According to Moody's, production restarts were largely smooth, and disruptions in the supply chain no worse than expected. And as production levels continue to rise, rating agency analysts expect operating efficiencies to climb as well.
However, Moody's said balancing automotive production with recovering consumer demand and inventory levels in the sales channel will challenge the pace of productivity.
Mr. Greaser noted that second- and third-quarter results for the sector are not an accurate gauge for industry demand since the ramp-up of production in the second quarter was boosted by consumers' wanting to buy vehicles in the early part of 2020 but unable to because of pandemic-related lockdowns and closures.
As that deferred demand is met and inventories reach more normalized levels, fundamental demand drivers will be more discernible, providing a better read on the sustainability of a recovery, he said.
Meanwhile, Moody's said there is potential for margin improvement as part of a recovery, but it's likely to be less of an improvement than the last industry downturn in 2009.
During that Great Recession, Moody's said, suppliers implemented aggressive cost-cutting measures that resulted in sizable, permanent reductions in costs. Vehicle makers also curbed new model introductions and refreshes, enabling suppliers to generate higher returns from volume-driven operating efficiencies on longer-lived vehicle platforms.
This time around, suppliers have again implemented extensive restructuring programs and cost-saving initiatives in response to sharply weaker demand because of the pandemic, but unlike the last recession, auto makers plan to continue with new product introductions, Moody's said. As a result, margins for parts suppliers will be constrained, especially with production still below pre-pandemic levels.
"We believe a portion of the restructuring programs will again result in permanent reductions to cost structures longer term, enabling some margin improvement as production levels steadily climb back to pre-industry downturn levels," Mr. Greaser said.
"As well, in most cases, the product mix shift to light trucks/SUVs/crossovers offer greater opportunities for more parts content per vehicle, providing the potential to enhance returns through better cost absorption."
Moody's outlook represents the rating agency's expectations for fundamental industry business conditions over the next 12 to 18 months.
Moody's analysts would consider changing the outlook to negative if analysts expect to see year-over-year improvement in median EBITA at 10% or less for 2021 or if year-over-year vehicle sales in 2021 are unable to climb at least 5% from the sharply lower 2020 level.
The outlook could change to positive if the recovery generates at least 10% growth in vehicle sales in 2021, while also positioning the auto industry for solid demand momentum into 2022, Moody's said.
Among the companies Moody's tracks in this sector are Cooper Tire & Rubber Co., Dana Inc., Dayco Products L.l.C., Goodyear, Superior Industries International Inc. and Wheel Pros Inc.
