Cars, for Moody's recovery postponed until the second half of 2025

The major European carmakers, from the Volkswagen Group to Stellantis, from Bmw to Mercedes-Benz, as well as component suppliers, have in recent weeks issued a number of profit warnings and lowered their forecasts on sales, profitability and cash flow for the whole of 2024. According to a report by Moody's, the revisions reflect a definite picture and what's worse, looking ahead, the outlook doesn't look much better. "Global vehicle production has been weaker than expected and falling demand has produced a rapid deterioration in the European market since July."

A situation that 'has caused manufacturers to delay the development of key models, especially in the battery electric vehicle (Bev) segment in Europe'. And which also poses difficulties for suppliers, who are exposed to 'volume losses and increased order volatility', the rating agency points out. The current market weakness and relative volatility significantly limit forecasting capabilities, Moody's admits, but the recovery seems to be receding and could take a few quarters. To be more precise, 'the return to visible growth in sales and margins could be delayed until the second half of 2025'.

In the first half of the year, 'sales and profitability of European suppliers declined due to the slowdown in vehicle production globally, the weaker performance in a more challenging Chinese market where relationships with local car manufacturers still need to be strengthened. But also due to production delays. And intensified restructuring. A picture in contrast to our previous expectations, i.e. slight growth in sales and margins. And we believe that this growth is unlikely to be achieved in 2024. Now, in the face of a series of profit warnings from major continental automakers, we expect that the slowdown in production and volatility will lead to continued volume reductions and production inefficiencies at suppliers, resulting in further declines in sales and profits for the rest of the year,' write the report's authors, Goetz Grossman, Matthias Heck and Christian Hendker.

Moody's points out that when companies in the automotive sector, in particular component suppliers, reported their first-half results, most of them lowered their sales forecasts for the whole year. Others, however, maintained their guidance for profit margins. "Now," is the conclusion, "only two months later, companies such as Forvia, Hella or ZF Friedrichshafen are lowering their earnings forecasts.

Moody's downgraded Valeo from Baa3 to Ba1 and placed ZF's Ba1 rating on downgrade watch. A possible revision of the ratings or outlooks of some suppliers is expected to balance likely sluggish sales growth, further delays in profitability improvements and debt reduction, against the ability to protect cash flows (by reducing costs and capital expenditure) and liquidity profiles, 'which could help overcome possible prolonged market weakness'.