Vehicle production cuts and an uncertain sales forecast will plague auto suppliers for the rest of this year, and the outlook for 2006 isn’t much brighter, Standard & Poor’s Ratings Services said on Thursday in a new report, according to the Associated Press (AP).
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AP said Visteon was one of two suppliers to get a positive review from S&P – the agency said it is considering upgrading Visteon once it completes a restructuring plan, expected to be completed by September 30, that allows it to return 24 unprofitable plants to former parent Ford.
When the plan is complete, S&P reportedly said, it expects to raise Visteon’s debt rating from a B- to a B+, which still is below investment grade but four notches higher than the company’s rating in January. Lehman Brothers upgraded Visteon’s shares on Thursday, AP noted.
The Associated Press said S&P, which rates companies’ ability to meet their debt obligations, downgraded 25 auto suppliers including Visteon in the first six months of this year – only one supplier, Accuride Corp., has been upgraded by S&P due to its acquisition of truck supplier Transportation Technologies.
S&P reportedly said suppliers faced a sharp rise in steel costs in 2004 and early 2005 at the same time automakers were ending so-called “fast pay” programmes, which had allowed auto suppliers to collect money from automakers earlier.
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By GlobalDataSuppliers then lost substantial business in the first half of 2005 when General Motors and Ford cut production to deal with lack-lustre sales and rising inventories – GM cut production by 11% between January and June and plans a 9% cut in the third quarter, while Ford cut production by 7% in the first half and plans a 2% cut in the third quarter, S&P added, according to AP’s report.
“The production cuts were much steeper than we had anticipated,” S&P analyst Martin King told the Associated Press in a conference call on Thursday.
According to AP, S&P said said most suppliers expect production to stabilise at the end of this year and rebound slightly in 2006, but that will depend on improved sales at the domestic Big Three.
GM, Ford and DaimlerChrysler AG’s Chrysler Group saw sales rise by just 1.3% in the first half of the year, compared to a 6.6% increase for Asian brands, AP said, citing Autodata.
S&P reportedly said the second quarter may turn out to be the low point for production in 2005, since the Big Three automakers are under less pressure to reduce inventories after introducing a popular incentive that lets consumers buy vehicles at the employee rate – GM sales jumped 41% in June due thanks its discount programme; Ford and Chrysler began similar deals this month.
Despite the temporary boost from incentives, S&P analyst Robert Schulz told the Associated Press that the agency is sceptical Ford and GM can reclaim the market share they’ve lost – S&P cited flagging sales of sport utility vehicles when it downgraded Ford and GM to “junk” status in May, and the agency isn’t convinced that revamped SUVs coming in 2006 and 2007 will reverse that trend.
“Even with the new models, the peak years for SUV sales may be behind us,” Schulz reportedly said.
King told AP that S&P will be reviewing the ratings of three auto suppliers in the coming weeks for possible downgrades – those suppliers are Lear, which has been hit by falling SUV sales and announced a restructuring plan in June; American Axle and Manufacturing Holdings, also a major producer of parts for SUVs; and Affinia Group, which announced a $US15 million net loss in the first quarter.
