IMGCAP(1)]
Weak sales and too much production capacity may push the U.S. auto industry into an "airline-style" cycle of repeat bankruptcies, according to Fitch Ratings.
Like the airline industry, the auto sector - including suppliers - will wrestle with "boom and bust cycles without the boom," Fitch said in a report.
Chronic overcapacity, extended periods needed to develop products and high fixed costs will leave the industry littered with failures, impacting plants, product lines, brands and companies, the report continued.
The outlook was one of the rating agency's starkest reviews yet on an industry battered by recession, slow-selling products and crushing labor and retiree costs. 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.
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.
Fitch is forecasting a 7.8% 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 GM.UL 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."
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.
