The overall rating outlook for the European automotive parts manufacturing sector remains negative amid expectations of still stagnant, or even declining, demand in Western Europe and the US and persistent pricing pressure from original equipment manufacturers (OEMs), says Moody”s Investors Service in a new Industry Outlook report.
“The past two years proved challenging for the European automotive supplier industry. Volumes in the traditional markets of Western Europe and North America were sluggish, customers were increasingly pressing for price reductions and booming economies in emerging countries drove up commodity prices,” says Falk Frey, a Moody’s Senior Vice-President and co-author of the report.
On the one hand, Moody”s believes that certain commodity prices may now have peaked and that a growing trend towards cleaner and more fuel-efficient vehicles offers certain opportunities. “However, demand in Western Europe and the US is expected to further stagnate (or even decline) and pricing pressure from OEMs is set to persist in 2008, which will continue to be a burden on suppliers” earnings and cash flows. Moreover, an increasingly gloomy outlook for the US economy and a more risk-averse sentiment in financial markets following the US sub-prime crisis pose additional challenges to the industry,” Mr Frey adds.
Against this background, Moody”s maintains its cautious view on the sector and sees only limited scope for upgrades in the year ahead. “We continue to believe that the ratings that will prove most resilient will be those of companies that benefit from (i) broad diversification (by customers, regions and products), (ii) a sizeable after-market business, (iii) product offerings with increasing penetration rates (e.g. electronic braking systems, sensor systems or fuel-efficient systems) and (iv) a conservative financial strategy,” explains Rainer Neidnig, Analyst and report co-author.
Overall, Moody”s believes the year ahead will again be difficult for European automotive parts manufacturers. Continued growth in emerging markets could help support ratings, but is not expected to fully compensate for challenges in traditional markets. The credit crunch is unlikely to have direct effect on liquidity, but the increasing risk aversion of lenders could amplify rating pressure at those companies reporting material earnings shortfalls