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ESG Industry Report Card: Autos And Auto Parts

Analytic Approach

Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics, which enables analysts to factor in short-, medium-, and long-term impacts--both qualitative and quantitative--to multiple steps of their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019).

Our ESG report cards qualitatively explore the relative exposures (average, below, above average) of sectors to environmental and social credit factors over the short, medium, and long term. For environmental exposures, chart 1 shows a more granular listing of key sectors and (in some cases) subsectors reflecting the qualitative views of our analytical rating teams. This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative, forward-looking opinion of credit risks across sectors.

In addition to our sector views, this report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality compared to sector peers or the broader sector. These comparative views of environmental and social risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.

Environmental risks we considered include greenhouse gas (GHG) emissions, including carbon dioxide, pollution, and waste, water and land usage, and natural conditions (physical climate, including extreme and changing weather conditions, though these tend to be more geographic/entity-specific than a sector feature). Social risks include human capital management, safety management, community impacts, and consumer-related impacts from customer service and changing behavior to the extent influenced by environmental, health, human rights, and privacy (but excluding changes resulting from broader demographic, technological, or other disruptive industry trends). Our views on governance are directly embedded in our rating methodology as part of the management and governance assessment score.

Chart 1

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The list of entities covered in this report is not exhaustive. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with companies expected to increasingly focus on ESG in their communication and strategy updates.

Environmental Exposure

Environmental risks are the most relevant ESG factors for the global automotive sector, and these risks are increasingly affecting the ratings on major manufacturers. Accordingly, we consider the industry's exposure to these risks to be above average. Electrification and the transition to CO2-neutral mobility are significant disruptive forces that will shape the industry, but the pace of the transition will vary substantially by region. Also the momentum is different for light vehicles (i.e. passenger cars and light commercial vehicles) and heavy commercial vehicles; the former is required to comply with European CO2 emissions standards from the end of this year, while emissions regulations for the latter will kick in no sooner than five years from now. Similarly, in the U.S., for medium and heavy-duty trucks, Phase 2 standards prescribed by regulators will phase in over the long term and the requirements go into effect in 2027, compared to the more aggressive milestone for light vehicles that applies to model years 2022-2025 (albeit with increasing efforts from the current administration to freeze emissions and fuel economy standards at 2020 levels).

The Chinese government is targeting new energy vehicles (NEVs; mainly plug-in hybrids [PHEVs] and battery electric cars [BEVs]) to reach 20% of total auto sales by 2025, which looks ambitious considering they represent not even 5% of sales in the region today, according to the China Assn. of Automobile Manufacturers. While year-to-date NEV sales in China, as of Oct. 31, 2019, grew over 10% since 2018, they have been losing steam since August 2019. The Chinese government slashed incentives on NEV products in an apparent attempt to reduce supply in the overcrowded NEV segment.

Regulatory pressure is the greatest in the EU. Transport is responsible for nearly 30% of the EU's total CO2 emissions, of which 72% comes from road transportation (consisting of 60.7% passenger cars, 11.9% light-duty trucks, 26.2% heavy-duty trucks, and 1.2% motorcycles per the European Environment Agency). The EU regulator aims to significantly tighten CO2 thresholds by the end of 2020. Companies that fail to comply will be subject to fines. At the same time, the reduction in CO2 emissions from new light vehicles has stalled since 2017, as diesel-powered vehicles have declined to less than 30% of new sales and the mix of sales has moved to more profitable but higher-emitting SUVs. Original equipment manufacturers (OEMs) have been left with little alternative than to either push less profitable vehicles to the market or agree to pay fines (or a combination of the two). When assessing exposure to environmental risk in the EU we look at the disparity between the latest official CO2 emissions and company-specific targets for 2020. Companies will pay a fine of €95 per gram missed. For OEMs that may incur fines exceeding 25% of adjusted 2020 EBITDA, we would assess these companies as being more negatively exposed to environmental factors than peers.

OEMs have different strategies for addressing emissions regulations. Exposure to environmental risk can be material but not necessarily reflected in our base case, as long as we are comfortable with the OEM electrification roadmap based on a product's timely availability, dependence on diesel, pricing strategy, incentives to dealerships, and necessary mix for compliance. Volkswagen AG and Daimler AG are currently the only companies for which we include CO2-specific fines in our base case since we view these German OEMs' electrification roadmaps as aggressive compared to peers.

In the U.S., while regulations require CO2 emissions of no more than 119 grams per kilometer (g/km) by 2021, there's political pressure in favor of relaxing the target, which could further delay the adoption of electric vehicles in the U.S. At this point, we believe that U.S. requirements for emissions are less of a challenge to OEMs than those in China and the EU. We consider auto suppliers exposure to environmental risk as well, but to a slightly lesser degree compared to OEMs. As opposed to producers of light or heavy-duty vehicles, suppliers are not directly exposed to either regulatory fines and/or product acceptance issues. Furthermore, many suppliers we cover (including interior, tire-makers, and structural component and aftermarket suppliers) offer products that have minimal dependency on the evolution of the internal combustion engine. Nonetheless, the path to electrification, whether more or less regulatory driven, presents engine component-related suppliers with opportunities and challenges that could have rating implications. Positive rating actions could materialize for suppliers that solidify their competitive position for the transition to EVs through mergers and acquisitions to diversify product offerings and expand market share. On the other hand, we could also see some ratings pressure for suppliers that engage in aggressive research and development (R&D) and capital expenditures (capex) to fund new products and technology internally but without a clear path to profitable returns on investment. Equally, suppliers that fail to offer environmentally cutting-edge products and technology will likely weaken their competitive position, thereby leading ultimately to rating pressure.

Social Exposure

We expect social risks will intensify in the next decade because of changing consumer preferences toward transportation as a service and new mobility options that will disrupt car ownership. Additionally, potential headline risks related to accidents linked with autonomous driving and cybersecurity breaches will increase the risk of product liability, government scrutiny, and further regulation. We assume that future labor negotiations for some automakers will remain contentious and could pressure long-term cost flexibility or cause short-term production disruption, as observed with GM in late 2019. On the other hand, social factors also present opportunities for automakers and suppliers that improve active safety technologies that aim to protect vehicle occupants in a crash, as well as reduce the risk of an accident occurring through lane departure warning systems, automotive braking, adaptive cruise control, and blind spot detection. Additionally, social factors such as product liability and recall issues are inherent risks for the automotive industry, but apart from a few isolated events (airbags, ignition switches), most issuers have had a good track record in recent years.

Governance

Governance is a company-specific assessment and related to our view of how companies' governance affects their ability to achieve strategic targets while mitigating exposure to litigation and unexpected headwinds on performance. Our governance assessments are most relevant for Volkswagen AG and Nissan Motor Co. Ltd.

ESG Risks In The Automotive Industry

North America

Table 1

Company/Rating/Comments Analyst
Adient PLC(B+/Negative/--)  
We believe ESG credit factors for Adient are broadly in line with its manufacturing industry peers. Since Adient operates 220 manufacturing facilities in 35 countries, it is subject to a number of environmental laws and regulations. Reserves for environmental liabilities totaled only $12 million for the fiscal year ended Sept. 30, 2019. Estimating the ultimate level of liability involves significant uncertainty, but we believe the company properly accrues for potential environmental liabilities, and therefore do not expect them to materially affect its future operations, earnings, or cash flow. The company reviews the status of its environmental sites quarterly and may adjust its reserves. While past leadership has executed at a subpar level, we currently assess Adient's management and governance as fair, reflecting our revised expectations after a new CEO joined in October 2018. Since the CEO's arrival management has taken many steps to stabilize the business, including realigning staff incentives to ensure that it is not pursuing sales growth to the detriment of profits and cash flow. Lawrence Orlowski
American Axle & Manufacturing Holdings Inc.(BB-/Stable/--)  
American Axle has higher-than-average exposure to environmental risks. The company faces displacement from electrification, and its ability to offset potential losses in its engine and transmission-related business largely depends on higher content per vehicle in its differential and axle electrification businesses. A faster-than-expected transition to battery electric vehicles, coupled with slow adoption of the company's technology, represents a major downside risk. Through ongoing investments in lightweight axles and advanced drive units, the company has the technological capability to support the increased electrification of vehicle powertrains at a competitive cost. We expect high R&D costs leading to SG&A approaching 6% of sales over the next two to three years, with capex remaining high (5%-7% of sales). This will likely limit improvements in EBITDA margins and FOCF in the coming years. Social risks remain somewhat high, but manageable and largely in line with peers. Work has stopped in the past due to unfavorable labor negotiations, as about 60% of its associates fall under collective bargaining agreements with various labor unions. Governance risks are low because American Axle will likely extend its good track record of disciplined capital allocation and sound management of the executional risks related to launch activity. This should help the combined company navigate through operational issues that may arise as it works with its new customers to launch new technology. Lawrence Orlowski
Aptiv PLC(BBB/Stable/--)  
We believe Aptiv is better positioned than many of its peers to benefit from trends toward vehicle electrification and active safety technology. Social risks are key factors behind our assessment of Aptiv's business, as well as our sales and profits forecasts. The company provides active safety technologies that consumers are demanding and regulatory agencies are promoting. Aptiv's technologies aim to protect vehicle occupants in a crash, as well as reduce the risk of an accident occurring through lane departure warning systems, automotive braking, adaptive cruise control, and gesture control. We expect Aptiv to spend about 8% of its revenue on R&D and about 5%-6% of revenue on capex in current and future years, to remain competitive. R&D expenditures as a percentage of sales are in line with global European and Japanese auto suppliers. Auto suppliers like Aptiv are important partners in helping automakers comply with emissions regulations, but are also exposed to the costs of remediation and cleanups at manufacturing sites. Based on environmental reserves of about $4 million at the end of 2018, we see the impact as fairly immaterial, especially given the company's size and level of profitability. Aptiv has reserved $50 million for product warranty liability as of the end of 2018. We believe the company's reserves are currently sufficient to cover the costs of product warranty litigation. We see Aptiv's management and governance as satisfactory, reflecting its success in positioning itself to target fast-growing areas such as active safety, as well as its operational expertise and consistent execution. David Binns
BorgWarner Inc.(BBB+/Watch Neg/A-2)  
We view BorgWarner's position relative to peers as favorable for environmental and governance factors. The company has been successfully pursuing a propulsion-agnostic product strategy: it can offer an array of powertrain and drivetrain products for internal combustion, hybrid, and electric vehicles. We expect BorgWarner to spend about 4% of its revenue on R&D and 5%-6% of its revenue on capex in current and future years, to remain competitive and provide the technology to help OEMs comply with prevailing emissions regulations. R&D expenditure as a percentage of sales is generally less than global European and Japanese auto suppliers. BorgWarner's exposure to social factors are generally in line with the industry. We believe the company's reserves are sufficient to cover the costs of litigation. We see BorgWarner's management and governance as satisfactory, reflecting its success implementing its strategic plans, its operational expertise, and management depth and breadth. Nishit K Madlani
Delphi Technologies PLC(BB-/Watch Pos/--)  
We see Delphi Technologies' position on ESG factors as largely in line with the industry. The company has focused on supplying internal combustion engine products, including fuel injection systems and valvetrains. However, Delphi Technologies continues to develop its expertise in power electronics solutions to capitalize on the growing demand for hybrid and pure electric propulsion systems. In terms of environmental risk, our view of the company reflects its success in cost-effectively helping automakers comply with increasingly stringent emissions regulations worldwide. The company's exposure to social factors is generally in line with the industry. Although a substantial number of its workers belong to industrial trade unions or work councils, we do not anticipate major business disruptions from material disputes between management and its unions. Also, we are not aware of any large product liability claims against the company. David Matthews
Ford Motor Co.(BBB-/Stable/A-3)  
We see Ford's exposure to environmental risks as somewhat more significant than the sector given its volumes and exposure to EU regulations. Environmental considerations will have more influence on Ford's credit quality as it faces tough fuel efficiency and emissions targets globally, especially in Europe and China. We estimate that the combined EBIT from EU and China will represent about 5% of its projected 2021 EBIT and could approach 20% by 2023--still lower than other global automakers that rely more heavily on these regions for their profitability. To mitigate this risk in Europe, Ford is shrinking its passenger portfolio (discontinuing underperforming vehicles) and will offer an electrified powertrain option for all nameplates. Additionally, it will introduce the new Mustang‐inspired SUV BEV in 2020. Furthermore, we believe Ford will increase its commercial vehicle portfolio in Europe, which has relatively less stringent emissions standards. By 2021, passenger vehicles requirement will be 95 g/km; the commercial vehicles requirement is 147 g/km. In China, we remain somewhat skeptical on whether Ford's PHEV/EV offerings will perform in line with the overall market demand. Ford also faces tighter fuel economy targets in the U.S. by 2025. As its highest selling product, the all-aluminum 150 is already a positive for corporate average fuel economy calculations, we view Ford's ability to meet regulatory standards in the U.S. as in line with or better than peers. We expect the company to be in compliance in U.S. and Europe based on its current portfolio plans, albeit at high costs, assuming that its PHEV/EV offerings will perform in line with the overall market in terms of customer demand. Ford's overall R&D expenses in 2018 were $8.2 billion, up 12% from 2016, leading to sizable losses in its autonomous vehicle technology and services segment. We expect these trends to persist, limiting profitability improvement over the next three to five years. From a social risk standpoint, Ford has avoided any material fines related to high-profile recalls or safety issues in the U.S., similar to those faced by Toyota and General Motors in the past decade, and we view the company's social risk as generally in line with peers. We have very limited visibility on returns linked with Ford's plans for safe and reliable urban transportation systems and autonomous vehicle development, in which the company aims to build new revenue streams (possibly with fleet operators). Our assessment of Ford's satisfactory management and governance considers its robust risk management framework and consistent track record of strategic decisions to achieve its financial and operational goals since the Great Recession. However, we believe that during 2015 and 2016, the company's strong operating performance, backed by higher volumes, improved product mix, and low commodity costs, masked several operational inefficiencies and unperceptive capital allocation decisions. We also believe management's extended risk tolerance for several unprofitable segments may have somewhat limited its position to invest in newer business opportunities relative to some peers. Lawrence Orlowski
General Motors Co.(BBB/Stable/--)  
While the company's positions relative to ESG factors are largely in line with the industry, we expect environmental and social risk factors to increasing influence GM's credit quality as it invests heavily in vehicle and greenhouse gas emissions control, improved fuel economy, electrification, autonomous vehicles, driver and passenger safety, and urban mobility. The company's R&D expenses in 2018 were $7.8 billion, up over 7% from 2017 levels and up 18% from 2016 levels. We expect this trend to persist, limiting improvements in profitability and constraining financial flexibility somewhat over the next three to five years. Despite a lack of exposure to the tough emissions standards in Europe, GM faces these risks in China and--to a much lesser extent--in the U.S. Strides toward portfolio electrification in China will likely be credit neutral over the next two years. For instance, future improvements in battery technology and costs won't likely affect credit quality positively before 2025 because sufficient scale-related advantages would be hard to achieve until then. Back in 2014, GM's high-profile product recalls were a negative factor in our credit quality assessment because we believed they indicated a less effective risk mitigation culture. GM was able to manage ongoing cash outflows of over $4.4 billion associated with the recalls, fines and related litigation. We currently believe GM's management and governance demonstrates a robust risk management framework and consistent track record of making strategic decisions to achieve its EBIT and automotive cash flow targets, and strong responses to activist pressure under Mary Barra, who became CEO in January 2014. We also view management's low risk tolerance as credit positive, as demonstrated by the quick decision-making in its exit from unprofitable operations (Europe, South Africa, India, and manufacturing in Australia). This view is further supported by GM's effective targeted cost reduction actions and less emphasis on passenger cars. By avoiding additional costs in loss-making regions, the company is better positioned to invest in newer business opportunities than many automotive peers. GM's aggressive investments in autonomous technology (albeit shared with other players) will remain credit neutral for the foreseeable future. Social risks remain moderately high. After the recent labor union strike, we assume that future labor negotiations will remain contentious and could pressure its long-term cost flexibility or cause short-term production disruption. Other social risks will intensify in the next decade because accidents and cybersecurity breaches could increase the risk of product liability, government scrutiny, and further regulation. Lawrence Orlowski
The Goodyear Tire & Rubber Co.(BB-/Stable/NR)  
Unlike many auto suppliers, Goodyear has below-average exposure to tighter regulation of greenhouse gas emissions, and therefore below-average exposure to environmental risk. Whatever the vehicle powertrain, tires will be needed. As long as customer preferences do not shift back toward smaller vehicles or smaller-diameter tires, we believe the company's profitability will be mostly unaffected. Moreover, the company's investment in new tire technology will likely help future sales and profits as the pace of electric vehicle adoption rises. Separately, the company is subject to various laws and regulations pertaining to air emissions, water discharges, and the handling, storage, and disposal of waste materials. A serious environmental accident at one of the company's facilities, for instance, could have a significantly adverse effect on ratings. Social risks remain somewhat high, but manageable. At the end of 2018, the company employed about 64,000 full-time and temporary people throughout the world, including approximately 38,000 people covered under collective bargaining agreements. Perception of unfair wage rates or dangerous working conditions could result in strikes or other union actions that disrupt production. Still, we believe the company has good relationships with the unions and do not think it is vulnerable to strikes or any disruptions. Social risks are less likely to affect Goodyear than other large Tier 1 auto suppliers (which could benefit from much higher content) over the next decade since demand for tires will be largely unaffected by trends such autonomous driving technology. However, any resultant decline in vehicle ownership will still be a long-term risk for the entire industry. We see Goodyear's management and governance as satisfactory, reflecting operational expertise as well as management depth and breadth. Lawrence Orlowski
PACCAR(A+/Stable/A-1)  
We view PACCAR's governance as strong because its conservative product and geographic strategies have proven highly effective, in line with organizational capabilities and marketplace conditions. We have a positive opinion of the company's strategic positioning, given our view that its strategy is consistent with its capabilities. We also view PACCAR's organizational effectiveness positively because of its established success in operating all of its major lines of business. We believe the company's financial conservatism addresses the commercial vehicle market's inherent cyclicality, with respect to credit quality. The company has historically not incurred unexpected declines in earnings or cash flow emerging from operational risks, and fluctuations in operating performance reflect broader economic and industry cycles. PACCAR's exposure to environmental factors is largely in line with the industry and do not currently affect our expectations for continued strong credit quality. The company has established ambitious goals to further reduce emissions and enhance fuel efficiency in its truck models. The company also discloses greenhouse gas emissions as a percentage of revenue, and has improved this measure 29% over the past five years. Per the CDP (formerly the Carbon Disclosure Project), PACCAR is in the top 2% of over 6,000 companies reporting, which demonstrates a robust approach to reducing greenhouse gas emissions in Kenworth, Peterbilt, and DAF vehicles and from its facilities globally. Social factors are generally in line with peers. PACCAR's consistent focus on workplace safety has resulted in a recordable injury/illness rate lower than the U.S. heavy-duty truck manufacturing industry average. Grant Hofmeister
Clarios Global L.P. (Power Solutions)(B+/Stable/--)  
We view Clarios Global L.P.'s (Power Solutions) ESG position as largely in line with peers. While the company operates in an environmentally unfriendly subindustry, we view its successful track record of managing these risks as somewhat offsetting. If not responsibly managed, lead-acid battery recycling can pose serious public health risks through environmental emissions and occupational exposure. From an environmental standpoint, the company complies with local permits and lead-emissions regulations to avoid penalties and shutdowns. At the same time, there are legal and ethical obligations to prevent serious risks to the local community, especially children, who live close to its smelting operations. A positive for the industry is that 99% of automotive batteries are designed for recyclability and conventional vehicle batteries are the most recycled consumer product in the world. Over the years, the company has made significant investments in its manufacturing and recycling facilities. Because of these investments, Clarios' global footprint produces six times more batteries with 95% lower lead air emission than in 1990. Today its emission intensity in the U.S. is less than one-eighth as high as that of its competitors. How well a company ensures its workers' safety has important social ramifications, and Clarios appears to perform better than its industry peers in this area. The company's worker incident and illness rates in the U.S. are better than industry standards. Furthermore, over 95% of its workers maintain blood lead levels below 15 micrograms per deciliter (µg/dl), which compares with the U.S. Occupational Safety and Health Administration's requirement of 50 µg/dl and the industry's target of 30 µg/dl. Lawrence Orlowski
Sensata Technologies B.V.(BB+/Stable/--)  
While the company's positions on ESG factors are largely in line with the industry, Sensata will play an important role supporting its customers through its technological innovation to reduce CO2 and nitrogen oxide emissions targets. The company produces sensors that can play a key role monitoring the pressure and temperature of powertrains and exhausts to help OEMs increase fuel efficiency. While we believe the overall trend of lower emissions should help Sensata grow faster than the market, we believe there are some risks to the company's profitability even if electrification happens faster than expected. While Sensata will continue to innovate and find sensing solutions for EVs, the certainty of platform wins and ultimate volume of demand for these products is lower than for its existing products, for which Sensata has historically had success. We therefore consider the near-term impact on the group's credit profile as somewhat positive, but it will introduce greater risk in the long term. Social factors such as product liability issues are inherent risks for the automotive industry, but the company has a good track record and issues with its sensors are quite rare. We see Sensata's management and governance to be consistent with our broader industry assessment especially given the management's depth and breadth of expertise. Nishit K Madlani
Tenneco Inc.(BB/Negative/--)  
We consider environmental concerns related to global climate change to be a relevant factor in assessing Tenneco's credit risk because the company is in a weaker position than peers to address electrification. The company derives about two-thirds of its revenue from parts related to internal combustion engine powertrains. However, while Tenneco's ride performance product line does appear on EV platforms, it is not as well positioned compared with peers to capitalize on the trend towards EVs. Still, the automotive industry must comply with increasingly stringent GHG emissions regulations, and, in this regard, Tenneco's powertrain and clean air businesses offer effective solutions. Tier 1 suppliers such as Tenneco need to invest in R&D to create solutions that will help automakers comply with these regulations. Suppliers must also undertake capex to prepare for and support automakers' future model launches. Therefore, we expect the company to spend about 2% of its annual revenue on R&D and over 4% for capex because these expenses are necessary for Tenneco to remain competitive. Tenneco's exposure to social factors is generally in line with the industry. The risks we monitor are mostly related to product liability. We believe the company's reserves are sufficient to cover the costs of any potential litigation. We view Tenneco's management and governance as satisfactory, which reflects its success implementing its strategic plans, its operational expertise, and the depth and breadth of its management team. Lawrence Orlowski
Tesla Inc.(B-/Positive/--)  
We expect governance and social risk factors to remain high and influence Tesla's credit quality. Its environmental risks are minimal relative to other automakers given its focus on EVs and renewable energy generation and its ambitions to expand aggressively into the heavy-duty truck and energy storage markets. Governance risks will remain a bigger negative for credit quality than environment and social risks given the risk that CEO Elon Musk violates securities laws on fair disclosure and the high rate of senior executive turnover. We view key-man risk as very high for Tesla given Mr. Musk's dominant role in the company. In late 2018, the settlement with the SEC, under which Mr. Musk resigned as chairman of the board of directors but remained CEO, averted a significant disruption to Tesla's operations. With the addition of two new board members and the reduction in tenure to two years from three, the higher proportion of new directors (with fewer ties with Mr. Musk) will improve board diversity and independence through a better balance with directors that have longstanding acquaintance. Social risks will intensify in the next decade because potential accidents, fires, and cybersecurity breaches could increase the risk of product liability, government scrutiny, and further regulation. Until those risks abate, in our view Tesla's progress toward improving safety by successfully deploying its autopilot technology will at best remain credit neutral. From an environmental risk perspective, we think Tesla has an advantage over competitors given its battery and powertrain technology, the superior range per kilowatt hour (as rated by the U.S. Environmental Protection Agency) of its vehicles compared with upcoming launches from competitors, and ability to improve vehicle performance through over-the-air software updates. Further upside could arise if Tesla is able to make progress in its solar energy generation systems and energy storage products, making them more compelling to customers. Lawrence Orlowski
Ratings as of Feb. 11, 2020.
Europe, Middle East, And Africa

Table 2

Company/Rating/Comments Analyst
AB Volvo(A-/Stable/A-2)  
We view Volvo to be broadly in line with the truck industry for ESG factors. In our view, Volvo is in a good position to manage its exposure to tighter environmental regulation, thanks to its advanced technology. Volvo has invested large amounts already in alternative fuels that substantially lower emissions. For example, methane, hydrotreated vegetable oil (HVO), and liquefied natural gas-powered trucks are offered in Europe, with 20%–100% lower CO2 emissions compared with diesel. In North America, Volvo was the first OEM to approve using advanced HVO in all of its products. In addition, electric trucks are now offered in Europe. Given the company's innovative strength and sizable investments, we see longer-term growth opportunities that could allow Volvo to strengthen its competitive position over the medium term through strong technological developments. We expect that Volvo will at least keep up its already-high R&D costs and capex, likely in the higher range of the SEK20 billion-SEK25 billion spent annually since 2015. We don't expect this will lead to further significant pressure on profitability, which will instead depend more on the industry cycle. Product liability risk is not a specific concern for Volvo as no recalls have occurred to date. Per Karlsson
BMW AG(A+/Negative/A-1)  
We regard BMW as broadly in line with the industry for ESG factors. While the group has sold 500,000 EVs since 2013 and targeted 1 million by the end of 2021--which is above industry average--we still believe the EU's CO2 emissions targets are a challenge for BMW. In 2018, the average CO2 emissions for BMW's Europe fleet were 128 g/km, compared with a company target of 105-110 g/km in 2021. We believe that BMW can meet the EU targets, but if it misses them the fine would be about €90 million for 1 g/km of CO2 exceeding the target. The company plans to offer 25 electric models by 2023, more than half of them fully electric. The company also targets significant CO2 reductions by increasing the proportion of car sales with 48-volt technology. Higher investments in fleet modernization and electrification will likely sustain BMW's solid market position and growth prospects, but will pressure margins in the short term. BMW spent about 14% of revenue on R&D and capex in 2018 and we expect similar numbers in 2019. We have only minor concerns on governance factors, primarily related to potential fines with regard to diesel exhaust gas emissions and antitrust proceedings. The announced €1.4 billion fine due to an EU antitrust proceeding could burden the company's cash flow in 2020; we included the fine in our current base case. Anna Stegert
Compagnie Generale des Etablissements Michelin S.C.A.(A-/Stable/A-2)  
We see governance for tire manufacturer Michelin as a supportive factor because its management has an excellent track record of executing its strategy and meeting its operational and financial targets. For instance, the group has maintained a strong brand reputation and pricing power resulting in above-average margins. Unlike many auto suppliers, Michelin has a below-average exposure to tighter regulation of greenhouse gas emissions. This is because the demand for tires is agnostic to the powertrain mix. Moreover, Michelin generates only about 20%-25% of its sales from automakers while the rest comes from replacement and specialty markets. We expect that Michelin will maintain its focus on innovations to retain its competitive edge. Recently, the company developed an airless tire with General Motors, and created a joint-venture with Faurecia on hydrogen mobility solutions. We see social factors for Michelin as broadly in line with its peers. As part of its competitiveness plan aimed at offsetting cost inflation, Michelin has successfully implemented reorganization actions without suffering major plant disruptions. Margaux Pery
Continental AG(BBB+/Stable/A-2)  
We consider Continental to be favorably positioned on environmental factors because about 40% of its €44 billion sales were achieved through products that help to reduce CO2 emissions like lightweight components, green tires, and powertrain components. We consider Continental's governance factors positively versus peers because it has a strong track record of forward-looking strategies for developing new products. We expect margin pressure through high R&D spending (about 10% of sales in Continental's auto segment) in the next few years, given the extensive upfront development costs that Continental will need to absorb for EVs, autonomous driving, connectivity, and other technologies. Continental's EBITDA margins (including S&P Global Ratings' adjustments) already decreased to 14% at year-end 2018 from 15.5% in 2017, and we expect further margin pressure in 2019 and 2020, partly due to weaker industry volumes. Road and vehicle safety is particularly relevant for the company's auto and tire divisions but have not significantly affected the company's operating results, reputation, or creditworthiness over the last years, and therefore we consider the company's exposure to social risks as in line with the industry. Eve Seiltgens
Daimler AG(A-/Negative/A-2)  
Daimler's ESG factors are broadly in line with the industry, although its position relative to EU emissions regulation requirements is somewhat worse. To achieve the challenging CO2 targets the EU set for 2021 and to avoid possible fines, Daimler plans to invest around €10 billion in developing EVs and plans to launch more than 10 purely electric cars in all segments, which should account for 15%-25% of its sales volume by 2025. For 2019, Daimler expects average CO2 emissions for its European fleet to go up to 138 g/km, compared with a company target of about 105 g/km in 2021. The fine for Daimler would be about €100 million for 1 g/km of CO2 exceeding the target. Daimler has spent about 14% on R&D and capex in the first half of 2019 in its Mercedes Benz Car division and we expect similar numbers in 2020. The high investments in electrification will likely sustain Daimler's solid market position and growth prospects, but will pressure margins in the short term (2019-2020). Governance factors are currently in line with peers but could become a credit concern if the current government investigations of diesel exhaust gas emissions are significantly above €2.6 billion, which we already reflect in our base case for 2019-2021. Anna Stegert
Fiat Chrysler Automobiles N.V.(BB+/Watch Pos/B)  
FCA has material exposure to environmental factors due to CO2 regulations for automakers in the EU, and we consider it to be more exposed than the broader industry. This is because we view FCA as somewhat behind peers with regard to the electrification of its product portfolio. We see FCA's agreement to pool its car fleet with Tesla's for CO2 emission testing as further evidence that the group would fail to meet the European CO2 emission targets on a stand-alone basis. The group's ability to meet emissions standards is also impaired by its plans to reduce diesel engines. At the same time, however, FCA's strategy shields it from market acceptance risks compared to peers that need to push new technology in the market to ensure compliance with CO2 regulation by the end of 2020. The company is planning to offer 12 electrified propulsion systems by 2022 and is planning the roll-out of its BEV Fiat 500e for 2020. We believe FCA might struggle to pass on the incremental costs to consumers for electrifying its small vehicles. The company has not disclosed the contractual terms of the agreement with Tesla, but we assume declining cost over 2019-2021. Vittoria Ferraris
Jaguar Land Rover Automotive PLC(B+/Negative/--)  
JLR, like many of its auto OEM peers, is significantly exposed to tougher emission standards, particularly in Europe. We see JLR as more exposed to environmental risks than the broader industry because the company's average CO2 emissions for its European fleet were about 152 g/km in 2017. They are expected to rise slightly to about 160 g/km in 2018 and 2019 due to EU6D-Temp RDE1 calibration and the change in test procedure to the worldwide harmonized light vehicle test. The gradual shift in sales from diesel to gasoline engines are also a contributing factor, particularly because JLR's sales mix is more geared toward diesel engines than other European manufacturers. To achieve the challenging CO2 targets in 2021 and avoid possible fines, JLR plans to simplify its powertrain architecture and number of engine variants, invest in electrification, and lower its product weight. JLR has plans to offer mild HEV, PHEV, or BEV on every model from 2020. However, we consider that larger peers are committing significant financial resources to electrification and are also further along the curve (at this stage) than JLR. Social factors are generally in line with peers, with risks related to product liability issues linked to road and vehicle safety. In our view, JLR's investments have recently been inconsistent with marketplace conditions. The company has had to address a sudden and material decline in demand in some of its core markets and enact a £2.5 billion cost-cutting project in order to arrest falling margins and high cash burn. Our assessment of JLR's governance considers its transparent communication with investors and good depth and breadth of management. On the other hand, tighter emissions standards, the industry's shift toward electrification, and geopolitical risks (including Brexit and U.S. tariffs) all present material challenges through which management will need to successfully steer the company. David Matthews
Peugeot S.A.(BBB-/Stable/NR)  
We see PSA as more exposed than the broader industry because its sales are primarily concentrated in Europe (about 90% of group sales). PSA is mainly focused on securing compliance with 2020 average fleet CO2 emission targets (95-100 g/km). This compares with an average CO2 emissions of 114 g/km in 2018. According to its sustainability report, if the company-specific CO2 target is missed, a penalty amounting to €95 per g/km of CO2 and per vehicle will be applied (e.g. for Groupe PSA approximately €240 million for 1 g/km of CO2 exceeding the target). Groupe PSA has already launched four new all-electric and six plug-in hybrid models in line with its roadmap to offer a 100% electrified range from 2025. Since 2019, all new models Groupe PSA launched come with either an all-electric or a plug-in hybrid powertrain. Reporting 2019 sales volumes in January 2020, the company stated that LEV orders were promising and in line with group objectives to be compliant with the European 2020 CO2 target. Execution of the electrification strategy requires consistent efforts from OEMs on R&D and capex. According to our estimates, PSA is generally in line with peers, since its R&D and capex should hover at approximately 8%-9% of sales, versus an industry average we estimate at 10%-12% for OEMs in Europe, the Middle East, and Africa. Our base case factors in some margin dilution due to the transition to electrification and the higher production costs of hybrid and pure battery vehicles, which we think will gradually subside toward 2025 with wider adoption of EVs and increased production scale. Vittoria Ferraris
Renault S.A.(BBB-/Negative/A-3)  
French carmaker Renault has material exposure to environmental factor due to its large share of volume sales in Europe (52% in 2019). In order to meet the EU's 2020/2021 CO2 emissions target of around 93g/km for its average car fleet in Europe, compared with 112g/km in 2018, Renault is stepping up its efforts to electrify its portfolio. This will constrain, at least temporarily, Renault's operating profitability and free cash flow generation due to the associated R&D costs and capex. Renault acknowledges that its electric cars generate operating margins below the group average, but indicates that they are profitable in terms of variable costs. By the end of 2022, the company expects to generate an operating margin in Europe at the group average. Thanks to its cooperation with Nissan and Mitsubishi, Renault expects benefits for R&D and production costs. The cost benefits will mainly come from the use of a common platform for electric vehicles. This is a key consideration because Renault is a mass-market manufacturer focused on small and entry-level cars, and runs a risk of not being able to pass on extra costs on to consumers. Social factors do not play a major role in our credit assessment for Renault, but we monitor the risks of product liability issues linked to road and vehicle safety. Our assessment of Renault's management and governance does not constrain our ratings, but it is lower compared to other investment-grade companies. Renault has strengthened its governance with the appointment of Jean-Dominique Sénard as chairman and the recent appointment of Luca de Meo as CEO (following the dismissal of Thierry Bolloré in October 2019). Previously, both the chairman and CEO positions were concentrated in the sole person of Carlos Ghosn. However, we believe that the management turnover since Mr. Ghosn's arrest adds uncertainty about the successful execution of the company's strategy. Margaux Pery
Robert Bosch GmbH(AA-/Negative/A-1+)  
We view Robert Bosch's environmental and governance factors as positive versus its peers because it has a strong, forward-looking strategy for developing new products. The company develops and manufactures a wide range of systems and components for an electrified powertrain, such as electric motors, power electronics, and battery systems, as well as a new 48V battery for hybrids and an e-axle for EVs, which help Bosch's customers manage the shift away from traditional combustion engines. It targets €5 billion of electro-mobility sales by 2025 and we project the company will continue to spend heavily on electrification and automation of mobility to help OEMs to reduce CO2 emissions. Bosch spent more than 13% of sales (including capitalized development costs) on R&D and capex in recent years--more than most its industry peers. Furthermore, Bosch targets to reduce its own worldwide net CO2 emissions to zero by 2020 and to invest about €1 billion in its locations' energy efficiency by 2030. In addition, Bosch proactively tackles water scarcity by investing approximately €50 million annually until 2025 to reduce water consumption at its own locations by 25% in regions facing water scarcity. Our positive view of the group's governance is only partly offset by various legal risks that are covered by a provision of €1.2 billion as of Dec. 31, 2018, including those stemming from the supply of engine control software to Volkswagen AG, Audi, Porsche, and several other automakers. Bosch has already reached several settlements in the U.S. and paid about US$450 million. Eve Seiltgens
Scania AB(BBB+/Negative/A-2)  
We view Scania to be broadly in line with the truck industry for ESG factors. While the company is positioning itself well relative to environmental factors in the long run, we do not believe it is more favorably positioned relative to peers in the near term. Scania's credit profile is bolstered by its high awareness and focus on supporting fossil-free commercial transport solutions by 2050. The company already has a portfolio of engines that cover all commercially available alternative fuels (biogas, bioethonal, biodiesel, biogas, compressed natural gas, and hydrogenated vegetable oils). Scania's biogas engines reduce CO2 emission by 90% compared with traditional diesel combustion engines. The company actively supports infrastructure development through a various partnerships. As a result, we view Scania as in a good position to comply with tighter environmental regulation in Europe mainly, albeit over a longer timescale than our rating horizon. The CO2 regulation will continue to require substantial investments at Scania, which will likely constrain profitability in the near to medium term. We expect R&D of about 6.0%-8.0% of sales, with a focus on strategic automation, connectivity, and electrification. However, given Scania's position as a premium truck manufacturer, we believe its high awareness and focus on lower emissions will continue to strengthen its competitive position over time. Social factors are generally in line with those of peers, although we are monitoring an ongoing investigation by the European Commission concerning inappropriate cooperation. Per Karlsson
Schaeffler AG(BBB-/Negative/--)  
We consider Schaeffler's exposure to ESG factors as broadly in line with the industry. While Schaeffler's product portfolio is well positioned to offer better fuel efficiency for internal combustion engine technology, we expect Schaeffler will need to carefully balance necessary investments to enhance and broaden its product offering in e-mobility and autonomous driving competencies. We expect the shift to organically build up this product offering will weaken margins. At the same time, the company earmarked about €100 million-€500 million for acquisitions per year (€163 million in 2018) to strengthen the e-mobility segment. In addition, the company is planning to incur R&D of about 8.0%-8.5% of sales in its automotive OEM business, which is largely consistent with peers' efforts. While this will constrain profitability in the near term, it should support the company's transition in an evolving industry environment longer term. We see Schaeffler's management and governance as satisfactory, reflecting its depth and breadth of expertise. In addition, the ongoing leverage reduction at Schaeffler's parent company IHO Verwaltungs GmbH, reduces IHO's reliance on dividends from Schaeffler to service its debt. Anna Stegert
Valeo S.A.(BBB-/Stable/A-3)  
We view Valeo's exposure to environmental factors as positive versus its peers because about 50% of its products are dedicated to reducing CO2 emissions. Valeo's product portfolio in its powertrain business helps OEMs to reduce CO2 and nitrogen oxide emissions mainly through electrification. We see Valeo as well placed to address this trend by offering its customers with 48V technology, for which it holds a significant market share. In addition, Valeo should see growth opportunities through its joint venture with Siemens on high-voltage components. The ongoing electrification of car powertrains offers growth opportunities to Valeo because the content per car for a low-voltage electric car is about twice that of a standard internal combustion engine powered car and it can go as much as seven to nine times higher for plug-in hybrids (including high-voltage products from its joint venture with Siemens). However, at the same time, gross R&D investments remain high (at around 10.8% of 2018 sales) constraining the company's EBITDA margin and free cash flow generation in the near term before sales reach a critical mass. We view social factors for Valeo as generally in line with peers. We score Valeo's management and governance as satisfactory, supported by management's expertise and experience. Margaux Pery
Volkswagen AG(BBB+/Stable/A-2)  
We continue to regard VW's fair assessment of management and governance as a weakness for the rating because the consequences of the diesel emissions testing scandal continue to weigh on cash flows (around €2 billion in 2019), albeit less than in the past. In addition, although not expected, if VW became a second offender (i.e. class action recently started in Europe), VW could face even higher fines from regulators and more damage to its brand reputation if additional misconduct comes to light at one of its subsidiaries. We view VW's ownership structure as negatively influencing its corporate decision-making, with limited consideration given to minority shareholders. In particular, this reflects the continued disproportionate voting rights of Porsche Automobile Holding SE (Porsche SE). Porsche SE has a 52.2% share in VW, held through only 30.8% of VW's subscribed capital, which gives it control of VW (except on matters linked to factory and headquarters location). Porsche SE is itself 100% controlled by members of the Porsche and Piech families. Without improvements in VW's management and governance framework, a rating in the 'A' category is unlikely. We see VW as more exposed to environmental factors than the broader industry because of its leadership in Europe where environmental regulation is particularly restrictive and punitive., In Europe, where VW controls a little less than 25% of the market, VW still needs to manage a reduction of more than 25g/km to secure compliance with 2020 average fleet CO2 emission targets (95g/km-100g/km). To achieve this, VW, unlike some of its global peers, is accelerating the deployment of pure battery vehicles and has developed a separate platform for its EV portfolio, which has been translating into R&D and capex above 12% of sales in recent years. This is at the very top of the industry range and is constraining the group's operating margins. While we monitor this, we do not think it represents downside risk to the rating at this stage considering VW's double-digit adjusted EBITDA margin, now less severely burdened by dieselgate-linked provisions. Vittoria Ferraris
ZF Friedrichshafen AG(BBB-/Negative/--)  
We view ZF's management and governance as weaker than German peers, given the group's demonstrated aggressive acquisition policy, as shown by the large debt-funded acquisitions of TRW in 2014 for €9.6 billion plus the assumption of debt, and WABCO in 2019 for €7.4 billion. Environmental factors are well in line with that of industry peers. Like many of its competitors, ZF has to invest heavily in R&D to reposition its product offering toward electric vehicles. About €12 billion in R&D and capex is planned for the coming five years in the areas of electrification and autonomous driving. This will continue to weigh on profitability and constrain reported FOCF. The company's adjusted EBITDA margin was 8.3% in the 12 months to June 30, 2019, and we forecast adjusted FOCF at about €0.7 billion in 2019 compared with a weak €0.4 billion in 2018, but well below the FOCF that ZF generated in 2016 and 2017. The near-term impact of environmental factors on the group's credit profile is therefore somewhat negative. However, longer-term growth opportunities could allow ZF to strengthen its competitive position by leading the industry in technological developments in those areas. Social factors are generally in line with industry peers. However, we monitor the current air bag investigation of 12.3 million vehicles manufactured by ZF's U.S. subsidiary TRW. So far, the magnitude of recalls has not significantly affected the company's operating results. Anna Stegert
Ratings as of Feb. 11, 2020.
Latin America

Table 3

Company/Rating/Comments Analyst
Metalsa S.A. de C.V.(BB+/Stable/--)  
Environmental factors are relevant for our credit analysis on Metalsa due to the increasingly rigorous regulations on emission control and energy and water consumption in the auto supplier industry. However, we do not view Matalsa as overly exposed to these factors relative to peers. We do not believe that the company faces significant environmental risk in the next 12-24 months because we believe its operating strategies adequately address environmental factors that could hurt cash generation for debt repayment. Metalsa's sustainability strategy focuses on increasing emission control by reducing 792 tons of CO2 emissions, water recycling of about 12,159 m3, and energy consumption annual savings of 441,660 kilowatt hours, which we believe has benefited the company's cost-efficiency results. In addition, Metalsa is constantly innovating its R&D to continue developing new technologies for OEMs aligned to the auto industry's long-term environmental and sustainability regulations. In our view, these strategies have allowed the company to partially offset price increases on energy costs and raw materials (mainly steel), leading to EBITDA margins of around 12.9% as of second-quarter 2019, which we consider average compared to its industry peers. We view Metalsa's governance as satisfactory, mainly due to its strategic planning process, risk management standards, and independent board members, which respond to all stakeholders by providing sustainable policies and risk prevention strategies. Humberto Patino
Nemak S.A.B. de C.V.(BB+/Stable/--)  
Environmental factors are relevant for Nemak's credit analysis due to the increasingly rigorous regulations for emissions control (CO2), as well as for energy and water consumption within the auto supplier industry. However, we do not view Nemak as overly exposed to these factors relative to peers. Nemak invested $10.5 million as of Dec. 31, 2018, in emissions reduction, waste disposal and remediation, and other efforts. This has led to a total emissions reduction of 72,225 tons of CO2 equivalent, use of around 80.0% of recycled aluminum in production, more efficient energy consumption through alternative sources, and 15 water treatment plants reusing more than 203,000 m3 during production. Nemak's development of new technologies for OEMs has allowed Nemak to maintain operating efficiencies, leading to EBITDA margins of around 15.3% as of third-quarter 2019; which are above average compared to its industry peers. Social exposure is also a significant factor in our credit analysis. Nemak is mainly exposed to potential strikes in its production plants from labor union workers, liability claims of quality deficiency, and potential fines and liabilities regarding environmental, health, and social issues affecting communities around its main operating activities. Nemak faced an employee strike during third-quarter 2019 after announcing the closure of a production plant in Windsor, Ontario. The company responded quickly to inquiries and ultimately its cash generation was not significantly affected. We view Nemak's governance as satisfactory, reflecting its proven track record in strategic planning and execution processes, as well as management's expertise and experience. These factors align the company with its parent company's (Alfa S.A.B. de C.V.) sustainable policies and risk prevention strategies. Humberto Patino
Ratings as of Feb. 11, 2020.
Asia-Pacific

Table 4

Company/Rating/Comments Analyst
BAIC Motor Corp. Ltd.(BBB+/Negative/--)  
BAIC's exposure to ESG factors is broadly in line with industry peers. NEV sales accounted for 3% of BAIC's total sales volume in 2018 and will likely increase moderately in the next one to two years due to its increasing focus in electrification. We believe BAIC will invest substantially to advance NEV technology in the coming two years. BAIC mainly rolls out NEV models through its proprietary Beijing brand, EU- and EX-series. The company is working to upgrade its pure electric models by incorporating intelligent networking and lightweight technology, and it's also rolling out hybrid electric models. As such, we anticipate BAIC will moderately increase its capex and R&D spending in 2019 and 2020 from the 6% in 2018. However, we anticipate that this will likely have only a limited impact on the company's financial metrics given its large net cash position. Meanwhile, BAIC is currently localizing the Mercedes-Benz EQC model, Daimler's first NEV model in China. With the increasing integration of Daimler technology, we believe the company should be able to increase product competitiveness in the NEV market. Social factors are largely in line with industry peers, but product liability issues are inherent risks for all auto producers. So far, we have not observed any material recalls or lawsuits regarding product recalls for the company. Stephen Chan
Beijing Automotive Group Co. Ltd. (BBB+/Negative/--)  
We view BAG's ESG factors to be broadly in line with industry peers. The company, via its subsidiary BAIC BluePark, is one of the early entrants into the NEV sector and is the market's largest pure electric vehicle producer in China. The company sold 158,012 electric vehicles in 2018, accounting for 12% of China's total NEV sales. This also accounts for around 6.6% of its total sales volume in 2018. We expect BAG to continuously invest in NEV technology enhancement and capacity to meet regulatory requirements and strengthen its market position. The company's current NEV are mainly mass-market models, and the company is working on higher end products with better product appeal and longer mileage. We anticipate BAG will maintain stable investment in NEV, with R&D and capex at around 6%-8% of its revenue level. This is because the company can leverage Daimler's R&D capability for model localization. They are in the process of launching the EQC model, Daimler's first NEV model that targets the mid-high end market, at their joint venture company Beijing Benz. Social factors are largely in line with peers, but product liability issues are inherent risks for all auto producers. BAG recalled 69,358 NEVs in 2018. However, we don't believe the magnitude of recalls significantly affected BAG's credit profile. Stephen Chan
Bridgestone Corp.(A/Stable/A-1)  
We believe that environmental and social risk factors are generally in line with its peers. The automotive industry faces tighter regulations on greenhouse gas emissions, vehicle safety, and energy independence. The requirements for tire durability and fuel economy performance will likely increase further. Moreover, in anticipation of autonomous driving, we expect greater demand for Bridgestone's specialized run-flat tires. These tires can travel for some distance after the loss of air pressure and therefore enable driving even after punctures. The company has already put fuel-efficient tires at the center of its product lineup for public roads. Its work to raise fuel efficiency has been ahead of peers. We therefore do not expect a huge spike in R&D spending, which was at 4% of total sales in fiscal 2018, over the next few years. Furthermore, as the world's largest tire and rubber related company, it has taken the lead in sustainable procurement of natural rubber. We deem this as positive in the medium to long term regarding stable raw material provision and market conditions. Social risk factors related to product safety and recalls are generally in line with peers. We believe that the company has been stepping up its efforts to ensure safety and has recently experienced only minor recalls, such as one over a partial tire leak. Governance factors are somewhat favorable compared to peers given the company's strong management and governance assessment. We view the ability of the company's management to fulfill its longstanding challenge of passing on raw material price volatility to customers positively. Taishi Yamazaki
Denso Corp.(AA-/Stable/A-1+)  
We consider Denso to be favorably positioned with regards to environmental factors. We expect cost reductions and the company's collaborations with the Toyota group to mitigate the burden of this R&D spending compared with industry peers. We believe Denso plays an important role as a leading auto parts maker. The company helps automakers to reduce CO2 and nitrogen oxide emissions through its technologies. The company is developing a broad product range for technologies that will facilitate vehicle electrification. The lineup includes inverters and motor generators for HEVs. The company's products for hybrid vehicle and engine management systems have a proven record of contributing to fuel efficiency. As an auto parts maker, social risks for Denso relate to safety management and product recalls, and we view Denso's exposure to social risks as generally in line with peers. The company was involved in a small recall of home-use electric heaters in 2008 and 2011. We believe Denso management's ample knowledge and extensive experience support its strong planning and execution of business strategy, as reflected by its record of stable earnings. We assess Denso's management and governance as strong. Katsuyuki Nakai
Dongfeng Motor Group Co. Ltd.(A/Stable/--)  
We consider ESG exposure for Dongfeng to be broadly in line with the industry. NEVs currently account for around 2%-3% of the company's total sales. We expect the company to gradually accelerate its investment in NEV to enhance its market standing. The company's electric passenger vehicles have been focused on the low-mid end market in recent years, and the company has set up a new department dedicated to developing high-end NEVs. The company has also formed a lithium battery manufacturing joint venture with Contemporary Amperex Technology, the world's largest lithium battery manufacturer, to enhance its NEV battery technology and functionality. Meanwhile, its joint venture with Nissan Motor Co. Ltd. is also in the process of localizing NEV production in China. As such, we anticipate Dongfeng to increase its capex and R&D by 2%-3% of revenue to strengthen its NEV capabilities and upgrade other products. We forecast the increasing spending will reduce its EBITDA margin by 30-80 percentage points and FOCF by RMB1.5 billion-RMB2.5 billion annually. However, we expect Dongfeng to maintain its net cash position. Social and governance factors are largely in line with peers, but product liability issues are an inherent risk for all auto producers. Although Dongfeng's JVs had over 500,000 vehicle recalls in 2018, we do not believe they significantly affected the joint venture's operations or the company's credit profile. Stephen Chan
Geely Auto (BBB-/Stable/--)  
Geely Auto's ESG exposure is in line with global auto OEM peers, in our view. NEV accounted for about 8% of Geely Auto's total sales volume in 2019, up from 5% in 2018, and the company is quickly ramping up its NEV offerings by launching a stand-alone NEV brand platform in 2019. In addition, Geely Auto is cooperating with battery technology leaders, such as Contemporary Amperex Technology and LG Chem, to further improve its competence in the NEV powertrain space. In our view, the company will have to invest substantially in NEV R&D and new model launches in the next few years to meet China's dual-credit requirements on domestic auto makers. We estimate that Geely Auto's total R&D spending (including both expensed and capitalized) will increase slightly to 6%-7% of revenue in the next few years from the current 4.5%-5.5%. Social and governance factors are generally in line with peers, but product liability issues are inherent risks. Geely Auto recalled 40,068 vehicles in 2018 and 89,657 in January 2019. In our view, the magnitude of these recalls does not significantly affect the company's current credit profile. Chloe Wang
Honda Motor Co. Ltd(A/Stable/A-1)  
Environmental and social risks to Honda are broadly in line with the industry, in our view. Environmental regulations on CO2 and nitrogen oxide emissions and the standards for vehicle energy use are getting tougher. Honda has less exposure to Europe and China, which have more stringent environmental standards. However, its profitability could be pressured if R&D costs to meet the standards rapidly increase. The ratio of its R&D expenses to sales rose to 5.2% in fiscal 2018. We expect the ratio to keep rising, albeit at a moderate pace, over the next year or two. However, this will likely have only limited impact on the company's EBITDA margin, which is underpinned by its highly profitable motorcycle business. On social risks, Honda has promoted measures to secure staff while pursuing initiatives to establish business alliances with companies in other industries to develop next-generation technologies. For example, it has collaborated with Softbank on artificial intelligence and connectivity, and with SenseTime and General Motors on autonomous driving. We also believe the company will likely maintain its leading position in the motorcycle business with its strong technological advantage, despite tougher environmental regulations in both developed and emerging countries. Katsuyuki Nakai
Hyundai Motor Co.(BBB+/Stable/--)  
Hyundai Motor Group (Hyundai Motor Co., Kia Motors Corp., and Hyundai Mobis Co. Ltd.) is fairly well positioned relative to peers for increasing environmental risks in the global auto market (e.g. fuel economy regulation in China, carbon emissions target in Europe). The companies are investing to expand its green car models to over 30 by 2020 and 44 by 2025, from 15 in 2018, and aspires to become a top three automaker in the global green market. The group's green cars have competitive performance specifications relative to its global peers and have full technology coverage (hybrid, pure electric, and hydrogen fuel cell-powered). A key factor affecting the company's credit profile is its ability to execute green targets in a timely manner, without any significant detriment to its operations and leverage profile. The higher manufacturing cost of green cars could put some pressure on margin as it makes more of them. Also, in 2019, the group announced a plan to materially expand investment in new technology (around 50% and for mostly green technology and autonomous driving), which could pressure cash flow. Social factors (workforce and safety management) remain major risks to HMC-Kia. The companies' domestic plants (over 40% of total production) have experienced labor strikes almost every year since 2012, with the most significant one in 2016 (utilization rate down by nearly 10%). As the application of new technology accelerates, the risk of reputational damage from unexpected quality issues becomes more critical for automakers to manage with respect to customer acceptance and regulatory responses. For instance, HMC-Kia had over US$2 billion in quality-related expenses in 2017-2019. Governance is generally in line with peers. However, there could be changes in the group's complex ownership structure ("circular shareholding" among HMC, Kia, and Mobis) in the near future, which the government is pushing to resolve. The impact remains uncertain given the low visibility of the resolution. Minjib Kim
Nissan Motor Co. Ltd.(BBB+/Negative/A-2)  
We consider Nissan's governance as a weakness for our rating on the company. In our view, the company's governance system is not sufficient, given that it appears to have been unable to guard against the misconduct and conflicts of interest of which its former chairman is accused. We also believe that the recent cases of inadequate inspections show the company's internal risk management is not strong. Additional risks could emerge from possible accusations against Nissan or potential shareholder litigation. Going forward, we will monitor Nissan's efforts to improve governance and the progress in negotiations with Renault about the alliance structure. Overall, we see Nissan's management and governance as fair, lower than that of most global peers. Environmental factors are generally in line with peers. By 2022, Nissan aims for a 40% reduction in CO2 emissions compared with those for 2000 in its new car sales in Japan, the U.S., Europe, and China. Under this ambitious goal, Nissan aims to increase its sales of EVs and e-Power hybrid vehicles to 1 million units. This will require a rapid increase in R&D expenses (4.5% of sales in fiscal 2018), limiting the likelihood of a significant improvement in Nissan's profitability over the next two to three years. Also, fierce competition in eco-friendly vehicles could weaken Nissan's business position if it fails to adequately deal with technological development. We believe social factors are less material for Nissan. The company is potentially exposed to risks deriving from labor issues and engagement with local communities given its global operation. It also has potential risks with regard to product safety and recalls. However, Nissan has a record of controlling those risks effectively, in our view. Katsuyuki Nakai
Toyota Motor Corp.(AA-/Stable/A-1+)  
We view Toyota Motor to be favorably positioned with regards to environmental risks. We believe negative credit implications for Toyota Motor are low compared to industry peers, given its readiness for several potential scenarios for future electrification, backed by its strong technological capability for hybrid vehicles. It also has an ample cash position and fair supplier selection. Toyota aims to achieve global sales of at least 5.5 million EVs, including at least 1 million zero-emission BEVs and fuel cell EVs by 2030, versus 1.5 million in total in 2017. It also set a target to cut CO2 emissions from new vehicles by 35% compared with 2010. Toyota's R&D expenses in fiscal 2018 (12 months ended March 31, 2019) were ¥1.05 trillion, or around 4% of sales; and capex for the auto business was over ¥1.5 trillion in fiscal 2018, up 10% from the previous year. Starting in 2020, Toyota will accelerate the introduction of BEVs, initially in China, and will expand these models to at least 10 in the first half of the decade worldwide. It will also expand the line-up of fuel cell EVs and plug-in hybrid EVs throughout the 2020s. We expect this trend to persist, limiting marked improvement in profitability. However, we believe Toyota will manage R&D and capex effectively because it is making effective use of joint ventures within the group and business tie-ups besides its own R&D resources. Social factors are generally in line with industry peers in our view. The company has potential risks with regard to product safety and recalls, but we believe Toyota has a strong commitment to prioritizing safety issues. Having chief quality officers in various region, the company has a record of controlling those risks effectively. Toyota is also extending such efforts for product safety among companies of its whole supply chain. Katsuyuki Nakai
Zhejiang Geely Holding Group Co. Ltd.(BBB-/Stable/--)  
Zhejiang Geely Holding's ESG exposure is in line with global auto OEM peers, in our view. NEV accounted for about 8% of Geely Auto's total sales volume in 2019, up from 5% in 2018, and the company is quickly ramping up its NEV offerings by launching a stand-alone NEV brand platform in 2019. Volvo Car,99% owned by Zhejiang Geely Holding, is also aiming for 50% contribution from pure electric cars to its sales by 2025, and aims to slash the lifecycle carbon footprint on each vehicle by 40% by the same year. In addition, Zhejiang Geely Holding is cooperating with battery technology leaders, such as Contemporary Amperex Technology and LG Chem, via its subsidiary Geely Auto, to further improve its competence in the NEV powertrain space. In our view, Zhejiang Geely Holding will have to invest substantially in NEV R&D and new model launches in the next few years to meet China's dual-credit requirements on domestic automakers, relevant overseas regulations, as well as its own production target. We estimate that Zhejiang Geely Holding's total R&D spending (including both expensed and capitalized) will increase slightly to 7%-8% of revenue in the next few years from the current 6%-7%. Social and governance factors are credit neutral to Zhejiang Geely Holding, but product liability issues are inherent risks. Geely Auto recalled 40,068 vehicles in 2018 and 89,657 in January 2019. Volvo Car also recalled 674,000 vehicles in 2019. In our view, the magnitude of these recalls did not significantly affect the company's current credit profile. Chloe Wang
Ratings as of Feb. 11, 2020.

This report does not constitute a rating action.

Primary Credit Analysts:Vittoria Ferraris, Milan (39) 02-72111-207;
vittoria.ferraris@spglobal.com
Nishit K Madlani, New York (1) 212-438-4070;
nishit.madlani@spglobal.com
Eve Seiltgens, Frankfurt (49) 69-33-999-124;
eve.seiltgens@spglobal.com
Secondary Contacts:Anna Stegert, Frankfurt (49) 69-33-999-128;
anna.stegert@spglobal.com
Margaux Pery, Paris (33)1-4420-7335;
margaux.pery@spglobal.com
Chloe Wang, Hong Kong;
chloe.wang@spglobal.com
Lawrence Orlowski, CFA, New York (1) 212-438-7800;
lawrence.orlowski@spglobal.com
Katsuyuki Nakai, Tokyo (81) 3-4550-8748;
katsuyuki.nakai@spglobal.com
Per Karlsson, Stockholm (46) 8-440-5927;
per.karlsson@spglobal.com
David Binns, CFA, New York (1) 212-438-3604;
david.binns@spglobal.com
Minjib Kim, Hong Kong (852) 2533-3503;
Minjib.Kim@spglobal.com
Stephen Chan, Hong Kong (852) 2532-8088;
stephen.chan@spglobal.com
Alessio Di Francesco, CFA, Toronto (1) 416-507-2573;
alessio.di.francesco@spglobal.com
Claire Yuan, Hong Kong (852) 2533-3542;
Claire.Yuan@spglobal.com
Robyn P Shapiro, New York (1) 212-438-7224;
robyn.shapiro@spglobal.com
Grant Hofmeister, New York + 1 (212) 438 8855;
Grant.Hofmeister@spglobal.com
Humberto Patino, Mexico City + 52 55 5081 4485;
humberto.patino@spglobal.com
David Matthews, London (44) 20-7176-3611;
david.matthews@spglobal.com
Taishi Yamazaki, Tokyo (81) 3-4550-8770;
taishi.yamazaki@spglobal.com

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