Wednesday, September 7, 2011

Stable outlook for auto industry, says Moody's

KUALA LUMPUR: Weaker macroeconomic fundamentals will slow global light vehicle demand growth over the next 12-18 months and constrain the pace of earnings improvement, according to Moody's.

As a result of this weakness, fundamental credit conditions for global auto manufacturers are considered to be stable rather than positive, hence the corresponding change in outlook, Moody's said in an Industry Outlook report published on Sept 6.

A Moody's Corporate Finance Group senior vice president, Falk Frey, said the agency had revised downwards its forecast for global demand growth to 3.5% from 5.1% for the current year and to 6.5% from 7.4% next year.

"Over the next 12-18 months, weaker fundamental credit conditions for the sector will result from weaker-than-expected gross domestic product growth in mature markets, and rising interest rates being imposed to dampen inflation in emerging countries, especially China and India," he said.

Frey said original equipment manufacturers (OEMs) faced higher input costs due to the rising cost of raw materials.

Moody's expects that higher raw material costs will take 1%-1.5% off OEM profit margins compared with a year earlier if manufacturers fail to take measures to cut other costs, he said.

According to the report, Moody's now expects light vehicle demand in Western Europe to fall less than 1% on the year to 14.3 million units.

'This is 110,000 units more than Moody's anticipated at the beginning of the year, when we forecast a 1% on-year decline, and is mainly due to robust demand in France and Germany more than offsetting weaker-than-expected demand in Italy and Spain.

'Economic growth remains weak, and as a result Moody's does not expect the car market to prosper,' said Frey.

European manufacturers are also being hit by the dollar's weakness and by overcapacity, he said.

In addition, Moody's expects Japanese demand to be down 16% on the year in 2011 due to the March earthquake and subsequent tsunami, compared with a 10.1% on-year decline expected earlier, he said.

For 2012, Moody's forecasts 7.3% growth, as it expects production to recover in the fourth quarter of this year and the first quarter of 2012, said Frey.

'In the US, profit growth is slowing as the structural benefits of last year disappear.

'Moody's has revised its 2011 outlook downwards, to 8.1% from 12%. In 2012, Moody's expects 16% growth, to 14.5 million units, which is 500,000 units less than our previous expectation of 15.0 million light vehicle sales,' he said.

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