Despite continued weakness in global car sales, key European automakers are likely to see their credit strength improve, bolstered by earnings growth, rising cash flows, and restrained financial policies, Moody’s Investors Service said.
The credit ratings specialist, in a report titled Automotive – Europe; Auto sector faces higher capital spending, residual value risk, but well-positioned to cope, specifically mentioned BMW, Daimler, Peugeot, Geely’s Volvo Car and Aston Martin, adding that profitability pressures from investments in new technology will remain the industy’s largest longer-term challenge.
Go deeper with GlobalData
“For European automakers, steady operating performances – characterised by solid cash generation and a lack of significant M&A activity – have helped strengthen balance sheets and credit metrics,” said Falk Frey, a Moody’s senior vice president.
“This leaves them better positioned than before to weather a host of looming financial and business challenges.”
Although the cyclical downturn in consumer demand for cars posed the greatest near-term credit risk, the biggest longer-term challenge facing automakers was the increased spending needed to develop electric propulsion and autonomous driving systems.
“European automakers that have improved their respective credit profiles in recent years will be better positioned to contend with rising costs associated with the need to increase investments in new technologies,” said Frey.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataWhile Moody’s expected the transition to an electrified future to be manageable for incumbent carmakers, the rating agency saw important risks as well, including a potential breakthrough in battery technology that slashes costs and a steeper than expected sales ramp for Tesla, and other “upstart” BEV manufacturers, among others.
Moody’s also noted captive finance subsidiaries could face residual value challenges.
“Early signs of shrinking demand for diesel cars suggest that existing finance portfolios could be at risk of material losses, particularly in the key leasing markets UK and Germany,” said Bernhard Held, a VP and senior analyst at Moody’s.
“Even so, if diesel used car prices were to come under pressure across Europe, we would still expect the parent companies to be able to absorb the earnings hit.”
Moody’s noted autonomous driving was likely to require a longer transition, reducing but not eliminating credit impact.
