Fitch: U.S. Automakers Well Positioned for Weak Demand in 2012

CHICAGO January 3, 2012; Fitch Ratings expects the financial profiles of U.S. automakers and parts suppliers to remain resilient in a downside scenario characterized by sluggish global economic growth and weaker-than-expected North American light vehicle demand.

Unlike 2008-2009, when U.S. original equipment manufacturers (OEMs) and their primary suppliers were forced to undertake dramatic restructurings in the face of plummeting demand, we believe the Detroit Three (Ford, General Motors, and Chrysler) and the largest U.S. parts makers are well positioned from both a cost and liquidity standpoint to withstand significant demand pressure this year. While we continue to see U.S. light vehicle sales growing modestly to approximately 13.2 million units in 2012, credit profiles are likely to remain relatively stable if a slowdown in unit sales and softer pricing undercuts margins this year.

Relative to the last downturn, operating profiles are more resilient as a result of capacity reduction, lower fixed costs, and a more manageable labor cost structure linked to the recently ratified United Auto Workers (UAW) contracts. We estimate that the break-even industry sales level for the Detroit Three and major parts suppliers is now about 10.5 million light vehicles, corresponding to 2009 recessionary sales volumes.

OEMs and suppliers have also taken steps to bolster their balance sheets since 2009, with generally solid liquidity positions and ample credit facility availability across the industry. Importantly, management teams have also repeatedly emphasized their commitment to achieving investment-grade status over the medium to long term, with a focus on free cash flow generation, strong liquidity, and consistent debt reduction.

Although U.S. light vehicle sales are likely to grow this year, the forecasted size of the market, at 13.2 million units, will remain well below the industry annual sales level of approximately 17 million units seen from 1999 through 2006. We believe the U.S. industry may struggle to exceed annual sales of approximately 15 million light vehicles at the peak of the current demand cycle.

With auto sales in Western Europe likely to fall this year and sales growth rates declining in key emerging markets such as China, India, and Brazil, U.S. automakers' operating results in 2012 will depend more directly on volume growth and pricing traction in the U.S. market.

Although a global downturn would clearly impede the progress of U.S. automakers in their efforts to strengthen their balance sheets, most Fitch-rated issuers have sufficient cushioning in their credit metrics to withstand a significant demand shock without driving negative changes in outlooks or ratings. This fundamental improvement in the U.S. auto industry's resilience forms the primary foundation of our positive outlook for the industry in 2012.

For additional detail regarding Fitch's 2012 expectations, see "2012 Outlook: U.S. Auto Manufacturers and Suppliers," dated Dec. 15, 2011, at www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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2012 Outlook: U.S. Auto Manufacturers and Suppliers

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