Trade Credit Insurer Sees Troubled Times For The Automotive Industry

Euler Hermes ACI keeping "close watch" on several industry sectors
The U.S. automotive industry remains one of the toughest business segments in 2006 with different sectors having different problems and varying degrees of concern, according to industry analysis from global trade credit insurer Euler Hermes ACI.

The recent higher fuel prices can’t get all of the blame, but they did have an impact across multiple sectors of the automotive industry,” said Euler Hermes ACI Risk VP Tony Clary. In the most recent issue of Foresight—a bi-annual Euler Hermes ACI publication that features industry and economic analysis—Clary issued his report on the overall health of the automotive industry, which remained "troubled" for the second straight year. "Four particular areas we are monitoring are auto parts suppliers, auto parts retailers, tire manufacturers and auto manufacturers," he said.

The following are excerpts from the industry report:

Auto Parts Suppliers: Foreign automakers are increasing vehicle production in North America, but Detroit’s "Big Three" (Ford, GM and Chrysler) continue to cut back. That, coupled with rising raw materials costs, is pinching auto suppliers. The outlook remains bleak for suppliers closely aligned with domestic manufacturers, while those that serve foreign manufacturers are much better placed to take advantage of their vehicles’ popularity.

Auto Parts Retailers: Short-term prospects are adversely affected by the recent high fuel prices, as customers’ spending habits change when their disposable income gets squeezed. However, vehicle maintenance cannot be postponed forever, so demand for auto parts should not change appreciably. The outlook for auto parts retailers is mixed, depending on the timeframe, but overall the sector is probably one of the more stable of the automotive industry.

Tire Manufacturers: Tire manufacturers directly feel the effects of the recent higher oil prices because nearly 60 percent of a tire’s cost is related to oil. Raw materials costs at Goodyear, the largest U.S. tire maker, have risen 16 percent since last year, and that has held back the company’s turnaround plans. While oil prices have come back down from recent record highs, the decreased costs will take a while to filter through the tire manufacturers’ bottom line. Additionally, OPEC recently hinted that production may decrease, which could bring the average price of a barrel of oil back up in 2007.

Auto Manufacturers: The U.S. automotive market, like most other developed markets, is largely saturated, so competition is expected to intensify. However, industry sales in North America in 2006 remain favorable compared with historic levels. U.S. manufacturers Ford Motor Co. and General Motors Corp. bear the brunt of the tough industry conditions as their market shares continue to erode. Also, intense competition increases the use of price incentives and drives down profit margins. The outlook for domestic manufacturers remains tough, requiring more progress in the companies’ restructuring efforts. Foreign manufacturers continue to outperform the market, and their outlook remains positive.

The complete automotive industry report is available upon request in the latest issue of Foresight.

SOURCE: NAME and Euler Hermes

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