Global sales of light vehicles will decline by about 2% in 2020 after an estimated decline of 4% in 2019, ensuring the credit outlook for the automotive sector in 2020 remains negative, unchanged from last year, says Scope Ratings GmbH, a leading European rating agency, in a recently released report.
Automakers face twin short-term challenges: the transition toward producing a higher share of electric vehicles in response to tightening emission legislation and declining volumes in their biggest markets: Europe, China, US.
“Higher costs related to electrification, investments in autonomous driving, and lower volumes in 2020 will leave their mark on profitability,” Werner Stäblein, analyst at Scope, says. “However, most manufacturers have the buffer of adequate financial resources and sufficiently low leverage to cope with these secular and cyclical trends.”
In terms of demand, the US market has reached a cyclical plateau. Rising auto loan rates, market saturation from vehicles coming off-lease, and high share of fleet sales already booked in 2019 do not provide a platform for further growth. The increasingly important Chinese market posted its first decline in decades in 2018 followed by a marked volume correction of an estimated 9% in 2019.
The mature Western European market has nearly returned to pre-crisis (2007) level volumes, helped by the sell-down of inventory carried over from 2018, and scrappage schemes for older diesels, notably in Germany, ahead of the introduction of tighter emission standards.
The European car industry faces two transition years to comply with more stringent carbon emission legislation which will leave its mark on the profitability of original equipment manufacturers (OEMs). Demand will shrink in 2020 after holding up last year partly through the rush to buy cars before the introduction of a new emissions-testing protocol last autumn and the array of government incentives available to buy new cars. The slowdown in the main auto markets is unlikely to be offset by growth in smaller regions (Middle East, South America, South Asia).
“OEMs will continue to invest in autonomous driving and more advanced vehicle connectivity, keeping research and development at elevated levels without any expectation of revenues from the deployment of these innovative technologies in the medium term,” Stäblein says. “In the meantime, OEM executives, who are used to cyclical changes and are well aware of the risks inherent in the industry, will stick to the long-standing conservative financial policies such as minimum liquidity goals, very low leverage, and moderate shareholder remuneration. Most OEMS have solid financial-risk profiles despite the challenges ahead.”
Car makers worldwide have shown discipline on leverage for almost a decade: financial leverage of industrial operations to continue at levels of slightly above 1.0x (sector median). The same is true for auto suppliers where leverage tends to be slightly higher (sector median around 2.0x) but still sufficiently low to cope with mildly negative volume changes.