The already challenging conditions in the global automotive manufacturing industry will likely worsen over the long term, says Moody’s Investors Service.
“The industry is currently extremely cyclical, competitive, capital intensive and burdened with excess capacity,” said Bruce Clark, a Moody’s Senior Vice President. “What’s more, automotive manufacturers face increasingly demanding fuel economy, emissions and safety standards, which will require significant investments from these companies.”
The greatest credit risk for the sector is cyclicality, particularly in the most profitable regional markets, including North America, Europe, Japan and Latin America, according to the report, “Increasing Risks in Global Auto Sector.” Down-cycles will periodically hit every regional market. China, now the largest automotive market in the world, is also growing vulnerable to slowdowns and will eventually see a cyclical contraction in sales.
“A key component of our assessment of an automotive issuer is its ability to contend with such cycles, primarily through the breadth of its geographic presence, a low breakeven operating model and a strong liquidity position,” added Clark.
Moody’s expects the sector to face additional pressure from (1) the uncertainty around the multiple technological paths that could be pursued in order to achieve emission and fuel economy objectives; (2) the need to incorporate a host of connectivity features into vehicles; and (3) emerging competitors in the already crowded market.