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U.S. Auto Sector Faces Bumpy Roads Ahead With Rising Recession Odds And Falling Demand

Fixed Income in 15 – Episode 16


COVID-19 Impact: Key Takeaways From Our Articles


Vaccines Won't Be A Cure-All For Australia And New Zealand Corporates And Infrastructure


How Did Our Ratings Perform During 2020

U.S. Auto Sector Faces Bumpy Roads Ahead With Rising Recession Odds And Falling Demand

S&P Global Ratings expects a 4% decline in light vehicle sales in the fourth quarter of 2019, a 3% decline in 2020, and around 1%-2% thereafter, towards 16.3 million by 2021, the lowest level since 2014. Despite rising transaction prices on new vehicles, we do not incorporate a steeper decline in our base case as automakers launch newly updated trucks and utility vehicles, amidst low gas prices and potentially lower financing costs later this year. Our base-case forecast is still above historical medians from the past four decades and is supportive of credit quality, and it implies strong factory utilization with a more favorable product mix than in previous years.

Following the Great Recession, U.S. auto sales hit a trough of 10.4 million units in 2009 before revving up again. Sales significantly outpaced GDP growth for six consecutive years and peaked at 17.4 million units in 2016. Thereafter, we believe the less than expected declines in 2017 and 2018 stemmed from historically low interest rates, tax refunds, abundant incentives, and low gas prices in previous years having motivated buyers to purchase vehicles sooner than they otherwise would have.

With increased overall odds of a recession (12 months out), declining used vehicle prices and ongoing geopolitical risks, the U.S. auto industry faces ongoing negative pressure.

Chart 1


Timing And Severity Of A U.S. Recession Remain A Wild Card

Our economists put the risk of a recession in the next 12 months at 30%-35%--more than twice what it was a year ago.

The ongoing trade dispute with China, coupled with waning effects of fiscal stimulus and slowing global growth, suggest that the domestic signs of strength may not be enough. We see hints of decelerating wage gains as payroll growth heads for a cyclical slowdown in the coming months, in line with a moderation in economic activity.

The ISM Manufacturing Sentiment Index fell below 50 in August and September--foreshadowing sluggish prospects for manufacturing hiring. Our historical analysis shows that when the ISM Index fell below 43, speculative-grade issuers in the auto sector tended to enter a period of credit distress.

Our recession case assumes light vehicle sales dropping to 15.6 million in 2020 and to 13.1 in 2021 before recovering to around 15 million by 2022. The average fall in light vehicle sales during the past six downturns since 1976 was 18.7% (see table 1).

Table 1

Cumulative Impact Of U.S. Light Vehicle Sales Decline
Period Sales Decline (%) Severity Recession
1979-1982 (34.3) High 1980; 1981-1982
1987 (7.4) Moderate
1989-1991 (21.6) High 1990-91
1995 (2.1) Low
2001-2003 (3.1) Low 2001
2006-2009 (44.3) High 2007-09
Source: S&P Global Ratings.

In our downside case, the sharp decline in 2021 (relative to past downturns) is because of sentiment shock coming from the stock market decline of 22% by the end of 2020 and very slow recovery in 2021. Our economists also incorporate a delayed consumer durables spending profile because of eroding wealth. Other compounding factors are the persistency of negative residential investment growth (single-family housing starts continue to run below historical equilibrium levels), and a decline in overall employment as well as labor force participation rates (LFPR).

If U.S. auto sales fall about 25% peak-trough by 2021 towards 13 million units, we estimate General Motors (GM) and Ford Motor Co. could still be operating 10%-15% above their breakeven volumes. We believe these automakers will stay committed to cutting production as demand slows rather than boosting their sales through incentives to avoid creating excess supply. Given the cushion in our credit metrics for many automotive investment-grade issuers, this may limit multi-notch downgrades, especially if a strong recovery seems imminent by 2022 and other credit factors remain supportive.

Intensifying Negative Rating Bias Is Not Cycle-Related

Downgrade potential within our coverage has risen in recent quarters, as indicated by the percentage of ratings with negative outlooks (see Chart 2). So far, pressures in the aftermarket and operational missteps by some tier-1 auto suppliers have driven most of our negative rating actions.

Chart 2


Overall, we don't expect the modest dip in auto sales (in our base-case) per se to lead to downgrades for automaker and supplier ratings in 2019-2020. For one thing, our forecast sales levels remain healthy enough for most automakers and suppliers to operate with healthy EBITDA margins, especially given the higher profits they earn on truck sales. Secondly, even though gas prices are rising, we believe significant new product launches--along with better fuel efficiency, higher perceived safety for trucks, and steady incentives--will support automakers' current product mix in favor of trucks, which accounted for nearly 70% of sales in the first nine months 2019.

We incorporate modest declines in automakers' EBIT margins in our forecast for 2019 through 2021 to account for:

  • Restructuring expenses related to plant closures;
  • Large engineering expenses for developing autonomous and electrification-related technologies; and
  • Elevated pricing pressure in several key markets, which could be partly offset by improved cost efficiencies.

Impact Of UAW Strike

On Sept. 15, 2019, the UAW declared a national strike on GM, the first since 2007, because of a lack of an agreement over wages, benefits, future product allocations, job security and temporary workers. As GM and UAW near a tentative deal, the most contentious issues holding up an agreement pertain to health care costs, pay progression of entry-level workers, use of temporary workforce, and commitments for future product allocations. The most pertinent credit factors are:

A) Cost Structure flexibility.   Although we assume labor negotiations will be contentious, our base case does not assume any major changes in breakeven volumes related to cost flexibility to be preserved for an eventual downturn. The large restructuring actions announced in November 2018 will improve GM's overall manufacturing utilization in the region due to consumers' shifting preference for SUVs and pickups instead of sedans. We are monitoring the situation and will update our base case as more details emerge upon eventual ratification.

B) Volumes and inventory levels.   We estimate GM loses production of up to 45,000 units per week but can recover a large portion through early 2020 if production resumes sometime this month. As of Oct. 1, 2019 (which represented only two weeks of impact), we believe GM had adequate vehicle inventory. Its 83-day light truck supply was much higher than the industry average, and we believe GM may have proactively overstocked some high-volume models, especially in the crossover utility vehicle segment. In the large SUV and pickup truck segments, GM's inventories seem more in line with industry levels. However, we see increased risks for permanent market share losses, albeit modest, if the strike prolongs beyond this month as inventory levels and customer preferred configurations diminish.

C) Earnings and liquidity impact.   GM has strong liquidity, with $17.5 billion in automotive cash and marketable securities, and availability of $16.5 billion under its automotive revolving credit facility (as of June 30, 2019). We have limited visibility on the likelihood of a strike lasting through October and the ability of the company to stem a multibillion dollar cash burn in that scenario. Liquidity will also fall substantially below our target of $18 billion as the company makes supplier payments that come due. But despite these clear short-term risks, our base case still assumes production will resume soon and that North America will remain the lynchpin of the company, with prospects for sustained EBIT margins of around 9% in 2020.

Trade And Geopolitical Risks

In our view, trade tensions between the U.S. and China are unlikely to have a meaningful impact on U.S. sales. However, other trade-related risks, including Section 232 tariffs on European and Japanese imports and a potential reemergence of Mexican tariff threats, would have an adverse impact on automotive demand because most of these costs will be passed on to consumers.


While the trade war brewing between the U.S. and China will likely have minimal direct macroeconomic effects on either country in the near future, the longer-term consequences for global supply chains, U.S. business sentiment, and consumers' purchasing power are growing. The risks of disruptions to China's supply chains in the medium term are rising.

The tariff threat could lead to reciprocal actions from Europe, Japan, and Korea. However, we currently incorporate only a limited ratings impact for Ford and General Motors because of their lower reliance on exports and higher level of localized content relative to foreign automakers. However, these tariffs will add incremental margin pressure for Tesla Inc. After incorporating Tesla's overseas transport costs and import tariffs, the company was operating at a 55%-60% cost disadvantage earlier this year compared with the same car produced in China. We expect tariff pressures to be minimal once Tesla begins production at the Gigafactory in Shanghai.

North America

Consistent with our base-case scenario, the U.S., Canada, and Mexico completed their renegotiation of the North American Free Trade Agreement (NAFTA) in late 2018, which has been renamed the USMCA. The USMCA has yet to be signed and further delays in ratification increase the risk of it being hostage to electoral politics.

Once ratified, we expect the USMCA to have a modestly negative but manageable effect on profitability because the automakers and their suppliers will bear the costs of repositioning their supply chains. This assumes higher production costs, the preservation of manufacturing for key components in the U.S. and Canada, and an increase in wages for Mexican autoworkers. We assume the auto industry will have adequate time to adapt its supply chain to adhere to the new rules. For example, the new country-of-origin rules for cars will likely phase-in annually through January 2023, while the rules for heavy trucks will phase-in through 2027.


Auto-related tariffs with Europe are another immediate concern as President Trump must decide by Nov. 17 whether to impose tariffs between 5% and 25% on foreign autos. Among U.S. automakers, Tesla faces the largest exposure, as it exports to Europe from the U.S. The impact to Ford would be very limited, and GM wouldn't be affected. (For more details, see "Trump's Tariffs Could Hurt EU Carmakers--Not The Economy," March 26, 2019.

A Stronger Product Mix Also Offers Some Relief From Sales Declines

Increasing demand for light trucks--including SUVs, CUVs (crossover utility vehicles), minivans, and pickups--will lower passenger car sales to about 30% of sales in 2019 compared with over 50% in 2012, and we expect automakers to shrink their passenger car footprints further. We also expect trucks' share to improve only marginally over the next 12-24 months.

Since 2012, the crossover segment has cannibalized the combined market share of small and midsize cars (see Chart 3). Over time, high pricing pressure amid declining year-over-year demand will likely lead to some compression in profit margins for automakers, especially as competition intensifies in the high-volume segments such as CUVs.


We believe volatility in automakers' sales performances (see Table 2 and Chart 4) could persist over the next few months. This is because of the differences in product-refresh cycles among companies as well as elevated pricing pressure in the passenger car segment, which will eventually affect the crowded CUV segment.

Table 2

U.S. Auto Unit Sales And Market Share Comparison
--First-nine months of 2018-- --First-nine months of 2019--
Units Share (%) Units Share (%) Change (%)

General Motors Co.

2,167,327 16.9 2,145,179 16.9 (1.0)

Ford Motor Co.

1,830,316 14.2 1,761,374 13.9 (3.8)

Toyota Motor Corp.

1,824,237 14.2 1,779,302 14.0 (2.5)

Fiat Chrysler Automobiles N.V.

1,668,355 13.0 1,648,838 13.0 (1.2)

Honda Motor Co. Ltd.

1,206,997 9.4 1,206,209 9.5 (0.1)

Nissan Motor Co. Ltd.

1,124,682 8.8 1,044,390 8.2 (7.1)

Hyundai Motor Co.

953,743 7.4 984,863 7.7 3.3
Others 2,077,277 16.2 2,138,974 16.8 3.0
Total 12,852,934 100.0 12,709,129 100.0 (1.1)
Source: Ward's AutoInfoBank.

Chart 4


Rivalry In The Pickup Segment Will Intensify

Our assumption is for roughly flat housing starts over the next two years. Newer pickup truck models with better interiors, ride quality, and technology in 2019-2020 will likely lead to an expansion of share for pickup trucks. Competition in this segment will intensify as absolute inventories on large pickup trucks remain about 6% higher year-over-year and sales need to be robust in order to wind down inventories at dealer lots. At Sept. 30, 2019, the average inventory days for full-size pickup trucks for the Detroit 3 was at 87 days (roughly in line with last year).

We estimate a 6%-8% year-over-year increase in housing starts would support a 3%-5% increase in full-size pickup sales over the next 12 months (see Chart 5), holding all else constant. Despite marginal growth in the housing market, in the current low-gas-price environment and with new products available, we expect pickups to outsell most other vehicle segments and account for about 13% of total sales, slightly higher than previous years.

Chart 5


The modest drop in Silverado sales so far this year (see Table 3) was likely due to a lack of regular and double-cab pickups, which were scarce on dealer lots as GM rolled out new models. We will monitor the impact of the ongoing strike on the company's crew-cab sales, especially those with premium trims and significantly higher profits. We expect Fiat Chrysler Automobiles N.V. (FCA) to gain some share as it continues to produce its older pickup truck alongside its new offering and maintains elevated incentives.

Ford re-entered the mid-size pickup segment (3% of U.S. light vehicle sales) with its Ranger, and FCA is introducing its Gladiator product. We see risk to GM's profits in the segment, as its GMC Canyon and Chevrolet Colorado have about a 30% market share in the U.S., which will likely decline.

Table 3

U.S. Top-Selling Light Vehicles
Rank --First-nine months of 2018-- --First-nine months of 2019--
Vehicle Units Vehicle Units Year-over-year change (%)
1 F SERIES 630,681 F SERIES 616,488 (2.3)
2 SILVERADO 424,403 RAM PICKUP 448,809 23.3
3 RAM PICKUP 363,955 SILVERADO 409,312 (3.6)
4 RAV4 319,147 RAV4 324,622 1.7
5 ROGUE 309,979 CR-V 280,739 1.1
6 CR-V 277,621 ROGUE 272,300 (12.2)
7 CAMRY 262,887 CAMRY 258,456 (1.7)
8 CIVIC 255,036 CIVIC 255,484 0.2
9 EQUINOX 234,379 EQUINOX 253,956 8.4
10 COROLLA 217,301 COROLLA 233,978 7.7
Source: Ward's Automotive Group, a division of Penton Media Inc.

A Less-Supportive Financing Environment Adds Some Risk

Lenders are still willing to support loans of 72-84 months to attract borrowers with lower credit scores. Moreover, they're frequently offering loans that exceed the value of the vehicle. The downside risk is that it could prevent many buyers from re-entering the new-car market for several years because vehicle owners who would usually trade in for a new model could end up owing more than the car is worth. With higher vehicle prices and increased borrowing costs, average new vehicle loan payments were up 3.5% to $567 in the first half of 2019 compared to last year, and average lease payments are up 2.8% to $500.

From a historical perspective, total subprime auto lending hasn't returned to pre-crisis levels. Subprime loans as a percentage of all U.S. auto loans have averaged about 20% during recent quarters. This is only slightly higher than 17.2%, which is the lowest since the end of the Great Recession. Notably, captive debt is predominantly owned by prime borrowers and has performed relatively strongly. Superprime borrowers (those with credit scores greater than 760) accounted for one-third of all U.S. auto loan originations, which is the highest level since early 2011 and a significant improvement from average levels of about 22% in 2006 and 2007 (see Chart 6).

Chart 6


Lower Residual Values May Dent New Vehicle Sales

With the record high influx of late-model vehicles coming off lease in 2019-2020, used-vehicle prices will likely decline by about 2%-3% in 2019 and about 3%-5% in 2020. As of now, the decline will be most prominent in SUVs with higher levels of 0-5-year-old SUV supply returning to the market, and to a lesser extent in the luxury segment. Car buyers turned off by high sticker prices are finding attractive used-car deals as a surge of newer SUVs coming off lease wind up on used-vehicle lots. Used-car sales grew by around 9% in the first half of the year, according to an estimate from J.D. Power. We expect off-lease vehicle volume to reach a peak of 4.1 million in 2019 (up from 3.9 million last year) and then stay at those levels in 2020 because of high leasing penetrations over the past few years. Our forecasted decline would have been higher if not for demand for these vehicles remaining strong, especially as new car prices remain at all-time highs, making late-model used cars (from Model Year 2017) a good bargain. At the same time, the potential impact of higher tariffs on new vehicles could add some support to used-car prices and keep them steady, which is contrary to our base-case assumption.

The key risk to this prediction will be subventions and subsidies, which automakers use to reduce the cost of a lease on weak-selling vehicles (usually by increasing the estimated residual value of the leased vehicle or decreasing the interest rate on the lease). In turn, this reduces the monthly payments required over the lifetime of the lease. Data on gains and loses upon lease returns suggests that the captive finance arms priced residual risk fairly. To protect residual values, automakers have launched improved and more aggressive marketing strategies aimed at areas such as the certified preowned segment.

Electric Vehicle Sales Will Remain Sensitive To Tax Subsidies

We expect the combined share of electric vehicles (including plug-in hybrids) to remain under 3% of overall U.S. vehicle sales in 2020 despite significantly increased sales for Tesla's Models 3, S, and X. This will lead to some market-share losses for some competitors in alternate fuel segments (see Charts 7 and 8 and Table 4). We expect some downside risks to our prior base-case assumption, under which electric vehicles (including plug-ins) approach 10% of light-vehicle sales by 2025 because of ongoing customer concerns regarding range, price, and charging infrastructure. These concerns are being compounded by the lower cost of ownership for non-electric vehicles given the current low gas prices, reduced tax incentives, and the high likelihood that the Trump administration will roll back fuel-efficiency targets in 2025.

Chart 7


Chart 8


Table 4

U.S. Top 10 Electric Vehicles/Plug-In Hybrids (YTD Sep 2019)
--YTD Sep 2019-- --First-quarter 2019-- --Second-quarter 2019-- --Third-quarter 2019--
Brand Subseries Units sold % share Units sold % share Units sold % share Units sold % share
Tesla Model 3 118,745 48.1 57,554 57.5 53,551 67.1 44,660 49.7
Toyota Prius 15,412 6.2 4,026 4.0 4,924 6.2 6,462 7.2
Tesla Model X 13,901 5.6 5,597 5.6 2,850 3.6 5,250 5.8
Chevrolet Bolt 13,111 5.3 4,316 4.3 3,965 5.0 4,830 5.4
Tesla Model S 12,960 5.2 5,701 5.7 2,716 3.4 4,441 4.9
Nissan Leaf 9,111 3.7 2,685 2.7 3,323 4.2 3,103 3.5
Honda Clarity 8,651 3.5 3,756 3.8 2,796 3.5 2,099 2.3
Ford Fusion 6,482 2.6 1,741 1.7 2,664 3.3 2,077 2.3
Chrysler Pacifica 5,266 2.1 1,745 1.7 1,894 2.4 1,627 1.8
BMW 5 Series 5,245 2.1 1,595 2.1 1,963 2.4 1,687 1.9
Source: S&P Global Ratings.

Related Research

  • Will Trade Be The Fumble That Ends The U.S.'s Record Run? Sept. 27, 2019
  • Global Auto Sales Will Stay In The Slow Lane For At Least The Next Two Years, Sept. 17, 2019
  • German Carmakers Can Still Win The Electrification Race—At A Cost, Sept. 9, 2019
  • Global Trade At A Crossroads: Prospects For U.S.-China Deal Fade, Aug. 26, 2019
  • In Europe's Auto Market It’s All About Curbing CO2 Emissions, June 17, 2019
  • ESG Industry Report Card: Autos And Auto Parts, May 13, 2019
  • Worldwide Auto Sales Will Slump More Than Expected In 2019, May 6, 2019
  • Trump's Tariffs Could Hurt EU Carmakers--Not The Economy, March 26, 2019
  • The Future Is Electric: Auto Suppliers And The Emergence Of EVs, Feb. 21, 2019
  • 10-Year Retrospective: Changes In U.S. Auto ABS In The Decade Since The Great Recession, Feb. 15, 2019

This report does not constitute a rating action.

Primary Credit Analyst:Nishit K Madlani, New York (1) 212-438-4070;
Secondary Contacts:Lawrence Orlowski, CFA, New York (1) 212-438-7800;
David Binns, CFA, New York;
Sandeep Mantri, Mumbai;

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