Issue: Oct 2009


Global Auto Manufacturers May Be on Road to Recovery



by Moodys Investor Service

The sharp reduction in light vehicle production in the global automotive industry has started to moderate and very modest growth trends may be starting to emerge, says Moody's Investors Service in a six-month update of its Industry Outlook published today.

The trend toward a firming of business fundamentals among automotive manufacturers accounts for Moody's recent change in outlook on the sector to stable from negative. The outlook reflects Moody's expectations for fundamental credit conditions in the sector over the next 12-18 months and is detailed in the report, entitled "Six-Month Update: Global Auto Manufacturers May Be on Road to Recovery."

Moody's expects about 59.4 million light vehicles to be sold globally in 2009, a decline of about 8% from 2008. For 2010, Moody's looks for modest growth of about 2% globally due to a lower comparative base and the stabilising trend in global demand.

Although fundamentals for car makers are firming, Moody's does not expect the recovery to be particularly robust. Low capacity utilisation, pressure on prices, rising costs to meet stricter emissions requirements and tight credit availability for some consumers will continue to hamper auto makers' recovery. "Those hurdles, combined with a long-term trend towards smaller, more fuel-efficient cars that are in general less profitable for the manufacturer, will continue to challenge their operations," says Falk Frey, a Senior Vice President in Moody's Corporate Finance Group and co-author of the report.

There also remain distinct differences between markets. Sales in Western Europe were supported by government incentive schemes in 2009 and the effect may translate into a lower demand in 2010. "We estimate that about half of the sales supported by scrapping programs would have taken place during coming quarters anyway," Frey says.

In North America, the Car Allowance Rebate System (CARS), better known as Cash for Clunkers, provided a one-time sales boost in September. "However, it did not fundamentally alter demand or the credit quality of original equipment manufacturers and suppliers," says J. Bruce Clark, Senior Vice President in the Corporate Finance Group. The Detroit-3 faces three main operating challenges in the next 18 months, says Clark: "holding on to market share; developing new products that meet evolving consumer tastes and pricing those products competitively."

Moody's rates 13 global automotive manufacturers worldwide.

Moody's will continue to monitor the issues facing the global automotive industry over the next 12-18 months, in particular (i) how demand responds to the phasing out of government sales incentives; (ii) companies' efforts to trim costs and adjust capacity and the effect on operating performance; (iii) the effect of economic recovery and unemployment rates in major car markets, and will take appropriate rating action as and when necessary.

Summary

The report notes that "while Moody’s believes fundamentals for carmakers are firming, especially for those with a strong presence outside Western Europe, we do not expect the improvement to be exceptionally robust. Underpinning this view is low capacity utilization, pressure on prices, rising costs and expenses for meeting emission legislation requirements and tight credit availability for some consumers. Those hurdles, combined with a long-term trend towards smaller cars that bring greater fuel efficiency but also generally lower profitability for the manufacturer, will continue to challenge auto manufacturers’ operations."

The report goes on to say that "the biggest challenge in 2010 lies with European volume manufacturers, namely Fiat, Peugeot, Renault and Volkswagen. Because they benefited most from scrapping schemes in key Western European countries in 2009, they could be confronted with declining volumes in 2010 as scrapping schemes are phased out, or the level of incentives for each car buyer reduced

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