DBRS Publishes “Global Automotive Industry Study: As the Automotive World Turns”

DBRS Limited (DBRS) has today published “Global Automotive Industry Study: As the Automotive World Turns,” which describes the current state of the global automotive industry.

The auto industry remains subject to more than its fair share of drama. Recalls continue to beset the industry and attain ever-increasing volumes in line with the ongoing consolidation not only of vehicle platforms across the sector but also of the supply base. Indeed, the air bag recall linked to Takata Corporation now represents the largest recall in automotive history. Moreover, the (diesel) vehicle emissions controversy of Volkswagen AG (rated BBB (high) with a Negative trend by DBRS) shows little signs of abating (despite being publicly disclosed in September 2015), with numerous claims against the company remaining unresolved and regulators now also examining apparent emissions discrepancies in some of the company’s gas-engined models. However, consistent with recent history, automotive sales have subsisted at solid volumes despite such developments.

Partly a function of the above-cited drama, the industry will likely be subject to potentially substantive changes in the medium to long term. Alternative powertrain vehicles, which historically have managed to achieve only nominal sales even amid typically sizable incentive programs aimed at increasing their volumes, are likely to gain increasing prominence in line with the ongoing tightening of emissions regulations worldwide. Similarly, driver assistance technologies and systems are becoming more widely available even in relatively affordable models, with several auto manufacturers now aiming to offer fully autonomous vehicles (albeit in geographically limited environments) within roughly five years. Many auto companies are also engaging in nascent vehicle fleet management services such as car and ride sharing, which will likely undergo substantial growth going forward in response to flattening vehicle-ownership rates, primarily in mature urban markets. DBRS notes that, over the short term, such developments, in isolation, are not likely to result in any associated rating actions, as related investments (at least for the time being) remain typically well absorbed by the sizable liquidity that continues to prevail across the sector. Ultimately, however, DBRS anticipates that, at some point, peripheral businesses will come to represent an additional rating consideration across the sector.

Consistent with DBRS’s prior automotive study (“Global Automotive: A Few Speed Bumps Ahead, but Still a Smooth Ride Overall,” published December 8, 2014), in aggregate, the global automotive industry is expected to undergo additional growth for the foreseeable future, with worldwide sales likely to exceed 100 million units by the end of the decade (compared with the 2015 global sales of 88 million units). Worldwide growth has moderated, however, mostly as a function of markedly weaker conditions across several emerging markets that, together, were previously expected to account for the majority of growth going forward. Regional volumes in markets such as Russia and Latin America have contracted sharply in recent years. Moreover, growth in China has significantly moderated, although this can be explained by its progressive transition from an emerging market to a developed market, with the country representing the world’s largest source of automotive sales. Concurrently, conditions in mature markets remain generally reasonable, with slowing growth in the United States (where volumes nonetheless remain at very high levels) offset by Europe’s meaningful recovery.

Also consistent with DBRS’s prior automotive study, the automotive industry risk assessment remains stable in the BBB range. This reflects, among other factors, projected ongoing (albeit moderating) growth of the industry globally, notwithstanding significant variances across market regions. Moreover, the balance sheet and liquidity position of most automotive manufacturers remains generally sound, with the industrial operations of investment-grade-rated auto companies typically having a net cash position. Furthermore, while industry margins have historically been modest on average and subject to additional pressure in line with escalating costs primarily related to product development and emissions compliance, several original equipment manufacturers are nonetheless generating significant profitability.

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