Auto sector headed for repeat failures, report says
Fitch: 'Boom and bust cycles without the boom'
November 23, 2009 - 4:01 pm ET
NEW YORK (Reuters) -- The U.S. auto industry may be caught in an "airline-style" cycle of repetitive bankruptcies because of weak sales and a glut of production capacity, Fitch Ratings said today.
High fixed costs, the lengthy periods required to develop new products and chronic overcapacity will leave the industry "littered with failures -- plants, product lines, brands and companies," Fitch said in a report.
Like the airline industry before it, the auto sector, including suppliers, will grapple with "boom and bust cycles without the boom," Fitch said.
Even in peak conditions, companies will not generate enough cash to repair their balance sheets, leaving them vulnerable to severe financial stress in downturns, the agency said.
The Fitch report was one of the rating agency's starkest outlooks yet on an industry battered by recession, slow-selling products and crushing labor and retiree costs.
Fitch is forecasting a 7.8 percent rise in U.S. light vehicle sales next year to 11.1 million units. Even that rebound, however, will leave much of the industry burning cash in 2010, the agency said.
With about $125 billion in government support already doled out for the auto industry, more aid may be extended given the prospect for weak sales, Fitch said. General Motors and Chrysler, which were both restructured with government capital, will not be in a position to access the equity markets in 2010, Fitch said.
"A number of suppliers have emerged from bankruptcy with untested business models and capital structures, which have and may result in double-dip bankruptcies," Fitch said. "The manufacturers could also fall into the same pattern."
Moreover, a double-dip recession or spike in gas prices could halt any market improvement, the agency said.
Ford Motor Co., the only automaker not to receive a government bailout, has improved its liquidity and addressed refinancing risk, Fitch said. Its access to bank loans, unsecured debt and the equity markets for now give it a competitive advantage over Chrysler and GM, Fitch said.
"Ford is best positioned from a production and product standpoint to further strengthen its balance sheet," while GM and Chrysler are still restructuring and face a more difficult road toward independently access capital, Fitch said.
Cash-for-clunkers, a government auto scrapping program meant to bolster sales, had a negligible impact on sales volumes this year but has helped improve the used car market by getting rid of older vehicles, Fitch said.
The program also pulled forward some demand, generating some much-needed revenue for the crippled supply base, likely forestalling even more supplier bankruptcies, Fitch said.
