-Border Interbank Payment System, or CIPS, network created in 2015 by the People’s Bank of China for the purpose of cross-border payments in renminbi. CIPS features indirect participants in many countries. All these systems — Swift, SPFS, and CIPS — have the same architecture based on the global payments messaging standard ISO20022.
Rerouting through these alternative systems is simply “plug and play”, provided you have a member bank willing to plug you in. Mastercard and Visa systems could also be used for payment transfers. At a pinch they might even use WhatsApp if they are confident in its security from hacking.
Iran’s experience shows that asset freezes, transaction prohibitions and fines on any institution helping with evasion of financial sanctions are far more effective than banning a nation from Swift. Indeed, the restrictions on transactions made by the Central Bank of Russia announced this weekend are an important start.
Fines imposed by the US authorities between 2004 and 2019 for sanctions violations, mostly involving Iran, altogether cost western banks almost $12bn.
The inefficacy of a Swift ban is further illustrated by the fact that when, after the signing 2015 Iran Nuclear agreement, Iran’s banks were readmitted to the messaging network, they were still unable to conduct transactions with any major foreign financial institutions due to the other sanctions.
There was another curious feature to the focus on banning Russia from Swift. Berlin in particular was initially reluctant to go along with the plan, fearing that doing so would make it impossible to pay for the Russian energy upon which it heavily relies. This is especially strange, since energy companies have excellent workarounds already in place. For instance, Germany could simply pay one of Gazprom’s ten active subsidiaries, according to LEI Search, in Europe, instead of the Russian company itself. Avoiding the ban in the process.
Money is as money does. As long as it is not actually illegal, banks around the world have strong financial incentives to help clients get around sanctions. Effective financial sanctions need a legal framework, with associated penalties, in order to ensure that the compliance departments of banks block opportunities for making money from payments to sanctioned entities. As was the case for Iran, this is the best course of action to take if the West is serious about cutting Russian money out of global finance.
Gapping down
In reaction to earnings/guidance:
- GDRX -32.9% (also authorizes new $250 mln share repurchase program), SEER -19.4%, AMBA -17.7%, BIGC -17.6%, VRM -15.3%, HRTX -12.7%, LCID -12.5% (also signs agreements for a full production factory in Saudi Arabia), PUBM -11.9%, GRPN -11.1%, EHTH -9.9%, SE -8.6%, VLDR -8.4%, GOEV -7.7%, NVAX -7% (also shares Phase 3 data on NVX-CoV2373), FOUR -6.6%, TREX -6.4%, SUPN -6.1%, PGNY -6%, SDC -5.5%, ACAD -5.5%, ENDP -5.1%, ZM -3.3% (also authorizes new $1 bln share repurchase program), OKE -2.7%, KD -2.3%, RKLB -2%, FGEN -1.9%, HPQ -1.9%, SJM -1.4%, SBAC -1.1%
Other news:
- OZON -19% (comments on impact of U.S., EU and other sanctions on its operations )
- NTLA -6.9% (NLTA and REGN announce interim data from Phase 1 study of NTLA-2001)
- FOUR -4.8% (will acquire both Finaro and The Giving Block)
- AES -3.4% (files mixed securities shelf offering)
- XPEV -2.6% (delivered 6,225 Smart EVs in February 2022, representing a 180% increase yr/yr)
- NIO -2.4% (provides February 2022 delivery update )
- HBAN -2.3% (to acquire Capstone Partners)
- THC -1.7% (will no longer pursue a spinoff of its Conifer Health Solutions subsidiary; reaffirms guidance; will host call at 10 a.m. ET )
- TTE -1.6% (will no longer provide capital for new projects in Russia)
Analyst comments:
- IONS -3.2% (initiated with a Sell at Citigroup )
- HEAR -2.8% (downgraded to Neutral from Outperform at Wedbush)
- WIX -1.5% (downgraded to Neutral from Overweight at Atlantic Equities)
- CMCSA -1% (downgraded to Hold from Buy at Truist)
Gapping up
In reaction to earnings/guidance:
- DDD +13.4%, TASK +10.9%, TGT +10.9%, SAIL +9.6%, WDAY +7.4%, ADT +7%, EVRI +5.3%, APPF +5.2%, AZO +5.2%, AMRS +4.2%, BIDU +4%, BLDR +3.4%, STRL +3.3%, PRGO +2.8%, KSS +2.5%, NKTR +2.3%, DAR +2.2%, TWNK +1.7%, HGV +1.6%, FRPT +1.5%, AMRN +1.2%, HRL +1%
Other news:
- CTIC +61.6% (announces FDA accelerated approval of VONJO for the treatment of adult patients with myelofibrosis and thrombocytopenia )
- ACI +8.9% (commences review of potential strategic alternatives)
- DRIO +8.9% (enters into strategic multi-year $30 mln agreement with Sanofi (SNY))
- LEGN +7.3% (CARVYKTI BCMA-Directed CAR-T therapy, receives U.S. FDA approval for the treatment of adult patients with relapsed or refractory multiple myeloma)
- BITF +6.9% (Provides February 2022 Production and Mining Operations Update)
- VALN +3.9% (receives emergency use authorization from bahrain for its inactivated COVID-19 vaccine VLA2001)
- LDOS +3.5% (wins Defense Enclave Services contract)
- EGY +2% (provides update on Etame field reconfiguration and FSO Deployment)
- STLD +1.9% (increases dividend; also authorizes additional share repurchase program of up to $1.25 bln)
- AZN +1.5% (and Neurimmune close exclusive global collaboration and licence agreement to develop and commercialise NI006)
- APP +1.4% (to acquire Wurl for $430 mln; also authorizes new $750 mln share repurchase program)
- CVX +1.2% (executing plans to deliver higher returns and lower carbon; Raises share buyback guidance)
Analyst comments:
- TSHA +5% (initiated with an Overweight at Wells Fargo)
- RVMD +3.8% (upgraded to Buy from Hold at Stifel)
- NXTC +3.3% (initiated with a Buy at Ladenburg Thalmann)
- SDGR +1.6% (initiated with a Buy at Citigroup)
- LOGI +1.5% (upgraded to Outperform from Neutral at Wedbush)
Early premarket gappers
- Gapping up:
- CTIC +29.5%, LEGN +19.2%, DDD +11.2%, TASK +10.9%, SAIL +9.6%, ACI +8.9%, WDAY +6.7%, APPF +5.2%, VALN +4.5%, LDOS +3.5%, STRL +3.3%, NKTR +2.3%, DAR +2.2%, STLD +1.9%, CVX +1.7%, FRPT +1.5%, APP +1.4%, EGY +1.2%, AZN +1%
- Gapping down:
- GDRX -32.3%, SEER -19.4%, OZON -19%, AMBA -17.7%, BIGC -16.1%, HRTX -15.1%, VRM -14.3%, FGEN -14%, LCID -12.9%, GRPN -11.1%, PUBM -11%, NTLA -8.4%, NVAX -7%, SDC -6.8%, TREX -6.4%, SUPN -6.1%, PGNY -6%, ACAD -5.5%, VLDR -5.4%, ENDP -3.9%, AES -3.4%, GOEV -3.3%, ZM -3.1%, OKE -2.7%, XPEV -2.6%, BP -2.5%, TTE -2.3%, KD -2.3%, NIO -2.2%, LAZR -1.7%, HPQ -1.6%, SHEL -1.1%, SBAC -1.1%
Research Calls I
- Upgrades:
- Advanced Drainage Systems (WMS) upgraded to Overweight from Equal-Weight at Morgan Stanley; tgt $145
- Amedisys (AMED) upgraded to Neutral from Sell at UBS; tgt $168
- Farfetch (FTCH) upgraded to Hold from Sell at Societe Generale; tgt lowered to $23
- Jack Henry (JKHY) upgraded to Outperform from Perform at Oppenheimer; tgt $206
- Kroger (KR) upgraded to Outperform from Market Perform at Telsey Advisory Group; tgt raised to $54
- Lennox Int'l (LII) upgraded to Equal-Weight from Underweight at Morgan Stanley; tgt $271
- Logitech Int'l SA (LOGI) upgraded to Outperform from Neutral at Wedbush; tgt $90
- Quanta Services (PWR) upgraded to Buy from Neutral at B. Riley Securities; tgt raised to $129
- Revolution Medicines (RVMD) upgraded to Buy from Hold at Stifel; tgt lowered to $26
- Sunstone Hotel (SHO) upgraded to Outperform from In-line at Evercore ISI
- Downgrades:
- Ameriprise Financial (AMP) downgraded to Neutral from Overweight at Piper Sandler; tgt lowered to $325
- BP Midstream (BPMP) downgraded to Sell from Neutral at Citigroup; tgt $16
- Comcast (CMCSA) downgraded to Hold from Buy at Truist
- Foot Locker (FL) downgraded to Neutral from Buy at B. Riley Securities; tgt $34
- Foot Locker (FL) downgraded to Underweight from Overweight at Barclays; tgt lowered to $24
- Foot Locker (FL) downgraded to Neutral from Buy at Goldman; tgt lowered to $35
- Galiano Gold (GAU) downgraded to Hold from Buy at Berenberg (yesterday)
- GoodRx (GDRX) downgraded to Market Perform from Outperform at Cowen; tgt lowered to $22
- GoodRx (GDRX) downgraded to Neutral from Outperform at Credit Suisse; tgt lowered to $27
- Lincoln National (LNC) downgraded to Neutral from Buy at Goldman; tgt $74
- ON24, Inc. (ONTF) downgraded to Mkt Perform from Outperform at William Blair
- ON24, Inc. (ONTF) downgraded to Neutral from Outperform at Robert W. Baird; tgt $18
- ON24, Inc. (ONTF) downgraded to Neutral from Overweight at Piper Sandler; tgt $17
- Pennant Group (PNTG) downgraded to Hold from Buy at Stifel; tgt lowered to $18
- Sunstone Hotel (SHO) downgraded to Underweight from Overweight at Barclays; tgt lowered to $11
- Turtle Beach (HEAR) downgraded to Neutral from Outperform at Wedbush; tgt lowered to $24
- Viatris (VTRS) downgraded to Neutral from Buy at BofA Securities; tgt lowered to $13
- Viatris (VTRS) downgraded to Mkt Perform from Outperform at Raymond James
- Voya Financial (VOYA) downgraded to Neutral from Overweight at Piper Sandler; tgt lowered to $74
- Vroom (VRM) downgraded to Equal Weight from Overweight at Wells Fargo; tgt lowered to $6
- Wix.com (WIX) downgraded to Neutral from Overweight at Atlantic Equities; tgt $100
- Others:
- Alnylam Pharma (ALNY) initiated with a Buy at Citigroup; tgt $223
- Ameresco (AMRC) resumed with a Buy at Guggenheim; tgt $80
- America First Multifamily Investors, L.P. (ATAX) initiated with a Mkt Outperform at JMP Securities; tgt $7
- Arcellx (ACLX) initiated with a Buy at BofA Securities; tgt $24
- Ascendis Pharma (ASND) initiated with a Buy at Citigroup; tgt $187
- Blueprint Medicines (BPMC) initiated with a Neutral at Citigroup; tgt $71
- Constellation Energy (CEG) initiated with a Neutral at Mizuho; tgt $46
- Criteo (CRTO) initiated with a Buy at The Benchmark Company; tgt $45
- DZS Inc. (DZSI) resumed with a Buy at Stifel; tgt $20
- Ionis Pharma (IONS) initiated with a Sell at Citigroup; tgt $26
- Meta Platforms (FB) initiated with a Hold at The Benchmark Company
- MongoDB (MDB) initiated with an Outperform at RBC Capital Mkts; tgt $505
- NextCure (NXTC) initiated with a Buy at Ladenburg Thalmann; tgt $16
- Onconova Therapeutics (ONTX) initiated with a Buy at Ladenburg Thalmann; tgt $7
- Pinterest (PINS) initiated with a Hold at The Benchmark Company
- Schrodinger (SDGR) initiated with a Buy at Citigroup; tgt $55
- Silver Spike Investment Corp. (SSIC) initiated with an Overweight at Piper Sandler; tgt $17
- Silver Spike Investment Corp. (SSIC) initiated with a Hold at Stifel; tgt $14
- Snap (SNAP) initiated with a Buy at The Benchmark Company; tgt $50
- Taysha Gene Therapies (TSHA) initiated with an Overweight at Wells Fargo; tgt $25
- The Trade Desk (TTD) initiated with a Hold at The Benchmark Company
- Twitter (TWTR) initiated with a Hold at The Benchmark Company
After Hours Summary: Busy earnings session, DDD +13.2%, SAIL +10.5%, WDAY +7% higher on earnings; GDRX -27.6%, AMBA -18.5%, BIGC -17.6%, LCID -13.4%, PUBM -10.4%, GRPN -8.7% lower on earningsAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: DDD +13.2%, TASK +10.7%, SAIL +10.5%, WDAY +7%, STRL +5.5%, NKTR +2.3%, RKLB +1.5%, DAR +1.1%, OSH +0.4%
Companies trading higher in after hours in reaction to news: ACI +9% (commences review of potential strategic alternatives), LDOS +2.1% (wins Defense Enclave Services contract), APP +1.4% (to acquire Wurl for $430 mln; also authorizes new $750 mln share repurchase program), EHC +0.8% (provides update regarding Board refreshment and separation of Enhabit), STLD +0.7% (increases dividend; also authorizes additional share repurchase program of up to $1.25 bln), EAF +0.1% (CEO to retire)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: GDRX -27.6% (also authorizes new $250 mln share repurchase program), AMBA -18.5%, BIGC -17.6%, HRTX -15.6%, LCID -13.4% (also signs agreements for a full production factory in Saudi Arabia), GOEV -11.5%, SUPN -10.8%, PUBM -10.4%, GRPN -8.7%, SEER -8.6%, VRM -7.1%, ENDP -6.8%, TREX -6%, FGEN -5.5%, SDC -5.5%, NVAX -5.2% (also shares Phase 3 data on NVX-CoV2373), ACAD -4.8%, ZM -2.4% (also authorizes new $1 bln share repurchase program), KD -2.3%, OKE -2%, HPQ -1.2%, SBAC -1.1%, PGNY -1%, LAZR -0.4%, AMRC -0.3%, SRI -0.2%
Companies trading lower in after hours in reaction to news: NTLA -7.9% (NLTA and REGN announce interim data from Phase 1 study of NTLA-2001), DTM -3% (approves repurchase up to 125K shares to offset stock-based comp program), JBLU -0.8% (files mixed securities shelf offering), BP -0.2% (weighing sale of roughly 20% stake in Rosneft back to Rosneft at a discount, according to Bloomberg), YETI -0.1% (authorizes new $100 mln share repurchase program)
Car Dealerships Don’t Want Your Cash—They Want to Give You a Loan
Buyers say dealerships are pushing them to borrow because they make more money that way. The hot car market is giving them the opportunity.
Fred Hebert wanted to buy a Lexus sport-utility vehicle late last year with cash, but he said the dealership gave him a proposition: Finance it or it will cost you almost $2,000 more.
He felt he had little choice. Supply-chain bottlenecks were making it tough to find the white RX 450 hybrid model he wanted elsewhere, and he had an immediate need for the vehicle. The dealership arranged a loan.
“He was very open,” Mr. Hebert said of the dealership staffer he spoke with. He said he was told the dealership would collect nearly $2,000 for arranging the financing, and “they were not going to give up that fee.”
Car buyers say they are hearing from dealers that cash and financing from outside the dealership aren’t welcome. Dealers tried to get some of them to finance by quoting higher prices for cash sales or refusing to sell if they couldn’t arrange the financing, according to interviews with buyers.
The hot car market, where heightened demand is meeting thin supply, is giving dealerships the upper hand, allowing them to wrangle more money and drive up their profit. Some have been selling cars for more than the sticker price, raising the eyebrows of industry executives.
Financing is a key profit center for dealerships, which collect a portion of the interest rate or a fee when they arrange a loan on behalf of a bank, auto company or other financial firm. The financing also makes it easier for dealers to sell high-margin add-on products like insurance. In the years leading up to the current supply crunch, financing and insurance have driven more profits per new vehicle for dealers than the sale itself, according to J.D. Power, a data and analytics company, deepening the industry’s reliance on credit.
Separately, some carmakers have long offered loans as a promotional tool.
Auto lenders extended $734 billion of loans last year, a record high in Federal Reserve Bank of New York data going back to 2004.
Mr. Hebert, a retiree who lives in New Harbor, Maine, took a 60-month loan at an interest rate of 3.69% from Toronto-Dominion Bank, reasoning that paying a few months of interest would be less than the extra dealership charge. He said he recently sent a check to pay off the loan.
He was also charged almost $6,000 over the manufacturer’s suggested retail price on the vehicle. The experience at the dealership, Darcars Lexus of Mt. Kisco in the suburbs of New York City, left a sour taste in his mouth. “The deeper they could get into my pockets, the happier I think the guy was,” Mr. Hebert said. He has since submitted a complaint through the Lexus website.
A spokesman for the auto dealership said in a statement: “We strive to make every sales experience excellent and obviously value our reputation.” He said the dealership didn’t know Mr. Hebert was dissatisfied, citing an online survey in which he gave the sales experience high marks. The spokesman said, “There is nothing we can reasonably do about the market clearing price” that resulted in the vehicle selling for above the suggested retail price.
A spokeswoman for Lexus said the customer-service team “is aware of the complaint and is actively working with the customer to resolve the situation.” A spokeswoman for TD Bank declined to comment.
Some 55% of car buyers used dealer-arranged financing last year, the greatest share in records going back to 2005, according to car-shopping website Edmunds. The share using cash, check or outside financing dropped to less than 18%, its lowest on record last year.
Dealer-arranged financing has long been the default for a swath of buyers. At least some of the shifts are also explained by the falling share of customers taking out leases after those terms worsened during the car boom.
But consumer attorneys have observed dealers using more pressure tactics recently to steer customers away from bringing outside financing or paying cash, according to John Van Alst, an attorney at the National Consumer Law Center. Regulators have also received complaints.
“When you have 10 people who want to buy one vehicle, and car lots are empty, some of these things I think are the result of that,” said Christine Graham, supervising financial examiner at the Texas Office of Consumer Credit Commissioner. “We are concerned about these practices.”
The state regulator has received several dozen complaints from buyers who say they were pressured to use dealer-arranged financing, many after Dallas news station WFAA ran a report on the topic last summer. The office has been investigating the claims. Texas law prohibits dealers from charging different prices for vehicles based on payment methods.
The Federal Trade Commission has also received at least a half dozen consumer complaints in the past few years regarding dealers refusing to accept cash or outside financing, according to complaints provided through a Freedom of Information Act request.
New York City’s Department of Consumer and Worker Protection sued two used car dealerships in November, alleging in part that they engaged in false advertising by promoting prices that buyers only received if they financed the vehicles. A 2017 city law made it illegal to increase the price of a used car for buyers who use outside financing.
Financing has long factored into the cost of buying a car. The auto-lending arms of car companies routinely offer incentives like 0% financing and discounts for buyers who take out loans, generally to make the deal more attractive to the buyer. Some buyers say taking the loan worked in their favor.
Bruce Sawyer, a retiree living in North Carolina, said that last year he was offered a $1,000 credit on his new Ford F-150 purchase if he took out a loan from Ford’s lending arm. The incentive came from the lender, he was told. He had intended to pay cash, but came around to the financing after talking with a friend who had encountered a similar deal about a decade earlier.
Mr. Sawyer took a $31,000 loan with a 6.74% interest rate, then paid it in full a few weeks later. “They said, you can pay it all off as soon as you want to,” Mr. Sawyer said. He estimates that he paid roughly $100 in interest, which was more than offset by the financing credit.
A spokeswoman for Ford said “customers may choose to pay off before the end of the loan term, which they are welcome to do with no prepayment penalty.” A dealership representative didn’t return requests for comment.
Others felt taken advantage of.
Jacob Pyper said a staff member at Sherwood Park Volkswagen near Edmonton, Alberta, told him he had to take out a loan if he wanted to buy a 2014 Kia Soul last summer. When he said he wanted to pay cash and offered to bring in a certified check, the dealer told him they weren’t accepting cash because of the risk of fraud.
“I should have walked away at that point,” Mr. Pyper said.
It was his first auto purchase, and the dealer said someone else might buy it if he waited, said Mr. Pyper, who is a 22-year-old student. He bought the vehicle with a down payment of 5,000 Canadian dollars, equivalent to roughly $4,000, and a 48-month loan from Royal Bank of Canada totaling around 13,000 Canadian dollars, or about $10,400.
Dealer representatives didn’t return requests for comment. A spokeswoman for RBC declined to comment.
When Mr. Pyper set up the online account with the bank, he said, he logged on and paid off the loan.