Moody’s Investors Service has released a new report detailing profit outlook for the North American automotive parts suppliers for the next 12 to 18 months.
The company says it expects global automotive production to be weaker for the second-half of 2019 than prior-year levels. This is largely driven by the lack of a recovery in demand in China and expectation of further demand softness in Europe. While they forecast a modest demand improvement in China for 2020, continued weakening in demand is forecast for Europe and the US.
Moody’s expect median profit levels for North American auto parts suppliers to deteriorate about 9.7% for 2019. Profits are expected to be about flat to up 1% in 2020, as parts suppliers benefit from restructuring and cost-reduction actions taken during the second-half of 2019.
Global light vehicle sales weakness forecast through 2020
Moody’s expects a contraction in global light vehicle sales in both 2019 and 2020. Overall, global unit sales is expected to decline 3.8% in 2019, versus our previous forecast of a 0.5% gain. For 2020, global volumes is expected to decline more modestly at around 0.9%.
Vehicle mix change in North America exacerbates softening demand
The profits of companies with long-standing products on passenger cars in North America suffered disproportionally to the level of declining automotive demand. Through 2018, North American automakers announced they would phaseout production of most of their passenger vehicle models. Moody’s believe this is a long-term credit positive trend for auto parts suppliers because, in most cases, light trucks/SUVs/CUVs offer opportunities for more parts content per vehicle.
However, passenger cars were long-running platforms for parts suppliers, so these companies gained operating efficiencies through volume that likely strengthened margins. As a result, the elimination of passenger cars exacerbated the effect of declining demand. Companies including Delphi, Cooper-Standard, and Visteon have called out the mix changes in the region as a drag on their businesses. Weakening demand and unfavorable mix in other regions also reduce profit expectations in 2019. Launch costs of new light truck/CUV/ SUV models will weigh on margins until volumes deliver operating efficiencies.
Commercial vehicles, a bright spot, to significantly decline in 2020
Moody’s sees North American Class 8 commercial vehicle build rates to decline in the range of 30% in 2020, after cyclical highs in 2019. Fleet operators have replenished their fleets, and macroeconomic trends are softening. Companies such as, Meritor, and Dana should see softening in their top line in 2020.