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Outlook for U.S. Market Is Mediocre, According to Fitch

Don’t Hold Your Breathe If You Want Return Of Glory Days
Toyota, Honda Under Pressure; Kia/Hyundai Poised To Pounce

U.S. light vehicle sales are likely to improve a bit in 2010, but worries about a double-dip recession or spike in fuel prices are a cause for concern, said Fitch Ratings of the U.S.

High unemployment, weak consumer spending, lost wealth from the property crash, and a higher savings rate will combine to take the steam out of any rally in sales. Long term attitude changes are taking place, with consumers losing interest in driving and seeking more utilitarian answers to transport questions as many embrace environmental policies. This makes a return to the glory days of 17 million sales a year unlikely any time soon.

Fitch said U.S. light vehicle sales will reach 11.1 million next year, up 7.8 per cent from 2009’s 10.3 million.

Fitch worries that what it calls an “airline-style” vicious cycle is possible, with severe competition and weak margins resulting in boom and bust, without the boom.

“Peak conditions may provide insufficient free cash flow to rebuild the balance sheet, restore liquidity and enhance debt capacity, leaving companies vulnerable to severe financial stress in succeeding downturns. As with airlines, this could lead to repetitive cycles of bankruptcies and industry restructurings,” Fitch said in a report.

Fitch said Toyota and Honda’s record of easy market share gains is over, as domestic and transplant competitors improve quality.

“Kia and Hyundai have shown the largest increase in market share and are posed to take more through an array of new products and increased capacity in the U.S. Several points of market share, primarily from GM and Chrysler, are up for grabs due to the companies’ downsized capacity, reduced or dated product offerings and adverse consumer sentiment,” Fitch said.

Capital destruction
Fitch said, ominously, that growth forecasts by global competitors appear to vastly outstrip even the most optimistic industry growth scenarios. Manufacturers are spending too much on developing hybrid vehicles which will far exceed market growth, “indicating a large amount of capital destruction”.

The U.S. market, despite its current weakness, continues to attract new entrants, with Kia and VW opening new plants in 2010 targeting the mid-sized market.

The dollar’s weakness against the euro has hurt the likes of BMW, Mercedes, and Porsche. But now the misery is being spread around because of the yen’s strength against the dollar. Toyota will be hit hard because it still ships a high proportion of its products to the U.S. from Japan. Honda and Nissan will be hurt to a lesser degree, Fitch said.

The Wall Street Journal’s Heard on the Street column quotes Chris O’Connell at bond rating firm DBRS bemoaning the lack of realism in the U.S. market where executives are said to still live in a 16 million annual sales world. The paper also quotes J.D.Power pointing to the big problem of over-capacity, because of the bailout of GM and Chrysler.

Capacity use 50 per cent
“In keeping Chrysler and GM alive (which cost $125 billion according to Fitch), their quick rinse bankruptcies did little to ease the central problem facing the industry: too much production capacity facing too little demand. North American capacity utilization will average about 50 per cent this year. It isn’t expected to average above 80 per cent until 2013,” J.D.Power said.

Neil Winton – December 1, 2009

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