"Since June 2008, the rapid deterioration in global auto markets has exceeded previous industry forecasts," says Emmanuel Bulle, Senior Director in Fitch's European Corporates group. "Fitch now believes that most, if not all, European vehicle manufacturers will not meet their mid-term sales and profitability targets and will have to review their business plans and financial forecasts accordingly."
Fitch is forecasting an economic decline in Europe, with a recession in 2009 and no recovery until mid-2011. Fitch has also revised downwards its forecasts for global 2009 GDP growth since July 2008 by 1.8 percentage points (pp) worldwide, including a downward 2.7 pp revision for the US and a downward 2.3pp revision for the Euro area (for further details see Fitch's Global Economic Outlook, 4 November 2008). Weak GDP growth and the international financial crisis are having a significant impact on the European auto industry, which is experiencing falling sales in several major countries including the US, the UK, Spain and Italy. Fitch expects sales in western Europe to decline by more than 8% in 2008 and by over 12% in 2009, but these forecasts may be revised down further in future due to the ongoing deterioration of the economic environment and consumers' reaction to the weakening economy. The agency also considers a sales rebound unlikely in 2010 because of these pressures. Emerging regions have fuelled new car sales growth in recent years, but forecasts for several of these markets are being revised downwards for the next couple of years by numerous industry research firms and manufacturers. However, Fitch believes long-term growth prospects remain positive.
Although Fitch's ratings take into account the inherent cyclicality of the auto industry, the agency now assumes a more significant-than-average industry downturn in the wake of poor economic conditions. More limited availability of credit from banks, financial institutions or the manufacturers' subsidiary financial groups (captives) to finance car purchases will also have a negative impact on new car sales and compound the cyclical decline. Several additional issues, including investment to comply with tighter emission legislation; increased financial support from manufacturers to ailing dealers and suppliers; and possible support for financial captives will also affect some manufacturers' credit profiles. Fitch believes any increased financial support from manufacturers could take the form of either facilitating more favourable payment conditions for suppliers or dealers, result in cash injections or possible acquisitions.
Carmakers have announced sharply revised production plans for Q408 which will have notable negative impacts on operating margins and cash flow generation in H208. As a result, Fitch expects financial debt to increase at the end of FY08 and main credit ratios for most manufacturers to deteriorate. The need for cash injections to manufacturers' banks/financial services subsidiaries to protect capital adequacy ratios are also a possibility. Although Fitch expects most of the FY08 working capital swings will be reversed in the future when sales and production pick-up, the timing and extent of such a rebound remain uncertain.
In view of the unprecedented challenges facing auto manufacturers, the industry may benefit from various forms of support from European institutions or local governments. Whilst Fitch does not anticipate any direct state aid, it notes that indirect incentives or the postponement of costly legislation may be enacted. According to recent media reports, the European Investment Bank is currently assessing financial support of several billions of euros in the form of a credit programme for the industry. In addition, special incentives to accelerate the renewal of older model vehicles are likely to be implemented in several countries to support falling new car sales.
Fitch also notes that European automakers enter this period with stronger credit profiles than during previous downturns, which should somewhat limit the extent of any further potential rating downgrades and Outlook revisions. All the major manufacturers have also announced additional measures to increase or accelerate cost-cutting efforts and boost efficiency. Fitch will continue to closely monitor the timing and success of such actions as well as the extent of the deterioration of auto markets in 2009.
