Fitch Ratings says in a special report that the outlook for Europe's automotive industry continues to remain difficult over the next 18 months, as it experiences one of its deepest ever downturns. However, not all companies will be affected to the same extent, as reflected by the agency's ratings of the sector.

"The main differentiating factors between the lowest- and highest-rated groups include the extent of product and geographical diversification, recent and expected market share developments and product positioning, strength of financial profiles entering the recession, and Fitch's expectations of the relative "exit" profiles of manufacturers from the current downturn," says Emmanuel Bulle, Senior Director in Fitch's European Corporates group. "These expectations include increases in leverage and the capacity to take advantage of a return to trend levels of economic growth, and a company's ability to implement further cost-savings and restructuring measures, and to curb investments and capex."

Fitch's recent rating actions reflect expectations for weak macroeconomic growth and a sharp industry contraction for the remainder of 2009 and 2010. Lower consumer spending and confidence are likely to pressure new vehicle sales and the sector's product mix, as consumers increasingly opt to purchase cheaper vehicles which are less profitable for manufacturers. Fitch is also growing increasingly concerned about the high risk of a pay-back effect on new vehicle sales when various incentive schemes, which are currently being offered in several countries stop and/or when demand for incentivised purchases declines.

Fitch believes that weak demand and lower sales will exacerbate the general overcapacity of Europe's auto industry, and lead to forced restructurings and strategic decisions. However, rationalisation and restructuring will not be immediate, and may take a few years. The agency also believes it will be costly and weigh further on companies' earnings and cash flows, as charges will not be only related to accounting but also have a cash impact. Financial support, potential cash injections into distressed suppliers or more favourable payment terms are also likely.

Manufacturers' financial structures have already been severely impacted and Fitch expects further volatility of, and stress on, financial profiles (as captured in its recent prospective rating actions on the sector), notably profitability, cash generation and leverage. The role, and potential support, of governments and European institutions remains uncertain. Several governments have already shown their willingness to intervene and provide implicit or explicit support, through guarantees, loans, or scrapping incentives. However, the impact of such support should not be overestimated as it may be conditional, nor will it be equal for all groups, and will not last indefinitely.

Against this backdrop, the auto industry still benefits from strengths and opportunities, including long-term growth prospects. Despite the saturation of a number of developed markets, worldwide growth in vehicle sales should be supported by emerging markets demand, continuous demographic expansion, and the lack of substitution products. The significant and pivotal importance of the auto industry in several countries and regions from a strategic, economic, political and social perspective provides further support to the auto sector as a whole.

On 24 March 2009, a Fitch portfolio review led to Daimler AG's ratings being affirmed at 'BBB+'/'F2', whilst its Outlook was revised to Negative from Stable; Fiat S.p.A.'s and Peugeot S.A.'s (PSA) ratings being downgraded to 'BB+'/'B' from 'BBB-'/'F3' respectively; and Renault SA's rating being downgraded to 'BB' from 'BBB-'. The Outlooks on Fiat, PSA and Renault are Negative. In addition, Volkswagen Group's ('BBB+'/'F2') ratings remain on Rating Watch Negative.