A report issued by independent global credit rating firm, Fitch Ratings, finds that U.S. automakers may face a future fraught with repetitive bankruptcies caused by weak demand and excess production capacity.
In its annual auto industry outlook, the Fitch report predicts that high fixed operating costs and the length of time required to develop and bring new products to market may leave the domestic auto industry “littered with failures — plants, product lines, brands and companies.”
“While economic recovery is looming in the US, Fitch expects a much longer, drawn-out sales recovery for autos in 2010,” the report says.
The Fitch report goes on to compare the state of the U.S. auto industry to the commercial airline industry and paints a gloomy picture of “boom and bust cycles without the boom.” Even assuming ideal market conditions, the report claims Detroit’s Big 3 will not be able to generate sufficient revenues to repair the damage done this past year and will be vulnerable to financial stress.
The report forecasts a 7.8% gain in domestic light vehicle sales in 2010 to 11.1 million units. However, that increase will not be enough to keep automakers in the black.
Given the weak sales forecast, Fitch predicts that U.S. automakers may need additional federal aid and that Chrysler and GM will not be in a position to tap the equity markets next year. To date, the federal government has injected $125 billion into the U.S. auto industry.
The Fitch report says, "A number of suppliers have emerged from bankruptcy with untested business models and capital structures, which have and may result in double-dip bankruptcies. The manufacturers could also fall into the same pattern."
The agency also warned that escalating gas prices or a double-dip recession could also damage the industry’s prospects for a sustained recovery.
Of the three major domestic automakers, the Fitch report claims that Ford Motor Company’s access to financing (both secured and unsecured) and to equity markets makes it the best positioned to compete in the rapidly changing marketplace. It concludes that Chrysler and GM’s protracted restructuring processes make it more difficult to access the capital needed to remain operational.
Fitch’s assessment of this year’s federal Cash-for-Clunkers program is that it had a negligible effect on sales of new vehicles. It did, according to the report, improve the market for used vehicles by eliminating much of the supply. The report goes on to state that, although the long-term benefits of the program for automakers fell short of some expectations, it likely helped some suppliers avoid bankruptcy.