Market Monitor Automotive USA 2019

• Imposition of import tariffs could lead to more insolvencies
• Payments take 30-60 days on average
• Subdued sales performance in 2019

The sector performance outlook remains “Fair”, but the credit risk outlook has deteriorated somewhat due to the still looming uncertainty surrounding the implementation of import tariffs and lower demand.

According to OICA, US vehicle production increased 1.1% year-on-year in 2018, to 11.3 million units, while sales of new vehicles increased 0.3%, to 17.3 million units with higher pickup truck and SUV sales offsetting a decline in passenger car sales. The continued rise in ride sharing services (such as Uber and Lyft) had a dampening impact on new car sales, as did higher sales prices triggered by higher production costs.

After years of steady growth it is expected that annual car sales will decrease below 17 million units in 2019. Rising new-vehicle prices are undermining consumer demand, while the benefits of 2018’s tax cuts are waning and US economic growth is losing momentum.

Limited impact of steel tariffs on profits so far

The imposed tariffs on steel and aluminium have, so far, barely impacted profits and cash generation of US OEMs and suppliers, as higher commodity prices have been largely passed on to consumers. The recent abolishment of tariffs on steel/aluminium imports from Mexico and Canada helps the sector, especially as a high percentage of cars and car parts for the US market are manufactured south of the border. The car dealers segment has enjoyed favourable trading conditions in recent years with subsidies, readily available affordable financing and above average consumer confidence.

The average payment duration in the US automotive industry is 30-60 days. Payment behaviour in this sector has been satisfactory over the past two years. In 2018 and H1 of 2019 the number of protracted payments, non-payments and insolvency cases has not increased and remained low compared to other industries.

US automotive businesses tend to be highly leveraged since the sector is very capital-intensive. Access to external funding has steadily improved since the 2008 credit crisis, due to improved trading conditions within the sector, relaxation within the traditional credit markets and access to funding via government-backed programmes. Banks are generally willing to lend to the industry.

Import tariffs on cars could trigger an insolvency increase

The still looming 25% tariff on vehicles and car parts imported from the EU and/or Japan has increased uncertainty in the market. Any future imposition of those tariffs would severely impact the industry, most probably leading to increasing insolvencies, especially in the Tier 2 segment where many businesses show thin margins. While still recording solid operating results, due to the ongoing tariff uncertainty large OEMs have started to close down domestic production sites and to shift production to more favourable destinations abroad.

Another challenge for the industry is the accelerated transition from traditional combustion engines to alternative fuel/electric technology and the growing trend towards digitalisation/ autonomous driving.

With those major challenges ahead we expect the credit risk situation for Tier 2 businesses to deteriorate in the coming 2-3 years, leading to higher annual insolvencies and a market consolidation.

Due to the potential downside risks and more uncertain sales outlook we have a neutral underwriting approach to the automotive sector. We continue to monitor developments in US trade policies, which could have a disruptive impact on the industry and ultimately lead to a change in our risk appetite.