Negative outlook for European car parts makers

The credit outlook for European automotive parts manufacturers remains negative, according to a Moody's report, adding that following a difficult 2009, 2010 will be another challenging year for the sector.
"2009 was probably the toughest year for the European automotive industry since World War II," said Rainer Neidnig, a Moody's analyst and author of the report. "The supply industry was hit even harder as original equipment manufacturers (OEMs) de-stocked their inventories well into 2009. As a result, the fall in car production was steeper than the decline in demand, with production volumes falling to their lowest level in 14 years."
In the report, Moody's said that it expects that, as incentive schemes phase out, new car sales in Europe could decline by 15% in 2010 from 2009. "Given that new car sales and car production should realign after the de-stocking of inventories in 2009, we expect car production volumes to perform better and to decline by only 3% in 2010," Neidnig added.
However, Moody's cautioned that car production rates could decline in the second half of 2010 after a strong start to the year supported by tailwinds from the scrapping schemes in various European countries. "We see this challenge mitigated to a certain extent by the strong action most suppliers have taken to lower their cost bases," said Neidnig. "Additionally, as emerging markets such as China are expected to grow further and light vehicle production in the US is forecast to rise, we expect car production volumes globally to grow."
Moody's also believes that cash flow generation will be challenged by a potential swing-back of working capital following the significant release in 2009 and by the need to increase capital expenditures again. In addition, a substantial portion of the restructuring charges taken in 2009 will become cash effective only in 2010. The rating agency also noted that raw material prices have strongly recovered from their lows, and it will be difficult to pass these on to OEMs facing end-customers who became accustomed to heavy discounts backed by government incentives.
Moody's believes enough challenges remain to maintain its negative outlook for the sector.
"Broad-based improvements in ratings are unlikely in the near term, although downward ratings pressure has abated following the 2009 downgrades," said Neidnig. Moody's further noted that most rated suppliers shifted their financial priorities towards creditors' interest in 2009. The rating agency cautioned that if companies abandon this conservative stance, pressure on ratings could increase.