S&P Ratings News
The Global Auto Industry's Long Road to Recovery
The guarantees and direct funds that many governments have offered their job-heavy auto industries over the past year have provided much-needed liquidity injections in some cases. But in our view they will not solve the industry's structural problems. Nor will they address the low profit margins that we expect to see resulting from the need to manage increasingly complex product portfolios while adapting manufacturing, logistics, and vehicle models to new environmental standards.
Government consumer incentives to boost car sales have helped avoid a more serious crisis in the short term. But we think they could impede what we see as a necessary rationalization and reduction of overcapacity. For example, the cash-for-clunkers schemes in many markets have boosted current sales but we believe much of this demand is merely pulling forward future sales.
Light-vehicle sales have plummeted in most markets around the world over the past year. Some markets have recently shown varying degrees of stability—albeit at weak levels—partly because of government incentive programs and partly reflecting some early signs of economic stabilization. Still, we expect sales worldwide to remain sharply lower in 2009, compared with sales a year ago.
In addition, we expect 2010 to be a year of weak demand in Europe—especially in Germany, France, and Italy—partly because we believe the incentive programs of 2009 have been pulling forward sales from 2010. This effect will be greater than any increase in demand stemming from economic recovery in 2010 (see table 1). Weaker demand in several countries outside North America remains a risk in our analysis because slowing global auto sales will reduce cash generation for all automakers, even highly rated ones.
Global Auto Sales And Forecasts By Region
% change YOY
% change YOY
% change YOY
Eastern Europe (incl. Russia)
Worldwide auto sales
YOY—Year over year.
Sources: Standard & Poor's, J.D. Power and Associates, Auto Manufacturer Assn. Information; 2009 and 2010 data is from J.D. Power and Associates, except for the U.S. and Korea, which is from Standard & Poor's.
For U.S. automakers, we expect sales in 2009 to be the lowest in decades. In our view, lower sales and production this year have so far contributed significantly to two automaker bankruptcies (GM and Chrysler) and multiple auto supplier defaults. This has pushed a number of other auto suppliers close to default.
We believe major structural changes are evident in the court-supervised restructurings of General Motors Corp. and Chrysler Group LLC (both unrated), which has led both to shrink their ongoing operations. In addition, Ford Motor Co. (F) (S&P redit rating, CCC+) reduced its debt by almost $10 billion in a distressed exchange and completed a revised labor agreement with its primary labor union. We believe Ford is showing signs of progress in reducing its cash use, but it remains exposed to ongoing adverse economic conditions. We still believe the U.S. government's willingness to support these companies is not open-ended, even with Washington's large equity position in the new GM entity and a smaller stake in the new Chrysler entity.
We expect U.S. light-vehicle sales of 10.3 million units this year, down 22% from the already weak levels of 2008. Overall light-vehicle sales in August were up modestly by 1% from August 2008, while passenger car sales were up 14%. Yet, absent the cash for clunkers program, we believe sales would have been down year over year. Sales for the first eight months of 2009 were down 27.8% from the same period in 2008. In our view, the cash for clunkers program pulled forward some future demand into August and sales for the rest of 2009 will be tepid.
Not surprisingly, given their well publicized financial problems, GM and Chrysler lost share in the U.S. light-vehicle market through the first eight months of 2009, while Ford's market share rose to 15.7% from 14.7%. GM's share for the first eight months was 19.6% compared with 21.8% in the same period in 2008. For Chrysler, the figure was 9.2%, down from 11%. The annual selling rate in August of 14.1 million units reflected the artificial boost of the cash for clunkers program. In our view, Ford has had some success—based on market share—in differentiating itself from its recently-bankrupt competitors. But we expect Ford to continue using cash in 2009.
Japanese and Korean automakers, meanwhile, are not immune to lower U.S. sales. Toyota Motor Corp.'s (TM) (AA) U.S. market share was 16.6% in the first eight months of 2009, down from 16.9%, in 2008. In August, its sales rose 6.4% year over year even as its light-truck sales fell, because the cash for clunkers program raised Toyota's passenger cars sales 13.2%. Honda Motor Co. Ltd.'s (HMC) (A+) sales rose 9.9% in August as its passenger car sales rose 23.2%.
Competition in the important full-size pickup truck market remains fierce, but demand is still weak. Full-size pickup sales fell 33.8% in the first eight months of 2009 from 2008 levels. Toyota's sales of its full-size pickup truck were down 53.1% in that period, and the company lost market share, as did GM, while Ford and Chrysler gained share.
In the remaining months of 2009, we believe we may see some signs of stability in U.S. light-vehicle sales once the payback from cash for clunkers passes. We think that would benefit all automakers serving the U.S. market.
The strong government support from incentive programs in several European countries has resulted in sales increases since June, after several months of decline. Yet, we believe that, as in the U.S., these incentive programs are likely prompting only a short-lived boost in new-vehicle sales, which we think will decline in the next six to 12 months because the programs attract buyers who otherwise might have bought cars later. Because most of the programs are scheduled to end in 2009 and we think it is unlikely they will be extended, we expect market conditions to be difficult for sales well into 2010. Added to this, the production cuts the European automakers implemented earlier to tackle declining demand in our view will make it less likely that they will meet their medium-term profitability targets.
The adverse industry conditions have taken their toll on credit quality. In fact, despite the early success of cash for clunkers incentive programs throughout Europe, we have taken negative rating actions on most European automakers, factoring in the expected payback on incentives and market weakening in 2010. We recently lowered our ratings on companyId=873861 (BB+). We also assigned negative outlooks to companyId=320105 (BB+) and companyId=377732 (A-).
European new car registrations in August were up by 3% from the prior year, which was mainly attributable to cash-for-clunker incentives. However, new car registrations in the first eight months of 2009 declined by 8.1% from the same period in 2008, and we expect declines for the full year 2009.
As in the U.S., European automakers are receiving wide-ranging support from governments beyond consumer incentives to prop up their high-workforce industries. This includes direct loans to boost liquidity, such as the € 3 billion each to Renault and Peugeot and Peugeot from the French government in the first quarter, and low-interest loans for research and development and consumer bonus incentives to scrap old vehicles and buy new ones. Such scrappage support, however, tends to stimulate sales only temporarily, in our view.
We believe the Japanese automakers, particularly the top two players, Toyota and Honda, continue to boast superior competitive positions. Still, we believe their profitability is likely to stay under substantial pressure for the current fiscal year because of low demand. We still view their broad lineups of highly fuel-efficient cars, including hybrid vehicles, as well as new technologies, geographic diversification, cost efficiency, and financial strength as positive rating factors for Toyota and, to a lesser extent, Honda. Yet, recovery in auto markets worldwide is still key for the companies to fully benefit from these strengths.
We believe Japanese automakers have eliminated most of their excess inventories following steep production cuts, and are now gradually increasing output. Aggregate domestic Japanese production of passenger cars, buses, and trucks was down 32% year over year in July, a meaningful improvement from a decline of 56% in February. Nevertheless, we expect output for the rest of the year to remain weak, at about 70% of that in 2008. If prospects for a recovery in demand remain weak for an extended period, we believe Japanese automakers may have to seek more ways to address overcapacity.
In Korea, domestic unit sales increased by 2.8% to 830,000 from 808,000 for the first eight months of 2009. We think this was the result of tax incentives effective until the end of 2009, as well as of some model facelifts. However, uncertain labor relations could drag down productivity in the latter part of the year. Labor talks at companyId=874828 (BBB-), which historically have often been accompanied by labor strikes, have been delayed to the latter part of this year. Meanwhile, the labor union of companyId=2481334 (BBB-) called a number of partial stoppages in July and August.
The auto industries in Brazil, India, and China are now showing signs of recovery, after slowing in the latter part of 2008, thanks again to government stimulus packages. It remains to be seen how much this will benefit full-year results, because most such measures will not be in effect for the entire year. Russia is an exception to the BRIC countries' recovering trend, in our view mainly because the government is providing support to sales of domestic Russian autos.