Moody’s: Global Auto Sector In Recovery But Challenges Remain

The recovery of the global auto sector looks to be stronger than the macro-economic recovery in many regions, driven by demand and pricing, says Moody’s Investors Service in its latest Industry Outlook for the sector. That said, the rating agency believes that certain key risks remain that could yet threaten the recovery.

Moody’s revised its outlook for the global automotive manufacturing industry to positive from stable on 19 May 2010. This follows a revision to stable from negative in February. However, the rating agency cautions that these changes do not mean it believes there is nothing but open road ahead for these companies.

“Indeed, many challenges remain in their path to recovery from the worst fall off in demand they had experienced since World War II,” says Falk Frey, a senior vice-president in Moody’s Corporate Finance Group. “Yet compared to where the industry was a year ago, the turnaround in volume sales, demand and to a lesser extent in pricing has been faster than we anticipated.”

In the report, Moody’s says that there are several reasons for this recovery. First, significant capacity was removed in the U.S. through restructuring. Chrysler was absorbed by Fiat; General Motors and Ford have streamlined their portfolio of brands. Globally, capacity utilization has edged up to 72 per cent from 66 per cent according to PriceWaterhouseCoopers. However, the rating agency notes that the industry is considered to operate at break-even levels at 80 per cent. Furthermore, structural overcapacity continues to be a problem in Europe, where government intervention has often hindered industry efforts to close plants and rationalize production.

“Another positive factor is the increase in demand, which picked up by 13 per cent between January and April 2010 compared to the same period a year ago, with the US, China and emerging markets such as India and Brazil the key drivers.” explains Frey.

However, despite the positive signs, the rating agency cautions that key risks remain high. “Rising prices of raw materials, especially steel and precious metals, could squeeze margins towards the end of 2010,” says Frey. “In addition, sovereign worries in Europe could slow down the economic recovery, reduce consumer spending and impact financing in the case of spill-over effects to the banking system.”

Moody’s also notes that regional differences remain. German manufacturers will be helped by a recovery in the US vehicle market and the US economy. Premium OEMs such as Daimler and BMW are also benefitting from strong sales in China. However, within Europe, the German and Italian markets look particularly bleak due to the negative impact of the end of scrapping schemes. Meanwhile, in Japan, volumes in 2011 are likely to reflect the broader challenges facing domestic sales of Japanese automakers, namely fewer drivers in an aging society and a largely urban population that is eschewing car ownership. On the other hand, Japanese OEMs will see the benefits of the US market’s recovery and the growth of emerging markets.

The report is available on www.moodys.com