From The Detroit News.
DETROIT — The outlook for U.S. auto suppliers will remain gloomy this year even as Detroit automakers introduce important new models, steel prices fall from record highs and consumer spending on new cars and trucks stays strong, according to a new report from Wall Street credit ratings agency Standard & Poor’s Corp.
While the situation could improve slightly in 2006, major suppliers in the near term are likely to post weaker profits and see more credit downgrades as industry challenges continue.
The grim forecast comes as more bad news to a U.S. supplier industry that has been hit hard since the second half of 2004 by high raw material costs and production cuts at General Motors Co. The industry’s downturn has led to a parade of bankruptcies and has planted doubts about the future of thousands of jobs in Michigan.
But underlying the forecast is more bad news: Market share losses at GM and Ford are going to continue as consumer tastes shift away from large and midsize SUVs.
Suppliers that are too heavily tied to the automakers will keep suffering unless they can find replacement business with foreign automakers.
“We’ve seen production adjustments in the past,” said Martin King, an analyst with S&P. “But the market share losses of Ford and GM have raised our concerns that this time demand may have permanently shifted to a new lower level.”
In May, S&P downgraded GM and Ford to “junk” status in a move that sent shock waves through Detroit. The agency has also downgraded 25 parts suppliers this year.
The firm warned that more suppliers — including Lear Corp.and American Axle & Manufacturing — could be downgraded in coming months as uncertainty continues over GM and Ford production levels, cash flow concerns mount and companies contend with still-high costs of fuel, resins and other commodities.
Suppliers should benefit in 2006 as Detroit automakers increase production due to new model launches, as well as from lower steel costs, which so far haven’t helped suppliers because many contracts set prices through the end of the year. But S&P is “highly skeptical” Ford and GM can reverse market share losses, which could leave many suppliers with excess capacity.
“Reducing capacity can be a bitter pill, usually requiring layoffs, production shifts and sizable cash outlays,” King said.
On Thursday, S&P said it was considering an upgrade for Visteon Corp., which recently launched a restructuring plan that will send 24 unprofitable plants back to Ford, the supplier’s former parent. The firm also upgraded Evansville, Ind.-based Accuride Corp.
Yet there will be more bad news than good in the weeks ahead, with second-quarter earnings expected to be “very weak” and third-quarter earnings traditionally low due to summer plant shutdowns for model changeovers, King said.
The S&P forecast countered a report on Thursday from Wall Street equity firm Lehman Bros., which lifted its view of the North American automotive sector from “neutral” to “positive” on the belief that stabilizing production levels and steel costs will entice investors back to auto company stocks.
Other Wall Street firms have also been more optimistic about automotive stocks in recent weeks after GM increased sales by nearly 50 percent in June with a promotion that offers all buyers employee prices. Ford and DaimlerChrysler AG’s Chrysler Group matched the deals with employee-pricing programs of their own for July.
Moody’s Investors Service, expressing doubt that stepped-up sales drives will help suppliers out of what it sees as a structural problem, also reiterated its negative outlook on the North American auto supply sector on Thursday.
While industry sales remain strong and near historic highs, Moody’s, like S&P, said many suppliers still remain vulnerable because of a heavy reliance on business from Detroit’s Big Three, pricing pressures and soaring raw material costs.
Suppliers with significant health care and pension costs will also struggle to stay competitive.
“In this environment,” said Moody’s analyst Ed Wiest, “further restructuring and potentially even downsizing of the North American auto parts supply sector is inevitable.”
Copyright 2005 The Detroit News. All Rights Reserved.
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