Moody’s Investment Service has released a new report indicating a change of outlook for the North American auto parts supplier industry.
The outlook for the North American automotive parts supplier industry is changing to stable from negative, in line with Moody’s expectations for a sharp recovery in global automotive demand through 2021, followed by a more moderate, protracted return to pre-downturn sales levels.
“Factory shutdowns, supply chain disruptions, further inventory liquidation and employee furloughs all substantially affected the auto industry, especially late in the first quarter and early second quarter. Sharply reduced production took a heavy toll on operating efficiencies, a key factor in boosting parts suppliers’ returns,” said Eric Greaser, a Moody’s vice president-senior analyst. “However, suppliers proved fairly resilient, aided by aggressive cost-reduction and restructuring moves, leaner inventory levels, and cash-preservation strategies.”
According to Moody’s, production restarts were largely smooth, and disruptions in the supply chain no worse than expected. And as production levels continue to rise, rating agency analysts expect operating efficiencies to climb as well. Meanwhile, Moody’s says there is potential for margin improvement as part of a recovery, but it’s likely to be less of an improvement than the last industry downturn in 2009. During that period, suppliers implemented aggressive cost-cutting plans that resulted in sizable, permanent reductions in costs. At the same time, auto manufacturers curbed new model introductions and refreshes in response to the recession, enabling suppliers to generate higher returns from volume-driven operating efficiencies on longer-lived vehicle platforms.
For their part, suppliers have again implemented extensive restructuring programs and cost-saving initiatives in response to sharply weaker demand because of the coronavirus pandemic, but unlike the last recession, however, carmakers plan to continue with new product introductions, highlighted by more hybrid and electric powertrains and continued growth in SUVs and crossovers. As a result, margins for parts suppliers will be constrained, especially with production still below pre-coronavirus levels.
“We believe a portion of the restructuring programs will again result in permanent reductions to cost structures longer term, enabling some margin improvement as production levels steadily climb back to pre-industry downturn levels,” according to Greaser. “As well, in most cases, the product mix shift to light trucks/SUVs/crossovers offer greater opportunities for more parts content per vehicle, providing the potential to enhance returns through better cost absorption.”