CHICAGO (Jan. 4, 2012) — Fitch Ratings Ltd. expects the financial profiles of U.S. auto makers and parts suppliers to remain resilient in a downside scenario characterized by sluggish global economic growth and weaker-than-expected North American light vehicle demand.
Unlike during 2008 and 2009, when U.S. original equipment manufacturers (OEMs) and their primary suppliers were forced to undertake restructurings in the face of plummeting demand, New York-based Fitch said it believes the Detroit Three — Ford Motor Co., General Motors Co. and Chrysler Group L.L.C. — and the largest U.S. parts makers “are well positioned from both a cost and liquidity standpoint to withstand significant demand pressure this year.
“While we continue to see U.S. light vehicle sales growing modestly to approximately 13.2 million units in 2012, credit profiles are likely to remain relatively stable if a slowdown in unit sales and softer pricing undercuts margins this year,” the company said.
Because of capacity reduction, lower fixed costs and a more manageable labor cost structure linked to the recently ratified United Auto Workers (UAW) contracts with the Detroit Three, Fitch said the auto companies' operating profiles are more resilient compared to the last economic downturn.
The global rating agency said it is forecasting the break-even industry sales level for the Detroit Three and major parts suppliers is now about 10.5 million light vehicles, corresponding to 2009 recessionary sales volumes.
“OEMs and suppliers have also taken steps to bolster their balance sheets since 2009, with generally solid liquidity positions and ample credit facility availability across the industry. Importantly, management teams have also repeatedly emphasized their commitment to achieving investment-grade status over the medium to long term, with a focus on free cash flow generation, strong liquidity, and consistent debt reduction,” according to the company's December report.
Although U.S. light vehicle sales are likely to grow this year, Fitch said the forecasted size of the market—at 13.2 million units—will remain well below the industry annual sales level of approximately 17 million units seen from 1999 through 2006. “We believe the U.S. industry may struggle to exceed annual sales of approximately 15 million light vehicles at the peak of the current demand cycle,” it added.
The company predicted that auto sales in Western Europe are likely to fall this year and sales growth rates will decline in key emerging markets such as China, India, and Brazil. Thus, “U.S. auto makers' operating results in 2012 will depend more directly on volume growth and pricing traction in the U.S. market.”
Fitch noted that the “fundamental improvement in the U.S. auto industry's resilience forms the primary foundation of our positive outlook for the industry in 2012.”
More information on Fitch's 2012 expectations are available in the firm's “2012 Outlook: U.S. Auto Manufacturers and Suppliers,” which is available on its website.