Got Fitch’s latest outlook on the auto industry. Frankly it’s not that good. I’m not sure what I can share/not share from the release, so I’ll try and hit the highlights here. If you want more, you can always go to their site here and sign up for updates.
At any rate, they really tackle a couple of key, hard-hitting themes when it comes to the outlook. First, was the forecast for 11.1 million in unit sales. How does that compare to the historic average? Abysmal. Over the last 20 years, sales have averaged 15.7 million units (courtesy of Ward’s).
Which rolls right into the next big point – negative cash flow. They didn’t discuss how they calculated that, but it’s safe to say they used a standard metric like free cash flow (FCF). FCF is defined as the following:
There won’t be a lot of new CapEx (no new plants being built and most auto manufacturers are not under capacity, they’re over capacity), there will be some level of working capital expenditures, but what it’s going to boil down to is too little income to go around between all of the players. The market is contracting. Which is why the estimated $125Bn spent on TARP, TALF, cash-for-clunkers, and other government programs were a waste. It was never going to stop the free-fall in net income for the industry, and it didn’t even stop GM from losing money and asking for more government money. Ford probably got some benefit from suppliers staying in business via supplier guarantees & other forms of assistance, but Ford is on the mend without government aid.
Also, negative cash flow for Chrysler and GM means no capital market access so all of that talk of an IPO? Total fail.
As for the companies that are left (i.e. the Japanese & Korean manufacturers), there will be a smaller market to fight for so there’s no more easy money to be made by grabbing more market share. There may be a few more points left over to take from GM and Chrysler, but there won’t be much more.
The one other takeaway? Unfunded pension liabilities. The loss in the value of pension assets will make funding the future pension liabilities that much tougher. And those liabilities continue to grow while the auto companies continue to conserve cash by reducing their contributions to the minimum amount allowed by law or contract. It seems to me this an area the government could actually help by restructuring the liabilities of GM and Chrysler which in turn would give Ford the wiggle room it needs to restructure these liabilities. Because these have the potential to bring the industry down.
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