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CreditWeekThe Global Authority On Credit Quality | September 26, 2012
Can The Ford, GM, & Chrysler
Resurgence Continue? (p. 50)
Global Truck Makers Face
Wavering Demand (p. 32)
Difficult Conditions Aw
Europes Carmakers (p. 9
As U.S. Auto ABS Recovers,
Do Risks Lie Ahead? (p. 74)
SPECIAL REPORT
THE AUTO INDUSTRY Chasing Global Growth (p. 12)
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CONTENTS
2 www. creditweek.com
September 26, 2012 | Volume 32, No. 36
The Global Auto Industry Holds Steady AmidEconomic TurbulenceBy Beth Ann Bovino, New York
The past five years have been tumultuous for the global economyandespecially the auto sector. First came the worst recession since the Great
Depression of 1929, then an earthquake in Japan and floods in Thailand,
and now the eurozone debt crisis. However, subdued consumer
sentiment has not yet dented healthy growth in demand for the auto
industry in the U.S., but some other markets are growing more slowly.
CREDIT FAQ
18 The Global Auto Sector Faces Obstacles And
Opportunities As Regional Economic Outlooks Diverge
By Robert E. Schulz, CFA, New York
Wide variations in the economic health and prospects
of regional markets are making for a disparate outlook
for global automakers. Sales are rising in the U.S. and
likely will rise in China. Yet Europes economic woes
are contributing to weaker sales and pressure to cut
production capacity. Although Japans auto market has
rebounded from the effect of natural disasters, a
strong yen is making it tougher for Japanese makers
to compete on exports.
32 Can Global Heavy Truck Makers Downshift Fast
Enough To Ride Out Wavering Demand?
By Michael Andersson, Stockholm
The outlook for global heavy
truck markets is hazy due to
uncertainty over the global
economy. The slowdown in
the European heavy truck
market seems to be
worsening, in line with our
base-case scenario of a mild
recession in the eurozone in 2012.
A weak order intake in the U.S. and
increased economic uncertainty have made
the outlook for the North American truck
market similarly uncertain.
37Life In The Slow Lane: Adjusting To TheFall In Replacement Tire Demand
By Lawrence Orlowski, CFA, New York
As the world economy has slowed,
so has demand in the largest
segment of tire manufacturing: the
replacement industry. The
underlying reasons for this shift
in behavior include stubbornly high
unemployment, prevailing economic uncertainty, and
rising fuel prices. And theres not much hope that
demand will increase any time soon.
46 Global Rental Car Companies Have The
Resilience To Ride Out A Weaker Economy
By Betsy R. Snyder, CFA, New York
We dont expect the global slowdown in economic
growth to significantly hurt global rental car
companies earnings and cash flow or our ratings on
the sector. These companies have proven resilient to
past downturns and we expect them to respond
similarly this time around.
50 Can General Motors, Ford, And Chrysler Continue
Their Resurgence?By Robert E. Schulz, CFA, New York
Even as economic uncertainty persists in the U.S.,
recession looms in Europe, Chinas economy slows, and
evolving intra-Latin America trade issues persist,
General Motors, Ford and Chrysler demonstrated
that they can maintain and move beyond their
improvements in credit quality from late 2009 to 2011.
12
SPECIAL REPORT
FEATURES
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62 U.S. Auto Suppliers Could Largely Weather
Slowing Global Economic Growth
By Nishit K. Madlani, New York
Growing global economic
risks will likely slow
earnings growth among
U.S. auto suppliers this
year and into 2013, but
most should sidestep any
significant deterioration in
their credit quality.
71 U.S. Banks Affinity For Auto Loans Continues
74 The Recovery Continues For U.S. Auto ABS,
But What Risks Lie Ahead?
79 The U.S. Subprime Auto Loan ABS Market: Not Seen
Headed For A 1997-1998 Style Contraction
85 The U.S. Personal Lines Automobile Insurance
Sector Is On Credit Cruise Control Through 2013
88 How S&P Values The U.S. Auto Sector To Arrive At
Its Post-Default Recovery Ratings
93 The Aggregate Auto Sector Spread Tightened As
Sales Picked Up
CREDIT FAQ
95 How Sustainable Are Hyundai Motor And Kias
Gains In Market Share And Profitability?
98 Europes Speculative-Grade Volume Carmakers Are
Still Rolling, But Driving Conditions Are Becoming
More Precarious
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SPECIAL REPORTFEATURES
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The past five years have been tumultuous for the globa
economyand especially the auto sector. First came the
worst recession since the Great Depression of 1929, then
an earthquake in Japan and floods in Thailand, and now the
eurozone debt crisis. However, subdued consumer sentiment has
not yet dented healthy growth in demand for the auto industry inthe U.S., but some other markets are growing more slowly, and
European sales are falling year over year.
The Global Auto IndustryHolds Steady AmidEconomic Turbulence
Overview
Despite the tepid U.S. economic recovery, we expect U.S. auto sales in 2012 torise to their highest level since 2008 as a result of consumers replacing their
aging vehicles, as well as better credit availability.
We expect the eurozone economies to remain depressed, and although the
severity and length of the downturn will vary by country, the overall trend will
be a continued decline in auto sales in 2012.
The auto markets in the emerging markets, particularly China and India, have huge
growth potential, but as demand is directly linked to overall economic activity, it
will decline if the economy weakens further, as we expect it will in 2012.
Although the Japanese economy has bounced back since the earthquake and
tsunami that hit in 2011auto sales climbed 46.3% in the first half of 2012we
expect it to slow in the second half of 2012 as domestic consumption loses
momentum once the government incentives end and global economicuncertainty hurts its exports.
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Auto sales growth has turned out to be
a bright spot in the U.S. in the past
year, benefit ing from demand as
drivers replace their aging cars and
trucks, which are now a record 10.8
years old, on average. In Japan, the
industry has bounced back from last
years production losses resulting from
the tsunami. The governments incen-
tive for fuel-efficient vehicles has also
given a boost to the countrys auto
industry. Economic growth has slowed
in the emerging markets, especially in
China and India, primarily because of
these countries efforts to contain
inflation, as well as the impact of tepid
growth in the U.S. and the recession in
Europe. Although auto sales growth
rates in India and China have slipped
from their recent highs, they remainstrong relative to sales in some other
regions. Meanwhile, auto sales inEurope continued to drop in 2011 and
were down 7.1% through the first eight
months of 2012. The drop could be the
result of the simultaneous delever-
aging taking place in the public sector,
the household sector, and the banking
sector, which is holding back growth in
the region and hurting auto sales.
The U.S.: Making Its Way
Toward A Recovery
Light-vehicle sales in the U.S. were one
of the consistent bright spots in the
economy in 2011, rebounding to 12.5
million in 2011 from 11.8 million in
2010 and the depressed level of 10.6
million in 2009. Last years sales figures
could have been even higher if not for
the tsunami and earthquake in Japan
and flooding in Thailand. These disas-
ters forced not only Japanese
automakers, but also other companies
(to a much lesser extent), to curtail pro-
duction in virtually all of their assembly
plants around the world. These events
also disruptedand in some cases shut
down entirelyJapanese auto parts
suppliers, which hurt U.S. carmakers
(again, to a much lesser degree than the
Japanese automakers).
We believe that auto sales will
improve as the U.S. economy continues
its tepid recovery. In addition, pent-up
demand and better credit availability
should support year-over-year sales
growth for 2012.
We expect auto sales to reach 14.1
million units in 2012surpassing the
13 million-unit mark for the first time
since 2008. Nevertheless, we remain
watchful of potential weakening in the
recovery because of Europes eco-
nomic troubles, slower growth inChina, and the potential U.S. fiscal
showdowns late in 2012, which could
dampen fragile consumer sentiment
and, consequently, hurt auto sales.
The economic recovery in the U.S.
has continued to advance, albeit
slowly, since the first half of this year.
Also, an increase in pent-up demand
and a falling unemployment rate have
benefi te d U.S . auto sales, despite
higher gasoline prices (see chart 1).
These factors, along with stronger con-sumer confidence, helped lift auto
sales. In addition, high used-car prices
and an aging U.S. motor fleet have
boosted demand in the U.S.
A l l of t hi s wa s good ne ws for
automakers, especially those in the
U.S., which have restructured their
operations to be profitable at lower
volumes. The Michigan Three
General Motors, Ford, and Chrysler
gained market share at the expense of
the Japanese manufacturers and have
now posted strong operating perform-
ance for several quarters. As the U.S.
companies are focusing on producing
more attractive vehicles, they also
reached a new and mutually beneficial
four-year labor agreement with the
United Auto Workers in 2011. By
offering newly hired workers rates that
are comparable to those that Asian
transplants in the U.S. pay, these com-
panies have taken another important
14 w ww. cr ed it we ek .c om
SPECIAL REPORTFEATURES
Passenger car sales in the eurozone continue to face
strong headwinds, and we dont expect a pickup in
demand this year.
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step in narrowing the gap on manufac-
turing costs.
Europe: Still Heading Downhill
Passenger car sales in the eurozone
continue to face strong headwinds,
and as most economies are weak-
ening, we dont expect a pickup in
demand this year. Passenger car regis-
trations decreased in Europe for the
second consecutive year in 2011, by
1.7%, after fa l l ing 5 .6% in 2010,
according to the European Automobile
Manufacturers Assn. (see chart 2). The
number of registered passenger cars
in the region shrank to 13.1 million
from 13.35 mil l ion over the same
period. Most of the significant markets
reported declines, with decreases of
2.1% in France, 4.4% in the U.K. ,10.9% in Italy, and 17.7% in Spain. In
contrast, car sales in Germany rose as
demand for new cars grew by 8.8%.
The eurozone economies continue
to face turbulence as growth stalled in
the first quarter and then dropped in
the second. Financial market condi-
t ions also worsened in the second
quarter. The recent spike in risk pre-
miums for Italian and Spanish bonds
and concerns about the future of the
eurozone have caused capital to flowout from countries in the southern rim,
such as Greece, Portugal, and Italy. In
the first six months of 2012, new pas-
senger vehicle registrations in the EU
fell 6.8% year over year, though we
saw wide variations by country. The
two largest marketsGermany and
the U.K.were up, while the next
three largest markets (Spain, France,
and Italy) were all down.
In 2012, we expect austerity meas-
ures and the debt crisis to continue to
depress eurozone economies. Recession
set in for most eurozone economies in
the first half of 2012. We believe that
the severity and length of the down-
turn will vary by country, but that the
overal l t rend wil l be a cont inued
decline in auto sales in 2012. We
expect eurozone GDP to contract by
0.6% this year and to recover only
slightly in 2013, with growth of 0.4%.
Outside the zone, we forecast anemic
Standard & Poors Ratings Services CreditWeek | September 26, 2012 15
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012e
2013f
2014f0
2
4
6
8
10
12
(%)
1
11
1
1
2
(Mil
eEstimate. fForecast.
Standard & Poors 2012.Sources: Global Insight and Standard & Poors forecasts.
Unemployment rate (left scale) Auto sales (right scale)
Chart 1 U.S. Auto Sales And The Unemployment Rate
2006 2007 2008 2009 2010 20118
9
10
11
12
13
14
15
(Mil.)
(10
(8
(6
(4
(2
0
2
4
(%
Source: European Automobile Manufacturers Association. Standard & Poors 2012.
Change (right scale)New passenger car registrations (left scale)
Chart 2 New Passenger Vehicle Registrations In Europe
2006 2007 2008 2009 2010 20110
2
4
6
8
10
12
(Mil.)
(20
(10
0
10
20
30
40
50
60
(% change
*Fiscal year.
Standard & Poors 2012.Sources: Society of Indian Automobile Manufacturers, Japanese Automobile Manufacturers Assn., and Global Insight.
India % change (right scale) China % change (right scale) Japan % change (right scale)
India sales* (left scale) China sales (left scale) Japan sales (left scale)
Chart 3 Auto Sales In Asia
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GDP growth in the U.K. of 0.3% in
2012 and 1.0% in 2013.
The eurozone debt crisisnow in its
third yearhas sharply dented con-
sumer sentiment in the region. In fact,
the crisis is probably more severe and
deeper than ever, and it is threatening
the viability of the eurozone in its cur-
rent form. Moreover, some of the
strongest European countries, especially
Germany, have started to feel the strain
tooGerman manufacturing output
contracted at its fastest pace in three
years. The unemployment rate in the
eurozone reached a record high of
11.3% in July. It averaged 7.8% in 2007.
Eurozone consumer sentiment dropped
to 89.9 in June, far below its long-term
threshold average of 100. Also, the
threat of implementing new austerityplans further hampered the economies.
The slew of bleak data and politicalleaderships failure to come up with a
long-term solution for the European
debt crisis have eroded consumer con-
fidence. Markit Economics, which
computes the purchasing managers
indices (PMIs), noted that in second-
quarter 2012, the eurozone appeared
to be experiencing the strongest quar-
terly downturn in three years. The
composite indices point to the euro-
zone economies having contracted by
about 0.6% in the second quarter. And
the big fear is that a disorderly default
on sovereign debt, such as Greece,
could turn into a bigger financial crisis
that would spread to larger economies,
like Spain and Italy. Moreover, the
fiscal stimulus measures that offset the
impact o f the recess ion in 2009
(including offering payments for scrap-
ping older cars and buying new, low-
emission vehicles) wont be available
this t ime around. The European
Central Bank (ECB) has undertaken
new monetary policies, including its
potentially unlimited bond-buying pro-
gram called outright monetary transac-
tions (OMT), in an effort to stabilize
secondary sovereign bond markets and
strengthen the viability of the euro-
zone. The OMT initiative is a major
move to consolidate states and is very
different than the ECBs earlier initia-
tives, but it has yet to be tested, so
risks remain.
Emerging Markets: On
A Roller Coaster Ride
After making significant progress fol-
lowing the 2008 financial crisis, the
recoveries in emerging economies, espe-
cially China and India, have slowed con-
siderably as policymakers try to curbrising inflation. Auto sales growth in
China dropped sharply to a meager 2%
in 2011 from its high of 46% in 2009,
and in India, it fell to 2.2% in 2011 from
26.9% the previous year.
Growth in these economies deceler-
ated sharply in 2011. Chinas economy
slowed to 9.2% in 2011 after expanding
10.4% in 2010. Indias GDP growth
slumped to 6.5% from 2011 to 2012,
compared with an impressive 8.4% in
the previous fiscal year. The slowdownresulted from tighter credit policies, a
weak recovery in the U.S., and the reces-
sion in Europe. The slowdown in exports
to EuropeAsias largest export
markethas hurt industrial activity in
the region, especially in China. We
expect economic growth to continue to
declineto 7.8% in China in 2012 and to
5.5% in India in 2012 to 2013.
Following the 2008 financial crisis,
emerging marketsChina in partic-
ularseemed to have the potential to
lead a recovery in global auto demand.
But Chinas economy is rapidly losing
traction, and a series of steps to ease
monetary policy in recent months does
not appear to be making much differ-
ence (see chart 3). In addition, Chinas
manufacturing PMIone of the early
ind icator s of the state of the
economycontinues to signal weak-
ness, dropping to 47.6, the lowest level
since March 2009. In addition, major
16 w ww. cr ed it we ek .c om
SPECIAL REPORTFEATURES
The slowdown in exports to EuropeAsias largest
export markethas hurt industrial activity in the
region, especially in China.
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Chinese cities like Beijing are increas-
ingly resorting to stricter standards of
emission and restrict ions on the
number of passenger car registrations
per year to curb emissions and ease
traffic congestion, which have further
hampered auto sales. However, to stem
the drop in sales, the government has
initiated a package worth Chinese ren-
minbi (RMB) 6 billion (US$952 billion)
to provide subsidies on purchases of
fuel-efficient cars with engines of less
than 1.6 liters. In addition, the govern-
ment announced that it will spend $156
billion on building new subways, high-
ways, and other infrastructure projects,
which likely will support a resumption
of growth in the coming year.
Similarly, auto sales i n India have
slowed considerably because of tightermonetary policies. The Reserve Bank of
India has raised borrowing cost rates 13
times since March 2010 to cool inflation,
which has remained above 9%.
Moreover, a 21.1% increase in gas prices
since the beginning of 2012 has sharply
cut into consumer sentiment.
Nevertheless, the auto markets in
China and India have huge growth
potential given their large populations,
ongoing urbanization, and rising pur-
chasing power. But obstacles to autoindustry growth in the region remain.
Because demand is directly linked to
overall economic activity, it will decline
if the economy weakens further, as we
expect it will in 2012. Also, rising oil
prices and supply concerns stemming
from troubles in the Middle East could
cause inflation to climb, which likely
would erode consumers income and, as
a result, demand for autos.
Japan: Recovering From
Natural DisastersIn March 2011, the earthquake and
tsunami that hit Japan created havoc
throughout the country and brought
the auto industry to a standstill. Plant
outages and power shortages jeopard-
ized Japans auto productionwhich
accounts for about 13% of worldwide
auto productionand manufacturing
of many critical components. The nat-
ural disaster struck a powerful blow to
the nations economy, triggering a
0.7% contraction in real GDP for 2011
after a gain of 4 .5% in 2010. This
resulted in a 15.1% decl ine in
Japanese auto sales in 2011 following
an increase of 7.5% in 2010. However,
the Japanese economy bounced back
in early 2012. The economy grew a
solid 4.1%, primarily because of
strong consumer spending, especially
on car purchases, which received a
bo ost fr om te mp orar y go ve rnm en t
incentives. This led auto sales to soar
46.3% in the first half of 2012.
However, the Japanese auto market is
fairly saturated, and domestic demand is
unlikely to lead to a significant recovery
in 2012 once the government incentives
are rolled back. Japans growth depends
more on exports. It recorded a tradedeficit of more than $37 billion in the
first half of the year, and most of its auto
exports are to the U.S. and the EU, which
ran into economic turmoil in 2011. So in
2012, reconstruction spending will con-
tinue to support Japans economic
growth, while the slowdown in Europe
and China will hamper it. We expect
Japans economy to grow by 2% in 2012
and 1.4% in 2013.
Auto Sales Should Hold Up,But Struggling Economies
Will Remain A Drag
Although we expect global auto sales
to remain steady in 2012, the looming
fiscal cliff in the U.S. , intensifying
recessions in eurozone countries, and a
slowdown in emerging economies such
as China pose significant risks to the
global economy. Other issues include
increasing geopolitical risks in the
Middle East, which could cause crude
oil prices to rise. We think these factors
could keep some potential car buyers
on the sidelines through 2012. CW
Standard & Poors Ratings Services CreditWeek | September 26, 2012 17
Analytical Contacts:
Beth Ann BovinoNew York (1) 212-438-1652
Kaustubh PandeyCRISIL Global Analytical Center, an S&P affiliateMumbai
For more articles on this topic search RatingsDirect with keyword:
Auto Industry
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SPECIAL REPORT | Q&A
18 w ww. cr ed it we ek .c om
FEATURES
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Wide variations in the economic health and prospects o
regional markets are making for a similarly disparate
outlook for global automakers. Sales are rising in the
highly competitive U.S. market, and we expect sales to be up in
China this year as well. At the same time, Europes economic
woes are contributing to weaker sales and pressure to cu
production capacity in the region. Japans auto market has
rebounded from the effect of natural disasters last year, although
a strong yen is making it tougher for Japanese makers to
compete on exports.
The Global Auto Sector
Faces Obstacles AndOpportunities As RegionalEconomic Outlooks Diverge
Standard & Poors Ratings Services CreditWeek | September 26, 2012 19
Credit FAQ
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Here, we provide insight into some of
the key issues for investors in the global
auto industry.
Q. What is Standard & Poors outlook forcredit quality in the global auto sector?
A. Standard & Poors Ratings Servicesoutlook for credit quality in the auto
sector is mixed: almost 40% of our out-
looks on the rated global automakers are
either positive or negative, reflecting
individual companies geographic con-
centrations and significant variations in
our regional economic outlooks. The
rated global automakers are navigating a
variety of conditions, including weak or
recovering markets and global economic
uncertainty. Some have more exposure
than their competitors to declining mar-
kets or a cost base that they cant easily
restructure because of their location.
20 www.creditweek.com
SPECIAL REPORT | Q&AFEATURES
2011 2012 2013
Units (000s) Units (%) Units (%) Units (%) Percent of the 2013 total
U.S.
General Motors 2,504 19.6 2,642 18.3 2,832 18.7
Ford 2,120 16.6 2,257 15.6 2,385 15.7Toyota 1,645 12.9 2,100 14.5 2,174 14.3
Fiat-Chrysler 1,369 10.7 1,643 11.4 1,669 11.0
Total Industry U.S. 12,748 14,459 15,174 Top 4 account for about 60%
Western Europe
Volkswagen 3,172 22.1 3,009 22.4 2,910 21.5
PSA 1,951 13.6 1,745 13.0 1,790 13.3
Renault-Nissan 1,945 13.5 1,632 12.1 1,666 12.3
Ford 1,208 8.4 1,168 8.7 1,182 8.7
General Motors 1,188 8.3 1,177 8.7 1,156 8.6
Total Industry Western Europe 14,375 13,453 13,510 Top 5 account for 64%
Eastern Europe
Renault-Nissan 1,186 25.4 1,180 24.4 1,272 24.5
Volkswagen 572 12.3 655 13.6 697 13.4
General Motors 485 10.4 488 10.1 485 9.3
Hyundai 448 9.6 496 10.3 453 8.7
Total Industry Eastern Europe 4,663 4,828 5,198 Top 4 account for 56%
China
Volkswagen 2,327 12.9 2,532 13.0 2,759 12.3
SAIC 1,396 7.8 1,508 7.7 1,806 8.1
Chinese Manufacturers 1,325 7.4 1,454 7.5 1,758 7.9
General Motors 1,301 7.2 1,405 7.2 1,529 6.8
Hyundai 1,247 6.9 1,343 6.9 1,552 6.9
Total Industry China 18,000 19,472 22,342 Top 5 account for 42%
Brazil
Fiat-Chrysler 781 22.2 790 22.9 798 21.2
Volkswagen 707 20.1 704 20.4 706 18.7
General Motors 643 18.3 615 17.8 674 17.9
Ford 312 8.9 327 9.5 341 9.1
Total Industry Brazil 3,515 3,449 3,766 Top 4 account for 67%
Source: LMC Automotive Ltd.
Table 1 | Top-Selling OEM BrandsLight Vehicle For Key Regions
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Accordingly, results in 2012 have
varied across regions and companies. In
Europe, for example, losses have been
the norm among volume automakers,
while luxury makers remain largely prof-
itable. We expect this variability to con-
tinue, and as such, some Europe-based
volume automakers have experienced
negative rating actions this year, while
the Korean automakers and some luxury
makers, along with U.S. automaker Ford
Motor Co. (BB+/Positive/), have seen
positive rating actions. We believe most
investment-grade automakers have room
within their ratings to weather some ero-
sion in performance, while most specula-
tive-grade automakers have less room in
their ratings for underperformance.
Standard & Poors base-case outlook
continues to forecast considerableregional differences in auto sales for
2012, and we believe the underlying fun-
damentals driving these differences
including economic and political uncer-
tainty in Europe, slowing economic
growth in China and Brazil, and fiscal
uncertainty in the U.S.could persist
into 2013. The mix of regional expo-
sures is a key aspect of automakers
credit quality and is unlikely to change
significantly over the next year or so
because of their established manufac-
turing and sales footprints. Table 1 illus-
trates the variety of regional exposures
among the global automakers.
Q. What are some of the major develop-ments Standard & Poors is watching?
A. Higher sales and stiff competition in theU.S. Competition in the U.S. market is
not abating, even as sales continue to
recover. The U.S. automakers halted the
trend of declining shares several years
ago, and their competitive position has
improved in many of their traditionally
weaker segments, such as small cars. At
the same time, Korea-based Hyundai
Motor Co. (BBB+/Stable/) and its Kia
Motors subsidiary have gained share
over the past few years, and in 2012 the
Japanese automakers have recoveredfrom 2011 inventory shortages: Toyota
Motor Corp.s (AA-/Negative/A-1+)
sales were up 46% year-over-year in
August 2012. Still, the Japanese
automakers share remains below its
peak. Nonetheless, we view the U.S. auto
market as highly competitive.
But beyond the established (and
reestablished) players, were also watching
how Volkswagen AG (A-/Positive/A-2)
executes its plan to gain share in the U.S.
Volkswagen is underrepresented in the
U.S. market relative to its share elsewher
in the world. However, the company ha
made inroads: Its market share has grown
steadily over the past few years, to 3.8% o
the U.S. passenger car market at the end
of June 2012 from 2.4% in 2008
Following the opening of a new plant i
Chattanooga, Tenn., in 2010 (with 2,500
employees and a current capacity o
150,000 vehicles), the U.S.-made Passa
has been the focus of the company
efforts to gain share in the U.S. The Jetta
Touareg, Tiguan, and new Beetle models
manufactured in Puebla, Mexico, as wel
as the Audi Q5 and Q7 models, added up
to some 440,000 vehicle deliveries fo
Volkswagen in the U.S. in 2011, a 23%
year-on-year increase.
Volkswagen targets sales of 800,00
vehicles annually in the U.S. by 2018 (and million units for North America altogether
as part of the companys strategy 2018
multiyear plan. Its U.S. 2018 target would
represent roughly 5.7% of our estimate
2012 U.S. industry sales. But even allowing
for a higher level of industry sales in 2018
Volkswagens plans to raise share in th
U.S. market, and its potential effect on
other volume makers, should not b
underestimated.
In Europe, fierce competition and weake
sales make for a tough market
Standard & Poors Ratings Services CreditWeek | September 26, 2012 2
Metric For a potential upgrade Actual*
Adjusted debt/EBITDA 2.5x 3.6x
Automotive-related FOCF to adjusted debt(excluding voluntary pension contributions) 15% 6.5%
Automotive EBIT profit margins Mid-single-digit area for total automotive and 5.1%high-single-digit area for North America
Prospects for sustained liquidity at the automotive parent More than $30 billion $38.5 billion
*Leverage and cash flow ratios as of 2011. Margins and liquidity as of June 30, 2012. FOCFFree operating cash flow.
Table 3 | General Motors Co.Quantitative Metrics For A Potential Upgrade
Metric For a potential upgrade Actual*
Adjusted debt/EBITDA 2.5x 3.5x
Automotive-related FOCF to adjusted debt (excluding voluntarypension contributions) 15% 12%
Automotive EBIT profit margins Mid-single-digit area for total automotive and 4.9% totalhigh-single-digit area for North America
Prospects for sustained liquidity at the automotive parent More than $30 billion $33.9 billion
*Leverage and cash flow ratios as of 2011. Margins and liquidity as of June 30, 2012. FOCFFree operating cash flow.
Table 2 | Ford Motor Co.Quantitative Metrics For A Potential Upgrade
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Competition has become fiercer than
ever in the depressed European car
market, and all manufacturers are strug-
gling to preserve market share while con-
sidering how to cut excess production
capacity. General Motors (GM;
BB+/Stable/) Opel unit and Ford are
among the losers in share so far: Each
currently holds an 8% share of the EU
passenger car market, down from some
2 2 w ww. cr ed it we ek .c om
SPECIAL REPORT | Q&AFEATURES
Toyota Motor Corp. Honda Motor Co. Ltd. BMW AG Volkswagen AG Daimler AGAA-/Negative/A-1+ A+/Stable/A-1 A/Stable/A-1 A-/Positive/A-2 A-/Stable/A-2
The ability to extend or protect retail market share in key markets by offering high-quality products desired by customers
Toyota successfully reversed Honda is the third-largest BMW is among the global With a share of 12.3% in the The group boasts leadingdeclining market share in automaker in Japan, leaders worldwide in the global auto market on positions in the niche, butthe U.S. after massive recalls following Toyota and Nissan, luxury car segment. The Dec. 31, 2011, VW is the highly profitable, premiumand supply chain disruptions in terms of revenues in group has solid positions global leading auto maker in segment through its reputedfollowing the earthquake that fiscal-year March 2012. With in Europe and the U.S. terms of market share. The Mercedes Benz brand. Inseverely challenged the 9.8% market share during group enjoys sizable market addition, it has significantcompany. In Japan, Toyota the first eight months of shares in most of the markets positions in trucks/vans/continues to enjoy dominant 2012, the company has an in which it competes, buses, as well as in the smallshare. Toyota also maintains established position in the including leading positions city car segments. Daimlervery strong position in U.S. In the Japanese in China, Brazil, and most sales volumes reachedAssociation of Southeast domestic market, Honda European countries. Recently, record levels in 2011 on the
Asian Nations countries. has the second-largest share the group has consistently back of double-digit growthof 14.6% (including mini- gained market share in China, in emerging markets.vehicles) in the first seven North America, and inmonths of 2012. several European countries.
Frequency of model replacement; ability to meet shifts, o ften rapid, in consumer preferences and perceptions
We believe Toyota has Hondas robust positions in The group has a solid track- Thanks to its multibrand Daimler reported an overallproven its ability to anticipate global auto and motorcycle record of successfully portfolio, products offered good model turnover in theand meet shifting consumer markets reflect the strong launching new brands and are wide and cover all premium segment andpreference reflected in its competitiveness of Hondas products with a reputation market segments with a demonstrated a goodtrack record in keeping a products. Hondas multiple for high quality. For example, clear focus on new products capacity to meet customersstrong lineup of fuel-efficient global core models (Civic, BMW introduced the MINI development. To support its taste in emerging markets.cars. Toyota also has Accord, Fit, and CR-V) are brand and enlarged the global growth strategy,demonstrated its outstanding of particular strengths that BMW family of products Volkswagen plans toability to create and develop contribute greatly to the with the inclusion of SUV increase the number ofa hybrid vehicle segment. companys performance models. The new challenge model launches per year to
despite increasing compet- is the BMWi brand, created about 40 from 30.ition from other automakers. for the sustainable mobility.
The first model will be
launched in 2013.
Ability to limit sales incentives because of brand loyalty and success in differentiating product on the basis of quality, style, or other consumer-driven measures
Toyotas incentive spending Honda has a proven track In line with the characteristics Despite its large exposure to The group benefits fromhas consistently been below record in its reputation for of the premium segment, the European volume market, high brand loyalty andthe industry average. We quality, technology, and BMW benefits from high Volkswagen continues to higher margins in the
believe Toyota will likely design of its products in pricing and higher margins gain market share and to premium segment. Highcontinue to refrain from many global auto and than its peers in the command a premium price pricing for Mercedes Benzaggressive incentives, which motorcycle markets. volume market. on its volume brands, has recently been suppor tedshould help sustain its key supported by its high brand by a high share of large-models strong residual value. recognition with customers. cylinder and luxury cars sold
Successful growth of the in 2011, notably in thegroups premium (Audi) and Chinese market.entry (Skoda) brands in therecent past is also asupportive factor.
Ability to generate consistent profits in key portions of the product lineup (retail and fleet) under most volume scenarios,along with prospects for breakeven results or better during a significant market slump
Toyota has a strong ability to Honda shows a return to a The BMW auto division Volkswagen reported an Since a steep decline inconsistently reduce costs steady growth path, which reported 11.8% EBIT margin operating profit for its auto 2009, Daimler has graduallythrough improving operating the company had to give up at year-end 2011, which is division of 6.9% in 2011, which improved its profitability onefficiency and other temporarily in fiscal 2011 among the highest in the is well above the average of the back of improvingmeasures. Nevertheless, the because of natural disasters. auto sector. We do not European peers in the volume pricing and increasing unitextremely strong yen against Hondas global unit sales of expect this level to be market. The group is profitable sales. In 2011 the groupsmajor currencies continues automobiles have shown a sustainable, but we believe in most of its segment/ operating margin in the autoto weigh on Toyotas steady recovery and the that EBIT margin of 8% to geography combinations and division reached 9%, whichprofitability given its figure has improved to 10% through-the-cycle its premium segment (Audi is well above the Europeanrelatively large yen exposure. about 1 million units in would be commensurate and now Porsche, will average, reflecting the
recent quarters. with the cur rent rating. represent some 50% of group groups large share of profitearnings going forward) generated in the higher-reports measures as strong margin premium market.as BMWs. Exceptions areoperations in the U.S. and Seat.
Table 4 | Key Credit Factor Peer Comparisons For Companies Rated AA- To A-
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10% back in 2008 (according to ACEA,
the European Automobile Manufacturers
Association). Manufacturers with the
most exposure to southern Europe
namely Fiat SpA (BB-/Stable/B), Peugeot
S.A. (BB/Negative/B), Renault S.A.
(BB+/Stable/B), and the Japanese manu-
facturersalso experienced significant
declines during the first half of 2012. As
in the U.S., the Hyundai-Kia group is
gaining in Europe: Its share of the EU
market has almost doubled since 2008,
rising to 6% at the end of June 2012 from
3.4 % in 2008 (its U.S. share was 9% for
the eight months ended August 2012,
according to Wards AutoInfoBank). More
surprisingly, Volkswagen has also been
able to boost or maintain its market share
in several European countries while main-
taining a disciplined premium pricingstrategy across the continent. The com-
panys share of the EU passenger car
market has steadily improved since 2009
and stood at 23.3% at the end of June
2012, up from 20.6% in 2008.
Automa ke rs st rug gl e to cu t ex ce ss
assembly capacity in Europe. Ebbing
demand and excess production capacity
amid the eurozone crisis have battered
the European volume automakers,
leading to a discounting race among
these companies, along with operatinglosses and cash use. According to ACEA
data, total EU new-car sales totaled about
7.4 million vehicles at the end of June,
down 7.3% year-on-year (compared with
14.9 million vehicles in full-year 2011).
The overall decline to date masks con-
trasts between countries, however.
During the first half of 2012, car sales in
Germany and the U.K. remained broadly
flat (with upticks of 0.6% and 1.3%,
respectively), and most of the declines
were concentrated in southern Europe,
primarily Italy (with a 20.6% drop),
France (down 13.3%), and Spain (down
11.3%). Combined, those five countries
represent about three-quarters of the
overall EU auto market.
Our base-case outlook for full-year
2012 foresees no significant improve-
ment in demand in the European market.
In light of the weakening economies and
the austerity plans that several European
countries are adopting, we assume no
significant turnaround during the second
half of the year.
We now expect the Western European
market to decline roughly 6.5% to about
13.4 million vehicles in 2012, followed
by potential anemic growth of about
0.4% next year. Volume declines have
resulted in fierce pricing competition
and rendered some volume makers
unable to break even in their core auto-
motive operations.
In that context, the need to reduce
production capacity has returned to the
forefront of the industrys concerns.
Peugeot in France, Fiat in Italy, and also
Opel in Germany have all been vocal
about the need for a concerted effort to
shut down some capacity across Europe,
as the U.S. automakers did before and
during the 2008 to 2009 financial crisis.Ford has stated that the industry needs
to match capacity to demand, although it
has not yet commented on the timing of
any actions within Ford.
Estimates of excess capacity in
Europe vary depending on the study
and, as in the U.S., forecasts of the real-
istic levels of future sales vary as well.
With the big volume automakers
reporting capacity utilization rates below
80% for their main European operations,
we think excess capacity of at least 20%
is a safe estimate. The German manufac-
turers, however, have hardly suffered
from the depressed market so farif
anything, they have strengthened their
market shares. Much of this resilience
reflects their line-up of luxury products,
strong historical market share in the
better-performing German market, and
still-solid exports to China and other
regions. Not surprisingly, they have been
lukewarm about any concerted effort to
support capacity reductions under the
umbrella of the EU direction.
In our view, reducing capacity in Europ
is therefore likely to be a piecemea
(country- and company-specific), costly, and
politically tough process whereby capacity
will be shut down case-by-case, primarily
following individual carmakers initiatives
As such, we assume the timing, execution
and benefit of any actions will be uneven
Struggling Peugeot announced a restruc
turing plan in July that will lead to a ne
reduction of 8,000 jobs, primarily in France
and the closure of its plant in Aulnay (with
140,000-unit capacity) outside Paris
Peugeot will also cut capacity at its Brittany
based Rennes plant in the near future. Two
other manufacturers are undertaking simila
plans: General Motors has changed senio
management at its Opel/Vauxhall division
and earmarked the 130,000-unit Bochum
plant for closure, and Fiat shut down itTermini Imerese plant last year.
Altogether, we estimate the curren
planned reduction in European capacity to
be less than 600,000 vehicles, or less than
5% of current European production. Ford
has not announced how it will deal with it
overcapacity, but with the prospect of sev
eral more years of weak vehicle sales i
Europe, we believe the company will ac
with increasing decisiveness and commit
ment to restructure its European opera
tions to become profitable.
At the current pace of planned
capacity reductions, we think it will take
well into 2013, if not longer, to restor
healthy supply and demand in th
European mass marketeven if th
sales outlook for 2013 improved unex
pectedly. If sales in Europe do no
recover, as they have in North America
then excess capacity will persist longer.
Q. What impact would a hard landingfor Chinas ec onomy have on globa
automakers?
Standard & Poors Ratings Services CreditWeek | September 26, 2012 23
Reducing capacity in Europe is therefore likely to be
a piecemealcostly, and politically tough process
whereby capacity will be shut down case-by-case
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A. With Chinas dominance in the globaleconomy increasing, any domestic eco-
nomic setbackincluding slower-than-
anticipated growthcould reverberate
throughout the world. Our base-case
scenario for China calls for 8% economic
growth, while our hard landing sce-
nario (to which we assign a one-in-10
chance of occurring) calls for 5% eco-
nomic growth.
We think automakers and auto compo-
nent manufacturers in the U.S., Europe,
and Asia (outside China) would face lim-
ited credit risk from a hard economic
landing in China lasting one year or less,
despite some companies significant sales
exposure to the worlds largest auto
market. Ratings on some speculative-
grade auto component manufacturers in
Asia may be more vulnerable, however.
And if our hard landing scenario lasted
two years, some investment-grade and
strong speculative-grade companies in the
auto sector could also be at risk of down-
grades. (For more details on our views see
The Credit Overhang: Implications For The
Global Automotive Sector Of A Hard Landing
In China, published May 29, 2012, on
RatingsDirect, on the Global Credit Portal.)
Q. What would it take for Ford and GMto achieve investment-grade ratings?
24 www.creditweek.com
SPECIAL REPORT | Q&AFEATURES
Toyota Motor Corp. Honda Motor Co. Ltd. BMW AG Volkswagen AG Daimler AGAA-/Negative/A-1+ A+/Stable/A-1 A/Stable/A-1 A-/Positive/A-2 A-/Stable/A-2
Production capacity utilization across the companys manufacturing footprint, in light of typically high industry operating leverage
Not disclosed, but a strong Hondas disclosures on BMW has achieved high Disclosures on capacity Daimler boasts very highrebound in production from capacity utilization are limited. labor productivity in utilization are scarce, but capacity utilization rates whensupply chain disruptions However, the significant Germany, where the bulk of this has not been a drag on compared with Europeanindicates a return to high increase in Hondas autombile its manufacturing facilities is VWs earnings profile, unlike peers. The group reportedcapacity utilization. production in recent quarters located, through high southern European players. plant utilization rates of 95%
supports its capacity operating rates for plants and The ability to command a in early 2011 for its Mercedesutilization at a high level. an innovative labor price premium may offset Benz division.Hondas flexible manu- agreement that provides dips in capacity utilization.facturing system, relative to flexible work schedules and The launch of the newits peers, may also support the deployment of workers modular toolkit strategy mayits productivity and efficiency. among production facilities. also play a role in terms of
cost-efficiency.
The extent of brand, geographic, and product line diversification
We believe Toyotas Although Honda has achieved BMWs revenues are well- With nine brands and Daimlers revenues arediversity is one of the best some product diversification diversified by region, and several models marketed in geographically well diversified,among global peers, in in its Acura brand in the North the U.S., Germany, and all segments, and large and and Europe and Northterms geographic and American automobile market, China are the largest three wide commercial vehicle America represent the groupsproduct line. Toyota also it uses the Honda brand in single markets. The coverage, VWs product largest single markets. Thehas the premium Lexus other regions in automobile, enlargement of its product offering is unmatched truck and van division
brand. Moreover, Hino, motorcycle, and other range has positively reduced among European carmakers. supports product diversity. Wecommercial vehicle maker, products. In terms of the groups dependence on The group has recently expect auto markets inand Daihatsu, mini-vehicle geographic diversification, the Series 3 models. increased its exposure to the developing economies tomaker, are consolidated North America has been the premium segment through support growth andsubsidiaries of Toyota. companys largest market, the consolidation of Porsche profitability in the
with Asia catching up in and has augmented its medium term.recent years in sales and presence in the truckprofit contribution to the segment through thecompany. Strengths in hybrid acquisition of MAN in 2011.and other fuel-efficient In terms of geographictechnologies are other key diversification, VW enjoys afactors that support Hondas strong position in Asia and a
product diversity and strong growing penetration incompetitive position. North America.
The scale, profitability, and funding efficiency of vehicle finance capabilities, through a captive unit or partnerships because of significantreliance on financing availability for the vehicle distribution and sales process
Toyota has extensive Honda has 100%-owned BMW Financial services is Volkswagen owns 100% of Daimler incorporates a 100%captive finance operations captive operations in the U.S. the fully integrated captive Volkswagen Financial owned financial servicesglobally. Toyota manages and Japan. In the U.S., Honda finance division of the group. Services AG and its division, which manages theits captive finance operates captive finance It is ultimately 100% owned subsidiary Volkswagen Bank captive finance operations ofoperations in a conservative operations through American by BMW AG and operates GmbH, the captive finance the group.manner and maintains Honda Finance Corp. (AHFC). globally through various arms of the group.strong asset quality. AHFC is a wholly owned locally registered Performance of the captive
subsidiary of American Honda banking operations. is in line with but hardlyMotor Co. Inc. (AHMC), which better than the group average.is a wholly owned subsidiaryof Honda.
Table 4 | Key Credit Factor Peer Comparisons For Companies Rated AA- To A- (continued)
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A. Our BB+ ratings on Ford Motor Co.and GM are the highest weve assigned
to either company since May 2005, and
a one-notch upgrade would bring both
companies back to investment-grade.
We revised our outlook on Ford to posi-
tive in August 2012 but have stated that
an upgrade to investment-grade isnt
likely to occur until late 2013 at the ear-
liest. Our outlook on GM is currently
stable, so we dont see a one in three or
greater chance of an upgrade in the next
year. In the longer term, a restructuring
of its European operations for a return to
profitability, along with the evolution of
its U.S. Treasury ownership and long-
term capital structure, would be factors
for any eventual upgrade.
The U.S. light-vehicle market is recov-
ering, notwithstanding a cautious U.S.
economic outlook (including the so-
called fiscal cliff of early 2013), and both
companies have been generating profits
and cash flow in their North American
operations since late in 2009. However,
we would also look for sustainable prof-
itability in key markets outside of North
America to support an investment-grade
rating for either company. While other
factors could also support a higher rating
(see tables 2 and 3), sustainable, geo-
graphically diverse profitability is a char-
acteristic we often associate with invest
ment-grade global companies. On
reason we view diverse sources o
profits as an important credit factor i
that we anticipate the return, at som
point, of cyclicality (and volatility) in
sales and production in North America.
For Ford, beyond regaining contro
over its ability to be profitable in Europe
we will look for the following when con
sidering an upgrade:
The company sustains debt to
EBITDA of about 2.5x;
Pretax automotive profit to reach the
mid-single digits overall and the high
single digits for North America;
Standard & Poors Ratings Services CreditWeek | September 26, 2012 25
Hyundai Motor Co. and Kia Motors Corp. Nissan Motor Co. Ltd.BBB+/Stable/ BBB+/Stable/A-2
The ability to extend or protect retail market s hare in key markets by offering high-quality products desired by customers
HMC and Kias structural improvement in their product quality, such as fuel Nissan has been gaining market share in the U.S. and China in the pastefficiency and design, has led to a gain in their share in major markets such several years. In China, Nissans sales performance is remarkable despite itsas the U.S. and China over the past three years. Although the improved late entry, thanks to its strong lineup of fuel-efficient small cars, and strongquality is unlikely to suddenly deteriorate over the next one to two years, distribution network leveraging on its local partner.their market share is likely to moderate from the peak in 2011 because oftheir planned modest increase of production capacity.
Frequency of model replacement; ability to meet shifts, often rapid, in consumer preferences and perceptions
HMC and Kia served consumer preference and perceptions well, especially We believe that Nissan has demonstrated an ability to keep its productsince the weak economy in 2009. During that time, they focused on the lineup refreshed and that it is committed to actively introduce new models.small and medium car segment by launching several models whose fuel Nissan plans to launch 51 new models in its midterm business plan throughefficiencies are good and sales prices are competitive. As a result, they fiscal 2016.continued to gain market share during the period.
Ability to limit sales incentives because of brand loyalty and success in differentiating product on the basis of quality, style, or other consumer-driven measuresHMC and Kia are offering the fewest sales incentives in the U.S. among the Nissans solid profitability generation despite limited success in its premiumautomakers based on their much-improved brand as a result of better Infiniti brand reflects its ability to limit sales incentives because of itsproduct quality measures. success in maintaining a strong product lineup.
Ability to generate consistent profits in key portions of the product lineup (retail and fleet) under most volume scenarios,along with prospects for breakeven results or better during a significant market slump
HMC and Kia have generated an elite profit margin among global Nissan has demonstrated stronger resilience to an external environmentautomakers in the past three years during the ups and downs of the global than Toyota and Honda in the past few years. Nissan has been profitable inauto industry cycle. Still, both companies lack more long-term track records all the geographic segments, including Japan, for the past two years.to generate consistent profits.
Production capacity utilization across the companys manufacturing footprint, in light of typically high industry operating leverage
HMC and Kia have maintained more than 100% utilization rates in most It is not disclosed, but we believe Nissans robust sales performance andcountries in which they have manufacturing facilities over the past three solid automotive profit margins in the past three years indicate high capacityyears because of their good sales. Still, their Korean manufacturing facilities utilization overall.often undergo halts in manufacturing because of labor union strikes.
The extent of brand, geographic, and product line diversification
HMC and Kia have limited brand diversification without any subbrand such Nissan has good diversity in both geographic and product line. Nissan hasas a premium brand. However, their geographic sales and production better balance than most peers between sales and production in mostdiversification are good across the major markets such as U.S., China, regions. Nissan is further diversifying its brand by adding new brandsEurope, and India. Venucia in China and Datsun in emerging markets.
The scale, profitability, and funding efficiency of vehicle finance capabilities, through a captive unit or partnershipsbecause of significant reliance on financing availability for the vehicle distribution and sales process
HMC and Kia own the majority share of Hyundai Capital Services Inc. and Nissan operates captive finance operations and has maintained healthyfully own Hyundai Capital America, which serve HMC and Kias vehicle asset quality. While Nissan uses Renaults captive finance operations infinancing in Korea and the U.S., respectively. Still, HMC and Kias vehicle certain countries, Nissan provides financial services to Renault customers infinancing capabilities are relatively weak, albeit improving, given the small some countries.size of capital of the captive finance subsidiaries. HMC and Kia are likely toincrease the capital of the two captive finance subsidiaries given the parentsstrong financials and form partnerships to develop vehicle financingcapabilities in the regions other than Korea and the U.S.
Table 5 | Key Credit Factor Peer Comparisons For Companies Rated BBB+
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Liquidity at the automotive parent
remains above $30 billion;
Automotive-related operating free
cash flow totals about 15% of debt;
The company successfully manages
the evolving competitive structure of
the global auto industry, including
continuing to develop and produce
2 6 w ww. cr ed it we ek .c om
SPECIAL REPORT | Q&AFEATURES
Ford Motor Co. Renault S.A. General Motors Co. Tata Motors Ltd. Peugeot S.A.BB+/Positive/ BB+/Stable/B BB+/Stable/ BB/Positive/ BB/Negative/B
The ability to extend or protect retail market share in key markets by offering high quality products desired by customers
Fords traction with the Renault boasts a solid GMs U.S. light vehicle share Tata Motors commercial Peugeot is the second-consumer because it avoided market position in the small (excluding legacy brands) vehicle operations are largest player in Europe after
bankruptcy has helped its and midsize auto segments, has been fairly stable. Two expected to maintain Volkswagen in terms ofretail share since mid-2009, and in the entry segment of the top 10 selling vehicles dominant 60% market share market share. In Europe, the
but this effect is likely through Dacia. Selective for the first eight months of in the Indian heavy and light group has recently sufferedmoderating by now. Two of expansion in emerging 2012 were GMs. commercial vehicle market some market share loss,the top 10 selling vehicles countries (Mediterranean despite increasing driving down its share of thefor the first eight months of countries, Latin America, competition. Jaguar Land European auto market to2012 were Fords. and Russia) has been Rover, Tata Motors largest 12% at the end of first-half
sustained while fierce subsidiary, has slightly 2012 from 14.2% in 2010.competition has slightly improved its small market Outside Europe, Peugeot haseroded the groups market share in the luxury car heavily invested in China,
share in Europe. Its alliance market through its new and Russia, and Latin America,with Nissan is beneficial to refreshed launches. with moderate success inRenault in terms of joint R&D terms of volume gains, andspending, market coverage, so far no positive impactand model launches. whatsoever on earnings.
Frequency of model replacement; ability to meet shifts, often rapid, in consumer preferences and perceptions
We believe that Ford has Renault has demonstrated a We believe that GMs ability We believe Jaguar Land There has been positivedemonstrated an ability to sound overall capacity to to keep its product line up Rover still has to make product mix evolutions inkeep its product line up anticipate market trends. fresh has improved, and it is significant investments to recent years, with Peugeotsrefreshed, and that it is The group has gradually committed to bolstering its refresh its product lineup product offer graduallycommitted to bolstering its reduced its reliance on the car lineup while lessening its and launch new products. We moving upmarket. Recentlycar lineup to lessen its Megane and Clio models, reliance on light trucks. view the companys Evoque announced restructuringreliance on light trucks. The adding new model families model as a step toward the plans may hurt PeugeotsFord Fusion and Escape to its offerings. The value- company developing new market positions in thehave been top 10 selling offer models sold under the models to meet changing coming quarters.vehicles during the past year. Dacia brand, e.g. the Logan- consumer preference. In our
Sandero family and the view, Tata Motors broadDuster family, have been commercial vehicle portfolio
particularly successful. is well equipped to meetcustomer demands, thoughits passenger vehiclesegment is behind the curvein this aspect.
Ability to limit sales incentives because of brand loyalty and success in differentiating product on the basis of quality, style, or other consumer-driven measures
Ford has been able to Intense price competition in GM has focused on keeping The incentive levels for Sales in Europe continue toremain disciplined about the European volume incentives under control Jaguar Land Rover be depressed by the intenseincentive spending because market continues to hamper and believes it is on track to significantly fell in fiscal price competition fromof past cost reductions and sales and profitability. meeting this goal. A lower 2012 because of excess European peers anda renewed ability to keep its cost base is a significant demand and supply increasingly by Asianproduct lineup renewed. factor in meeting this goal. constraints. Jaguar and Land competitors. The ability to
Rover are established niche retain any premium pricingbrands. Tata Motors India on any model will likelybusiness incentive structure be tested in theis in line with the industry coming quarters.average, in our view.
Ability to generate consistent profits in key portions of the product lineup (retail and fleet) under most volume scenarios,along with prospects for breakeven results or better during a significant market slump
Ford has been profitable in So far Renault has reported We believe GM can be Jaguar Land Rover has After a rebound in 2010 andNorth America since the low but stable profits in profitable at its current U.S. improved its efficiency of first-half 2011, Peugeot hasthird quarter of 2009, and most regions and segments, industry sales volumes of operations over the past been generating losses fromwe believe the company with above-average earnings about 12 million unitsfar two yearswhich should its core automotivecan remain profitable at from its captive finance lower than before 2009. result in more stable profits, operations, largely as a resultcurrent U.S. industry sales operations. We expect also supported by good of its strong dependence onvolumesabout 12 million declining sales in Europe to demand. Tata Motors Indias the highly competitive andunitswhich are far lower weigh on the groups overall operations are cost- mature European volumethan before 2009. profitability in the competitive and the company market. The group, so far,
coming quarters. has generated profits even has failed to translate higherduring the global revenues outside itseconomic downturn. historical markets into profits.
Table 6 | Key Credit Factor Peer Comparisons For Companies Rated BB+ To BB
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products that appeal to U.S. con-
sumers, and faces reasonable
prospects for profitability in devel-
oping markets, such as China; and
Ford Credit continues to be profitable
and demonstrates underwriting stan-
dards consistent with an investment-
grade rating.
For both companies, the challenges to
profitability outside of North America are
substantial. In Europe, the combination of
excess assembly capacity and recession-
like economic conditions are leading to
losses for almost all the volume
automakers there. We assume losses in
Ford and GMs European operations are
likely for at least a part of 2013, if not the
entire year (which contributes to our view
that a Ford upgrade isnt likely until at
least late 2013, assuming visibility into2014). In Latin America, especially Brazil,
trade restrictions and capacity additions
are creating challenges in the large
automakers established footprints. In
China, we assume sales will grow in the
upper single-digits this year. However,
Fords market share there is modest,
although the company is investing to
expand capacity. Ford China reported
that sales in the country were up 8% for
the first eight months of 2012, to 368,513,
compared with about 1.5 million in theU.S. for the same period. So the develop-
ment of sales in China sufficient to signifi-
cantly benefit Fords profit diversity will
be a matter of time and execution. GMs
presence in China remains strong.
Q. Could the French and Italianautomakers fall into the B category?
A. Following the downgrades of FiatSpA and Peugeot during the first part of
2012, some investors are wondering to
what extent further downgrades are pos-
sible, and at what point we would con-
sider the B category appropriate for the
three southern European volume
makers, namely Peugeot, Fiat, and
Renault. Fiat and Renault currently have
stable outlooks, so a downgrade in the
next year is not part of our current base
case. The negative outlook on Peugeot
indicates a one in three chance of a
downgrade over the next year.
In our view, these companies size and
diversification, their solid presence in sev-
eral markets outside Europe, and their
substantial share of the European car
market (which, though depressed, is still
bigger than the U.S. market) are anchor
points for their business risk profiles,
which we currently assess as fair. All
three companies also benefit from some
market positions outside Europe (e.g., in
Latin America for Fiat and the
Mediterranean countries for Renault),
harbor a fairly wide and well-accepted
product range, have good prospects for
compliance with tightening emission stan-
dards, and are all partners in wider
alliances to various degrees (Fiat through
majority-owned Chrysler, Renault through
43%-held Nissan and a more limited
working agreement with Daimler, and
Peugeot through GMs recent subscription
of a 7% equity stake in the company).Profitability is the key issue for all
three players. Peugeot is currently the
worst performer, with a negative 3.7%
operating margin in its core automotive
operations for the first half of 2012.
Renault and Fiat are currently breaking
even, but non-European operations are
supporting Fiat. A more pronounced
upturn in European profitability will
prove challenging, in our view, given
that German competitors remain
unwilling to take part in any concerted
capacity reduction.
Still, all three players are facing this
new round of crisis with relat ively
healthy balance sheets, adequate liq-
uidity, and long debt maturity profiles. So
far, we think these companies have con-
tinuing access to the capital markets and
bank funding, even if the cost of such
access has risen.
The ability to generate positive free
cash flow from operations (FOCF) is the
key differentiator among the three com
panies. Renault is the clear leader in thi
regard, generating positive FOCF in
2011 and likely to do so again this year
FOCF was negative for Fiat last year and
is likely to break even at best this year
while Peugeots FOCF was significantly
negative in 2011 and is likely to be even
worse in 2012; moreover, there is no sign
of a return to break-even cash flow fo
Peugeot in 2013.
Our current ratings assume that both
Fiat and Peugeots FOCF will turn posi
tive by 2014 at the latest. If we conclud
that such a turnaround is out of reach
we would consider downgrades to th
B category.
Q. What are the biggest challengefacing the Japanese automakers in thei
recovery?
A. Japanese automakers have beentrying to turn their businesses around in
fiscal 2012, as they did in fiscal 2011 to
recover from the effect of the Great Eas
Japan Earthquake and tsunami
However, these companies face a
number of obstacles, including the yen
appreciation, a potential global economi
slowdown, and intensifying competition.
Despite the strong yen, profits fo
Japans auto industry have rebounded
since the beginning of 2012 due to a rapi
recovery in production and sales. We
think profits for Japans auto industry wil
likely continue to recover in step with
improvements in the business environ
ment. We expect global vehicle sales to
rise overall in 2012 but that economi
conditions will vary by region. We expec
demand in North America to continue to
rebound and assume slower but still posi
tive growth in emerging markets, such a
China. We see demand in Europ
Standard & Poors Ratings Services CreditWeek | September 26, 2012 27
We think profits for Japans auto industry will likely
continue to recover in step with improvements in the
business environment.
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declining more significantly in 2012 than
in 2011. In the U.S.the biggest profit
source for many Japanese automakers
light-vehicle sales increased almost 15%
year-on-year during the first eight months
of 2012. Strong performance in the U.S.,
where Toyota and Honda Motor Co. Ltd.
(A+/Stable/A-1) regained market share,
drove the recovery in profitability for the
quarter ended June.
On the other hand, the strong yen con-
tinues to weigh heavily on Japanese
automakers earnings and undermines
their global competitiveness. Although
the rated Japanese automakers have
generally enjoyed a significant rebound
in production and sales in recent months
and a recovery in profit margins, their
resilience to the strong yen varies based
upon how much production capacity
they have outside of Japan. We believe
the ability to achieve stronger profits
through increased sales volumes despite
unfavorable exchange rates will be a key
factor for Japanese automakers credit
quality. In our view, Toyota is likely to
retain its strong financial standing, but
the ratings may come under further pres-
sure if the company is unable to boost
profits sustainably.
Q. How sustainable is Hyundai-Kiastrack record of share gains and solid
financial performance?
28 www.creditweek.com
SPECIAL REPORT | Q&AFEATURES
Ford Motor Co. Renault S.A. General Motors Co. Tata Motors Ltd. Peugeot S.A.BB+/Positive/ BB+/Stable/B BB+/Stable/ BB/Positive/ BB/Negative/B
Production capacity utilization across the companys manufacturing footprint, in light of typically high industry operating leverage
It is not disclosed, but Fords With a global capacity It is not disclosed, but we Jaguar Land Rovers During first-half 2012,N.A. profitability indicates to utilization rate of about believe GM is high in the U.S. capacity utilization has Peugeot reported a Europeanus that utilization should be 87% in 2011 (only about (based upon profits) and too significantly improved over capacity utilization rate ofmore than 80%. With losses 64% in Europe), Renault low in Europe (based on the past two years, and the 76%, a historical low.in Europe, we assume compares positively with losses). We assume some company is facing supplycapacity utilization is far direct peers in the European actions will eventually occur constraints on some of itstoo low. volume market. Renault in Europe. assembly lines. Tata Motors
has moved faster in moving Indias operations haveproduction out of high- traditionally maintainedcost Western Europe healthy capacity utilization,(e.g. to Romania, Turkey, though it occasionally cutsBrazil, or Morocco). production to manage
retail and wholesaleinventory levels.
The extent of brand, geographic, and product line diversification
Fords geographic diversity Renault has been able to GMs diversity of sales and Tata Motors geographic The group has average brandis not as good as GMs achieve some product product is the best among diversity is lower than most and geographic
because its presence in Asia diversification through its the U.S. automakers and at global peers. Tata Motors diversification. The group hasand South America is more three brands: Renault, Dacia, least as strong as the other Indias sales are almost two brands: Peugeot andlimited. Its product diversity and Renault Samsung large global volume entirely in the domestic Citroen, which target theis equivalent in the key Motors. In terms of automakers. But losses in market, though with a wide same market segments.North American market. geographic diversity, Renault Europe and weakness in product range across most Geographic diversification isIts ability to return to is still reliant on Western South America reduce segments. Jaguar Land too limited, with 73% of theprofitability in Europe could Europe, accounting for the benefits of Rover has moderate groups revenues generated in
be somewhat better than approximately 58% of its geographic diversity. geographic diversity but Europe. Some benefits stemGMs, although this remains unit sales and 70% of its weak product diversification. from the consolidation ofto be determined. revenues in 2011. Faurecia (auto parts) and
BPF, the fully owned captivefinance subsidiary.
The scale, profitability, and funding efficiency of vehicle finance capabilities, through a captive unit or partnerships because ofsignificant reliance on financing availability for the vehicle distribution and sales process
Ford has maintained full Renault owns 100% of RCI GM operates a captive but Tata Motors commercial Peugeot owns 100% of BPF,ownership of traditional Banque, which provides still fairly small scale unit vehicle operations are well which provides financing forcaptive finance unit Ford financing for Renault dealers though its growing. GM supported by its captive PSA dealers and retailMotors Credit LLC. It plans and retail customers in continues to use Ally and finance subsidiary. Because customers in PSAs major autoto increase leverage of Renaults and some of others for various financings, of good resale value, Tata markets. BPF represents acaptive as its ability Nissans major markets. RCI wholesale, and retail but commercial vehicles also substantial, relatively stableto diversify funding Banque provides Renault seems to be increasingly have diverse third-party source of earnings and cashchannels increases. with a substantial, relatively committed to expanding GM financiers providing vehicle flow for PSA.
stable source of earnings and Financial to other aspects of finance to customers. Jaguarcash flow not directly tied to auto finance beyond Land Rover doesnt havethe auto industr y cyclicality. subprime auto. captive finance operations
and is reliant on third-party funding.
Table 6 | Key Credit Factor Peer Comparisons For Companies Rated BB+ To BB (continued)
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A. As we expected after our upgrades inMarch 2012, Hyundai and its Kia sub-
sidiary have maintained sound financial
risk profiles, owing in large part to their
good market positions (9% U.S. share, up
from to 5.1% in 2008) and solid profitability.
Still, we see some challenges emerging that
could hamper further improvement. For
example, the companies are likely to fall
short of our prior expectation of around a
9% combined share of the global auto
market in 2012 (versus 8.7% in 2011 and
8.1% in 2010). The companies also face
hurdles to further improvements in prof-
itability, such as various cost increases,
including for labor and utilities; weak
domestic demand for vehicles; and rising
sales of imported cars in Koreas market.
Nonetheless, we believe the compa-
nies solid progress will support stable rat-
ings this year. (For more information, se
Credit FAQ: How Sustainable Are Hyunda
Motor And Kias Gains In Market Share And
Profitability? published Sept. 17, 2012.)
Q. How do the rated automakers compare on selected key credit factors?
A. We compared similarly rated companies using a number of key credit factor
Standard & Poors Ratings Services CreditWeek | September 26, 2012 29
Jaguar Land Rover PLC Fiat SpA Chrysler Group LLC Mitsubishi Motors Corp. Aston Martin Holdings (UK) Ltd.BB-/Positive/ BB-/Stable/B B+/Stable/ B+/Stable/ B+/Negative/
The ability to extend or protect retail market s hare in key markets by offering high-quality products desired by customers
JLR is made of two The group lags somewhat Chryslers light vehicle share Although Mitsubishi Motor Aston Martin is a leader incompanies, Jaguar and Land behind its direct competitors is more heavily weighted to Corp. (MMC) has limited the niche segment forRover, and both compete in in terms of market share in light trucks, so the presence in the major high-end luxury sports cars.
the auto premium segment. Europe (8% of the European companys share is more vehicle markets, it has With sales volumes of aboutLand Rover (LR) has a strong market). This weakness is exposed as gas prices relatively good positions in 4,000 units, market sharestechnological recognition in partially mitigated by the fluctuate. One of the top 10 ASEAN countries with the relative to other players arethe off-road passenger cars. groups leading position in selling vehicles for the first strong Mitsubishi brand. not meaningful.
Brazil (20% market share) eight months of 2012 MMC is one of the firstand by its expansion in the was Chryslers. mass producers of electricU.S. following the June 2011 vehicles, but it appears toconsolidation of Chrysler. take time for the market to
meaningfully expand givenvarious challenges.
Frequency of model replacement; ability to meet shifts, often rapid, in consumer preferences and perceptions
JLR has a limited range of Managements decision to Chryslers product line under Because of its limited size The company has a provenproducts when compared limit investments in new Fiats direction is evolving, and resources, MMC track record for designingwith its largest peers. modelsalthough beneficial but its ability to lessen its concentrates its business high-end and bespoke luxuryHistorically, the average life for cash flow in the near reliance on light trucks and resources in emerging sports cars that sets theof its LR products is higher termmay undermine the improve its standing with markets and environmental company somewhat apartthan average. The group has groups model diversity and consumers is still a work in initiatives. Although MMC from other premium makers.an ambitious model growth competitive position in the progress, in our view. has been active in
plan and the first new longer term. There has been introducing global smallproduct, the Range Rover limited success for Chryslers models and expanding SUVEvoque, has been well revamped products in lineup in emerging markets,received across Europe. Europe so far. it has decided to discontinueRebranding of Jaguar is region-specific models in thetaking more time. U.S. and Europe.
Ability to limit sales incentives because of brand loyalty and success in differentiating product on the basis of quality, style, or other consumer-driven measures
JLR benefits from a very While fast-declining in Chrysler reports that We believe MMCs ability to Aston Martin has strongspecific positioning of its Europe and Italy (a market average transaction prices limit incentive is high in brand recognition and highLR products: it is able to that experienced a double- have been fairly stable since ASEAN countries because of premium pricing policy. Itimpose a premium price on digit fall during the first half first-quarter 2011 and that its strong market position nevertheless suffers frommost of its models. Jaguar of 2012), consolidated average incentives have with strong brand strong positioning andis perceived as a luxury revenues are supported by been fairly stable as well. recognition. However, in the growing market shares of
brand but the brand appeal Chryslers robust performance U.S. or other established German brands in theis not yet as strong as it in the U.S. and sustained flows markets, MMCs weak sports cars segment.could be. from Latin America, Fiats presence and limited product
luxury segment (Ferrari), and pipeline likely limit
auto parts. such ability.Ability to generate consistent profits in key portions of the product lineup (retail and fleet) under most volume scenarios,
along with prospects for breakeven results or better during a significant market slump
JLR is taking advantage of Although loss-making in Chrysler has reduced its MMC has been unprofitable Aston Martin maintainedthe positive momentum in Europe, consolidated fixed costs significantly and in North America and positive operating profitglobal demand for premium earnings are supported by has reported profitability in Europe where it suffers from (EBIT) in 2009 when volumecars and its new products. Chryslers recently robust North America since the excess capacity and a strong dropped 48%. Since then,Unit sales are increasing, operating performance in the first quarter of 2011. yen. On the other hand, operating profitabilityand it has maintained its U.S. and sustained flow of Although we believe the MMC has been consistently deteriorated despitereported EBITDA in fiscal earnings from Latin America, company can remain profitable in Asia and posted improving volumes. A cost2011 and first-half 2012 at Fiats luxury segment profitableat U.S. industry double-digit EBIT margin in reduction program initiatedabout 15%. (Ferrari), and auto parts. sales volumes about 12 the past two years. in late 2011 may start
Excess capacity remains an million unitsits track bearing some fruit in 2012.ongoing issue for Fiats record is l imited,European operations. but growing.
Table 7 | Key Credit Factor Peer Comparisons For Companies Rated BB- And Below
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(KCF) to provide investors insight into
each companys relative positioning (see
tables 4 through 7). The KCFs we selected
are each an input we analyze in deter-
mining a companys business risk profile.
Specifically, we compared:
AA or A category BMW, Toyota,
Honda, Daimler, and Volkswagen;
BBB category Hyundai-Kia and
Nissan;
BB+ or BB rated Ford, GM,
Peugeot, Renault, and Tata; and
BB- and lower-rated Aston Martin,
Chrysler, Fiat, Jaguar, and Mitsubishi.
Q. What is the relationship between yourratings on Fiat and Chrysler? When
could these ratings converge?
A. Although Fiat has a majority own-ership stake in Chrysler, and we ana-
lyze some aspects of the companies on
a consolidated basis, we do not cur-
rently align our ratings on the two
companies. The financing agreements
are separate, there is still a substantial
minority stake, and the operational
integration is a work in progress.
However, we dont expect the one-
notch gap between BB- rated Fiat and
B+ rated Chrysler to increase, and the
ratings could well equalize. For
example, in addition to a performance-
driven upgrade or downgrade of one
or the other company, the ratings could
converge because of further opera-
tional and ownership integration, even
if Fiat were to maintain less than a
100% ownership stake in Chrysler.
We consider Fiats core operations
and Chryslers when determining Fiatsbusiness risk profile, which we continue
30 www.creditweek.com
SPECIAL REPORT | Q&AFEATURES
Jaguar Land Rover PLC Fiat SpA Chrysler Group LLC Mitsubishi Motors Corp. Aston Martin Holdings (UK) Ltd.BB-/Positive/ BB-/Stable/B B+/Stable/ B+/Stable/ B+/Negative/
Production capacity utilization across the com