Car manufacturers learned the lessons from H208 when inventories were at a record level and led to a cash haemorrhage from working capital needs. They are now managing their working capital cycles much more efficiently and several groups have already pre-emptively taken measures to slow or cut production at an early stage and avoid further stockpiling. Drastic and sudden cuts in production leading to under-absorption of fixed costs are therefore unlikely.
A structural difference from 2008-2009 is the leaner cost structure enjoyed by all manufacturers. Carmakers have spent the past two years saving costs, downsizing or cutting production capacity in Europe, working on more efficient processes and increasing the share of flexible staff. Temporary workers represent between 10% and 15% of car manufacturers' total workforces, leading to an easier adjustment if necessary.
In addition, geographic diversification is broader in 2011 than it was in 2008 and several groups, in particular Renault SA ('BB+'/Stable) and PSA ('BB+'/Positive/'B'), are now somewhat less dependent on western Europe, where Fitch sees the highest risk of a slowdown - or lack of recovery - in sales in Q411 and 2012.
Liquidity across the sector is also substantially higher at present than it was at end-June 2008 at the onset of the sharp decline in new vehicle sales. Manufacturers' cash and cash equivalent were 50% to 70% higher at end-June 2011 than at end-June 2008 (except for Fiat Spa ('BB+'/Rating Watch Negative/'B'), excluding Chrysler, for which gross liquidity was approximately three times higher). In addition, virtually all manufacturers have fulfilled their refinancing needs for the remainder of 2011 and 2012. Even financial services operations could operate for six to 12 months without any access to capital markets, according to manufacturers.
Nonetheless, Fitch cautions that the environment has deteriorated since the summer with declining consumer and corporate confidence in several European markets. The ongoing sovereign debt crisis in Europe, as well as concerns about a potential economic slowdown in other markets have prompted the agency to revise its expectations for several European manufacturers' revenue, underlying profitability and cash generation in 2012. These projections are based on Fitch's assumptions that the western European market will be down 0.5% in 2011 and will remain flat to modestly up 0.5% in 2012. This is somewhat worse than the agency's assumptions at end-June 2011 of 1% growth in 2011 and 3% growth in 2012
At the Frankfurt Auto Show, most manufacturers confirmed that they have not yet seen any concrete sign of a slowdown, as order books - including in Europe - remain stable and solid. European sales were robust in August compared with last year but Fitch cautions that these figures chiefly reflect orders booked before the summer. Sales in Q411 will be more representative of the trend going into 2012.
In this context, Fitch believes that premium manufacturers BMW and Daimler AG ('A-'/Stable/'F2') as well as Volkswagen Group ('A-'/Stable/'F2') are the best positioned to cope with an expected slowdown in sales. The latter should benefit from its broad product and geographic diversification, while BMW and Daimler should enjoy the relative higher resilience from the premium automotive market, especially from demand coming from emerging markets.
