The Fitch that stole Christmas

The analysts at Chicago-based Fitch Ratings issued a grim report Tuesday (Dec. 8) about the outlook of the auto industry — even if the industry receives federal aid.

Auto sales declines of 10.7 percent in 2009 are expected. And that’s the good news. Domestic sales by the big three automakers (General Motors, Ford Motor Co., and Chrysler) are expected to dip further.

And Fitch provides some clarity as to how the automaker dominoes could fall. According to Fitch, a bankruptcy filing by GM would put such pressure on suppliers and other pillars that support the automakers that Ford would likely have to seek bankruptcy protection. Fitch estimates that GM and Ford have about $21 billion in payables to the supplier base and that any inability to pay on the payables “would have crippling repercussions” on the industry as a whole.

“Fitch believes that a bankruptcy at GM would result in widespread production shutdowns across the supplier base, threatening production at all U.S. auto assembly plants, including those of transplant manufacturers,” according to the Fitch report.

(See this story from The City Wire about how auto sector woes could impact the Fort Smith region, and this story on what one local auto dealer thinks about the whole mess.)

Chrysler is small potatoes, comparatively. Fitch said a Chrysler bankruptcy would hurt the supplier base but would likely be handled as a liquidation, with assets and brands being sold to other automakers — likely to foreign-owned companies.

Other Fitch revelations include:

• “Given the global decline in auto production forecast for 2009, auto supplier operating performance and balance sheet deterioration will continue to take place across the vast majority of the sector, with access to capital becoming even more restricted. Suppliers are also becoming much more judicious in their willingness to invest in tooling and other product investment associated with new Detroit Three product opportunities.”

• “Financial assistance from the federal government would obviously improve liquidity at the recipients, although the extent of further capital structure improvement is unknown at this point. … It is unclear how GM’s plan to reduce debt by half ($30 billion) would be achieved in a scenario where the threat of imminent bankruptcy is removed by the provision of federal loans or loan guarantees.”

• “Under the proposed terms of financial assistance to the Detroit Three, the role of the federal government in shaping the industry will be greatly enlarged. Direct governance, when combined with regulatory and legislative initiatives, indicates that government initiatives will play a major role in shaping and/or defining industry investment and demand over the near and long term. The list of topics that could have an impact is long – fuel taxes, gas-guzzler taxes, tax credits for fuel-efficient vehicles, federal and/or state emission standards, etc. – and is extensive. It will be interesting to note whether Ford, by seeking a standby facility rather than a direct cash infusion at this time, will seek to preserve flexibility by positioning itself outside of the government oversight terms and structure that are currently being discussed.”

• “The combined effects of the economic cycle and the credit crisis have further impaired the competitive position of the Detroit Three versus the transplants. Even though transplant manufacturers are also experiencing 30%+ declines in monthly sales rates, the ability and willingness of transplant suppliers to offer zero-percent financing highlights the significant capital advantage enjoyed by these manufacturers – a competitive advantage that will translate into continued market share gains for the transplants in 2009.”

• “There are, however, several positive factors on the horizon, but these will remain overshadowed by economic weakness and industry risks. Lower commodity prices will reduce direct material (steel, in particular) and other indirect costs, savings that will be felt more materially in the second half of 2009.”