Auto Manufacturers – over-capacity one of several challenges; Auto Suppliers – negative outlook, growing appetite for debt-financed M&A activity
Auto Original Equipment Manufacturers (inlcudes individual outlooks for BMW, DaimlerChrysler, Fiat, Peugeot, Renault, Volkswagen on pages 9 & 10)
European auto manufacturers will struggle to maintain credit ratings in a very difficult environment. Increasing over-capacity is just one of several challenges – for the Western European market, Moody’s estimates an overall excess capacity of close to 30%.
No growth environment in W.Europe expected over the medium-term, only way to grow revenue is to gain market share. New registration of passenger cars in W. Europe in 2007expected to be flat at best, helped by expected double-digit growth in Italian demand supported by a change in the regulatory environment in Italy
Against this backdrop, Moody’s estimates that a 1% change in market share has an impact of â‚¬400 million-600 million on the profitability of European volume manufacturers
Further increases in raw material prices will create a risk for the whole industry (50-60% of car manufacturing costs related to raw material costs), while the ongoing strength of the Euro versus the US dollar and Japanese Yen poses a real concern for some European OEMs
Regulatory headwinds growing for the European auto industry â€“ the status of CO2 emissions by brand in Europe and reveals the significant challenges to comply with the 2008 target. The smart and Fiat are the only 2 brands meeting the 140g/km target for 2008
Prospects vary considerably between manufacturers. Fiat Auto’s sales in 2006 were up 16.7% over 2005, and it virtually completed its restructuring programme Sustained volume growth and market share gains which also drive earnings and cash flow will be key drivers for an upgrade into investment grade going forward
Moody’s expects Volkswagen, meanwhile, to consolidate its market position in Western Europe at the high level of 20% after years of rapid growth.
Constant downward rating pressure for industry players â€“ continued challenging industry environment with limited organic growth
Event risk is high. There is a growing appetite for debt-financed M&A activity in the sector – the European auto supplier industry has the highest level of fragmentation globally
Acquisition activity expected to accelerate, driven by a financially-weakening auto supplier base looking for efficiencies of scale; increasing activity of financial investors; OEM’s tendency to work with limited number of full-service providers; the plans of more sizeable Tier 1 auto suppliers to use the current consolidation trend
Acquisitions or the threat of debt-financed takeovers in general exposes the financial profiles of European auto suppliers to further weakening over the medium term, resulting in continued downward rating pressure
Operating margins exposed to persistent pricing pressure as well as raw material price increases, requiring constant cost-structure improvements
Financial profiles continuing to erode