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After Ending 2020 Strongly, U.S. Auto Sales Are Set To Continue Recovery In 2021


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Corporates: Could Interest Rate And Recession Risks Derail Corporate Credit?


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After Ending 2020 Strongly, U.S. Auto Sales Are Set To Continue Recovery In 2021

The nearly 15% drop in U.S. light-vehicle sales last year (according to Ward's AutoInfoBank; see chart 1) was the largest annual decline since the Great Recession. However, profitability in North America for most auto issuers recovered strongly in the second half of 2020. Automakers were able to lower sales incentives as demand was bolstered by strong housing starts (which have had a strong correlation to auto sales historically), benign interest rates, low gas prices and the ongoing shift of customer preferences toward more-profitable trucks and large SUVs. Another contributing factor was the consumer shift away from public transportation and a flight to the suburbs during the pandemic. As a result, we believe the industry's prospects have improved considerably since last spring, when we took several negative rating actions following dealership closures and a two-month halt in automotive production.

We expect credit quality within the sector to improve somewhat in 2021 because of better factory utilization and a more favorable product mix than in previous years. However, we believe there are increasing downside risks to our base-case , as affordability continues to be a risk. In December, the average transaction price surged 8% to a record $38,000, as per J.D. Power. This is largely because inventory shortfalls pushed incentives down to 9% of the sticker price versus 19% in April 2020. Also, the industry is grappling with a shortage in supply of semiconductors which will lead to some supply disruption and possibly lower retail availability of many models over the next couple of quarters. In addition, economic recovery could falter with the steady resurgence in new COVID-19 cases.

Chart 1


There Remains A High Degree Of Uncertainty Around Our Base Case

S&P Global Economists expect U.S. real GDP contracted 3.9% in 2020 and will grow 4.2% in 2021. Even with the boost of the stimulus package passed in December 2020, we expect GDP growth of 3.0% in 2022 and 2.1% in 2023. Adding to the pain is the U.S. unemployment rate, which is unlikely to return to its pre-pandemic low until after 2023. This could give the Federal Reserve good reason to keep interest rates near zero until mid-2024.

The December Institute of Supply Management (ISM) manufacturing index (PMI) was at 60.7%, up 3.2 percentage points from the November reading of 57.5%. This was the eighth consecutive monthly expansion of the overall economy. The economy contracted in March, April, and May, which ended 131 months of growth. This further supports our base-case for an expansion of the North American automotive industry in 2021, aided by a weak comparison in the second quarter of 2020. Typically, speculative-grade auto issuers have tended to experience credit distress only when the ISM Index falls below 43.

We continue to see the risk of recession over the next 12 months as near the top of the 25%-30% range. The U.S. economy, which has recouped two-thirds of the economic losses from the COVID-19-induced recession, showed signs of weakness this holiday season amid climbing COVID-19 infection rates. Per our economist's downside scenario (see "Staying Home For The Holidays", published Dec. 2, 2020), GDP would drop by 4.4% in 2020 and rise by only 0.8% in 2021.

Our downside (recession) case assumes light-vehicle sales dropping only about 5% to 14 million in 2021 before recovering to above 15 million by 2022. This equates to a cumulative decline of 18% from 2019 levels, consistent with the average fall in light-vehicle sales during the past six downturns since 1976 of 18.7% (see table 1).

As vaccine rollouts continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Table 1

Cumulative Impact Of U.S. Light-Vehicle Sales Declines
Period Sales decline (%) Severity Recession
1979-1982 (34.3) High 1980; 1981-1982
1987 (7.4) Moderate
1989-1991 (21.6) High 1990-1991
1995 (2.1) Low
2001-2003 (3.1) Low 2001
2006-2009 (44.3) High 2007-2009
2019-2020 (14.6) Moderate 2020
Source: S&P Global Ratings.

Intensifying Negative Rating Bias Is Not Cycle-Related, At Least For Now

Downgrade potential among the U.S. auto sector (including automakers, suppliers distributors and retailers) remains high, with over 45% negative bias (issuers with negative outlooks or ratings on CreditWatch with negative implications) (see chart 2).

Negative rating pressure in the U.S. automotive sector began even before the pandemic. For full-year 2019, the sector had the steepest increase (among all U.S corporate sectors) in its negative bias, up 18 percentage points to nearly 40%. This number doubled to over 80% at the peak of the pandemic in April 2020.

Revenue softness, higher costs (including the impact of regional restructuring, electrification for automakers and suppliers and tariffs for some high-yield aftermarket suppliers), and operational missteps by some Tier-1 auto suppliers triggered most of our negative rating actions in 2018 and 2019.

Chart 2


Overall, we don't expect the level of sales in our current 2021-2022 base-case to trigger any downgrades this year. One reason is that these levels are healthy enough for most automakers and suppliers to operate with relatively strong EBITDA margins, especially given the higher profits they earn on trucks. In addition, 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; trucks accounted for 76% of sales last year.

In our forecast for 2021-2022, we've incorporated modest declines in EBIT margins for most automakers and Tier 1 auto suppliers 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.

A Stronger Product Mix Also Offers Some Relief From Sales Declines

Increasing demand for light trucks--including SUVs, crossover utility vehicles (CUVs), minivans, and pickups--will sustain passenger car sales below 25% of total sales in 2021 compared with 24% in 2020 and about 28% in 2019. This is nearly half the proportion in 2012, when they accounted for more than 50% of vehicles. We expect this trend to continue as automakers launch more new or redesigned pickups, crossovers and SUVs and they discontinue many car nameplates. This steady mix shift also implies that average transaction prices (calculated net of incentives) will continue to rise, albeit at a moderating pace.

Since 2012, the crossover segment has cannibalized the combined market share of small and midsize cars (see chart 3), and it has surpassed the overall car segment share (which also includes large and luxury cars) consistently since late 2017. 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.

Chart 3


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 crowded CUV segment.

Table 2

U.S. Auto Unit Sales And Market-Share Comparison
--2019-- --2020--
Units Share (%) Units Share (%) Change (%)

General Motors Co.

2,877,860 17.0 2,535,781 17.5 (11.9)

Ford Motor Co.

2,343,040 13.8 1,968,418 13.6 (16.0)

Toyota Motor Corp.

2,383,349 14.1 2,112,941 14.6 (11.3)

Fiat Chrysler Automobiles N.V.

2,187,196 12.9 1,804,841 12.5 (17.5)

Honda Motor Co. Ltd.

1,608,170 9.5 1,346,788 9.3 (16.3)

Nissan Motor Co. Ltd.

1,345,681 7.9 899,217 6.2 (33.2)

Hyundai Motor Co.

1,325,342 7.8 1,224,758 8.5 (7.6)
Others 2,882,274 17.0 2,571,191 17.8 (10.8)
Total 16,952,912 100.0 14,463,935 100.0 (14.7)
Source: Ward's AutoInfoBank.

Industry inventories remain lower than in 2019. Moreover, it could take time to fully replenish vehicle stock due to strong demand (especially for pickups) as well as some component shortages in the auto supply chain (particularly with semiconductor chips).

Chart 4


Rivalry In The Pickup Segment Will Intensify

Consumer demand for pick-ups will remain strong as the housing market continues to grow, with mortgage applications remaining above pre-pandemic levels. As home building activity picks up, construction companies hire more people. Workers and contractors tend to then buy trucks to support these jobs. The housing market has remained strong during this recovery, driven by changes in household preferences, low mortgage rates, and the steady number of well-paying white-collar jobs despite the pandemic. Rising home prices can make consumers feel wealthier, which translates into greater consumer confidence to make large purchases such as new trucks.

Newer pickup truck models with better interiors, ride quality, and technology in 2021 will likely lead to an expansion of share for pickup trucks. Pickup truck inventory remains low (December pickup truck inventory supply was 37 days, down from 48 days in November and from 69 days in December 2019).

We estimate a 6%-8% year-over-year increase in housing starts could 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, with gas prices low and new products available, we expect pickups to outsell most other vehicle segments and account for about 15% of total sales, slightly higher than in previous years.

Chart 5


The drop in pick-up sales last year, albeit less severe than the overall decline for light vehicles, (see table 3) stemmed directly from the model changeover at Ford and the after-effects of the United Autoworkers strike which constrained inventory at the beginning of 2020. Even prior to the pandemic and model changeovers, the modest share decline was likely due to a lack of regular and double-cab pickups, which were scarce on dealer lots, as GM rolled out new models.

Table 3

U.S. Top-Selling Light Vehicles
Rank --2019-- --2020--
Vehicle Units Vehicle Units Year-over-year change (%)
1 F SERIES 833,378 F SERIES 721,132 (13.5)
2 RAM PICKUP 617,227 SILVERADO 586,675 2.8
3 SILVERADO 570,608 RAM PICKUP 547,881 (11.2)
4 RAV4 448,071 RAV4 430,387 (3.9)
5 CR-V 384,168 CR-V 333,502 (13.2)
6 ROGUE 350,447 CAMRY 294,348 (12.7)
7 EQUINOX 346,048 EQUINOX 270,994 (21.7)
8 CAMRY 336,978 CIVIC 261,225 (19.8)
9 CIVIC 325,650 SIERRA 253,016 8.9
10 COROLLA 304,850 TACOMA 238,806 (4.0)
Source: Ward's Automotive Group, a division of Penton Media Inc.

A Potentially 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.

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 averaged about 17% in the third quarter of 2020, which is the lowest since the end of the Great Recession. Notably, captive debt is predominantly owned by prime borrowers and has performed relatively well. Superprime borrowers (those with credit scores greater than 760) accounted for 34% 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 Could Dent New Vehicle Sales

In 2020 we saw a large increase in used vehicle prices. We expect used vehicle prices in 2021 to be decline by the mid-single digit percent area relative to 2020 as supply and demand continue to normalize because of rising new vehicle inventory and the likelihood for weak employment levels.

Car buyers dissuaded 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. Despite fairly steady supply, our forecasted decline for used prices in 2021 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.

The key risk to our prediction for a slight decline in 2021 used prices 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 losses 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 2021 despite significantly increased sales for Tesla and--to a lesser extent--Ford and the German automakers. This will lead to some market-share losses for some competitors in alternate fuel segments (see charts 7, 8, and table 4) as new model launches challenge the incumbents.

President-Elect Joe Biden has promised significant regulatory changes on climate policy. For example, he said he will rejoin the Paris Agreement, the international climate accord, on his first day in office. He also plans to convene a climate world summit in his first 100 days to promote global collaboration in climate protection. In addition, he could revoke the Affordable Clean Energy rule and replace it with a rule leading to net-zero emissions by 2035. We also foresee a possible increase in infrastructure spending and tax and environmental reforms.

As a result, we now have a higher confidence in our 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. Last year, the share of these vehicles was barely 2%.

Chart 7


Chart 8


Table 4

U.S. Top 10 Electric Vehicles/Plug-In Hybrids (2020)
--FY 2020-- --Q1 2020-- --Q2 2020-- --Q3 2020-- --Q4 2020--
Brand Subseries Units sold % share Units sold % share Units sold % share Units sold % share Units sold % share
Tesla Model 3 93,504 31.3 34,095 48.1 14,805 34.1 20,092 23.9 24,512 24.4
Tesla Model Y 60,073 20.1 550 0.8 6,019 13.9 25,917 30.8 27,587 27.5
Chevrolet Bolt 20,754 6.9 5,873 8.3 2,498 5.8 5,682 6.7 6,701 6.7
Tesla Model X 16,640 5.6 5,231 7.4 2,591 6.0 3,924 4.7 4,894 4.9
Toyota Prius 14,698 4.9 4,213 5.9 2,800 6.4 3,985 4.7 3,700 3.7
Tesla Model S 13,249 4.4 3,533 5.0 2,216 5.1 3,383 4.0 4,117 4.1
Nissan Leaf 9,564 3.2 1,958 2.8 1,049 2.4 1,916 2.3 4,641 4.6
Audi E-Tron 7,202 2.4 1,711 2.4 1,161 2.7 2,296 2.7 2,034 2.0
Porsche Taycan 4,414 1.5 221 0.3 818 1.9 1,858 2.2 1,517 1.5
BMW 5 Series 3,950 1.3 742 1.0 741 1.7 804 1.0 1,663 1.7
Source: S&P Global Ratings.

Related Research

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;
Suraj Rajani, Mumbai + 91(22)33423000;

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