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Moody’s sees slower growth in North American auto parts supplier industry

According to a recent report released by Moody’s Investor Service, the outlook for the North American auto parts supplier industry for the next 12 to 18 months has been revised to negative from stable. Moody’s further explained that suppliers’ profit levels will decline, driven by moderating automotive demand and declining production globally.

“Deteriorating automotive production trends in Europe and Asia will continue to have a negative effect on operational performance for North American automotive parts suppliers in 2019,” says Timothy Harrod, Vice President and Senior Credit Officer at Moody’s. “We expect median EBITA for the industry to fall about 4.4% for 2019 and increase about 0% – 1% in 2020.”

Global light vehicle sales totaled 94.9 million units in 2018, short of Moody’s previous forecast of 95.5 million. Moody’s expects unit sales growth of just 0.5% in 2019, down from its previous forecast of a 1.2% gain, and modest growth of around 0.8% in 2020, which led the rating agency to cut its global automotive manufacturing outlook earlier this month.

Parts manufacturers making components targeted on emission control, fuel economy, electrification, or autonomous-like safety features — which are increasing as a percentage of vehicle content as well as in the number of vehicles into which they are built — will suffer less margin deterioration, but still see EBITA flat to down, notes Harrod.

Tariffs and trade disputes looming. Heightened political risks, including the looming possibility of higher US import tariffs, are also a concern. The trade dispute between the US and China is as yet unresolved, despite lengthy ongoing negotiation, and last month the US Department of Commerce delivered its report on an investigation into whether imported vehicles and parts represent a threat to national security. This could result in the US imposing tariffs up to 25% on auto imports that would likely spark corresponding retaliatory actions from major trading partners that would disrupt about $500 billion of trade flow. These levies would be credit negative for auto parts suppliers, with US manufacturers suffering most because of their supply chain dynamics that often result in multiple cross-border trips for finished goods that could prompt multiple tariff charges.

What could change the outlook. Revising the outlook to stable if Moody’s expect to see an improvement in median EBITA or annual global light vehicle sales, with projected annual growth for either of these metrics exceeding 1% along with improving automotive industry sentiment for growth over the intermediate-term.

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