Negative outlook for global automotive manufacturers

The outlook for global automotive manufacturers is negative, reflecting the industry's ongoing challenges surrounding decreased vehicle demand due to the global economic downturn, Moody's Investors Service said in a new report. Furthermore, manufacturers' captive financing arms continue to face asset quality and funding challenges due to the weak global market and economic conditions.
"Moody's continues to forecast global double-digit volume declines in the sector in 2009, with limited prospects for a meaningful recovery in 2010," said Falk Frey, a Senior Vice President in Moody's Corporate Finance Group. "Operating profitability and cash flow generation look set to remain very weak in the intermediate term." Indeed, Moody's forecasts 2009 global auto sales volumes to be 13% lower than the already-low level posted in 2008 in the rating agency's central scenario.
While Original Equipment Manufacturers (OEMs) will be focused on preserving free cash flow and access to liquidity in 2009, Moody's believes they will struggle to reduce their high inventories and free up cash. "Furthermore, although production cuts are likely to continue in 2009, Moody's cautions that they might be insufficient to trim inventories and bring next year's volumes in line with demand, making deeper restructuring necessary," said Frey.
Moody's recognises that many governments have made efforts to boost sales, enacting so-called "scrapping" schemes in Europe and Asia, while the US Congress debates a "cash for clunkers" scheme. However, while the programmes have had their short-term desired effects, Moody's believes the packages will only serve to bring forward demand — not completely solve the problem.
Moody's also notes that tight credit markets continue to limit consumer and dealer access to financing, and captive financing arms of OEMs face asset quality and funding challenges. For dealers associated with the Detroit-based manufacturers, floor-plan financing has also become subject to higher costs and more restrictive terms as captives' access to traditional funding sources has declined.
"The ability of the industry to recover from its present slump depends in no small degree on how new-car sales can be financed, making the position of automakers' captive finance arms critical," said Frey.
The uncertainty of the depth and length of the down cycle will be a key factor in determining the credit ratings for the OEMs going forward, with a lack of consumer confidence adding another layer of unpredictability. In this context, preserving free cash flow and securing liquidity will be a key focus for global automakers in the next 12-18 months and one of the important metrics Moody's will closely monitor.
Moody's currently rates16 OEMs, located in Germany, France, Italy, Unites States, Japan, Korea and India.