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Auto Sales: No Turnaround Yet

We expect 2009 to be the year of the lowest auto sales in decades. In our view, lower sales and production this year have so far contributed significantly to two automaker bankruptcies ( and ) and multiple auto-supplier defaults and has pushed a number of other auto suppliers close to default. In our view, significant structural changes are under way, most notably the completed in-court restructurings of GM's ('D') and Chrysler's (unrated) ongoing operations. In addition, ( (F)) reduced its debt by almost $10 billion in a distressed exchange and completed a revised labor agreement with its primary union. We believe Ford remains less vulnerable to imminent bankruptcy than GM and Chrysler were before their filing, but only because of its larger cash balances rather than any lesser exposure to adverse economic conditions. Ford's automotive sector used $3.2 billion in cash in the first quarter of 2009, an improvement from the $6.6 billion it used in the fourth quarter of 2008. But in our view the rate Ford is using cash is unsustainable and reflects mostly the same set of problems the other U.S. automakers face. We expect U.S. light-vehicle sales of 9.9 million units this year, down 25% from the already weak levels of 2008. Sales in June were down 35.1% from June 2008 levels, and the seasonally adjusted annual selling rate in June was fewer than 10 million units. government help not open-endedOn Mar. 30, 2009, the U.S. government rejected Chrysler's and GM's viability plans. On Apr. 30 and June 1, respectively, the two sought bankruptcy protection. The U.S. Treasury Dept., already a large creditor to both companies, provided the bulk of debtor-in-possession (DIP) financing. We still believe the government's willingness to support these companies is not open-ended, even with the government's large equity position in the new GM entity and a smaller stake in the new Chrysler entity. GM and Chrysler lost share in the U.S. light-vehicle market through the first six months of 2009, while Ford's market share rose slightly, to 15.9% from 15.3%. GM's share for the first six months was 19.8%, vs. 21.5% in the same period in 2008. For Chrysler, the figure was 9.8%, down from 11.7%. The annual selling rate in June showed signs of stabilizing, albeit at a low level. In our view, Ford has had some success—as measured by market share—in differentiating itself from its now-bankrupt competitors, but we expect Ford to continue using cash in 2009. Japanese and Korean automakers, meanwhile, are not immune to lower sales in the U.S. ( (TM)) U.S. market share was 16.1% in the first six months of 2009, down from 16.8% in 2008. In June alone its sales fell 37.9% year over year compared with ( (HMC)) 33.5% decline. Competition in the important full-size pickup truck market remains fierce. Full-size pickup sales fell 36.2% in the first six months of 2009 from 2008 levels. Toyota's sales of its full-size pickup truck were down 52.8% in that period, and the company lost market share, as did GM, while Ford and Chrysler gained share. By the third quarter of 2009, we may see some additional signs of stability in light-vehicle sales, which would be important to all automakers serving the U.S. market. Commercial vehicles: The rebound that wasn't Net commercial-truck orders remained lackluster through the first six months of 2009, which in our view signals a third consecutive full year of sharply lower commercial-truck sales. We believe the U.S. recession has led to sluggish truck freight volumes, which is crimping demand, and weak credit availability has limited financing for new truck purchases. Even though the average age of the truck fleet continues to rise after two-plus years of low sales, we still believe many trucking companies can let their fleets age for now, especially with lower utilization causing less wear and tear. Including preliminary data for June, net orders of heavy-duty Class 8 trucks averaged fewer than 7,800 per month for the first six months of 2009, according to ACT Research Co. This was a 57% decline from the same period a year earlier. Net orders for medium-duty Class 5 to 7 trucks were even weaker, down 64%. For all of 2009, we believe retail sales of medium- and heavy-duty trucks could decline 50% or more from the already weak levels of 2008. We believe a small boost in sales is possible toward the end of 2009 in advance of another engine-emissions change, but not a substantial increase similar to what we saw before previous emissions changes. In our view, the added cost of the 2010-compliant engines will be partly offset by improved fuel economy, and this factor, along with the weak economy, will dampen any "pre-buy" effect.
Bissinger is a credit analyst for Standard & Poor's Ratings Services
Schulz is a credit analyst following the automobile industry for Standard & Poor's Ratings Services

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