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CreditWeekThe Global Authority On Credit Quality | September 26, 2012

Can The Ford, GM, & Chrysler

Resurgence Continue? (p. 50)

Global Truck Makers Face

Wavering Demand (p. 32)

Difficult Conditions Aw

Europes Carmakers (p. 9

As U.S. Auto ABS Recovers,

Do Risks Lie Ahead? (p. 74)

SPECIAL REPORT

THE AUTO INDUSTRY Chasing Global Growth (p. 12)


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CONTENTS

2 www. creditweek.com

September 26, 2012 | Volume 32, No. 36

The Global Auto Industry Holds Steady AmidEconomic TurbulenceBy Beth Ann Bovino, New York

The past five years have been tumultuous for the global economyandespecially the auto sector. First came the worst recession since the Great

Depression of 1929, then an earthquake in Japan and floods in Thailand,

and now the eurozone debt crisis. However, subdued consumer

sentiment has not yet dented healthy growth in demand for the auto

industry in the U.S., but some other markets are growing more slowly.

CREDIT FAQ

18 The Global Auto Sector Faces Obstacles And

Opportunities As Regional Economic Outlooks Diverge

By Robert E. Schulz, CFA, New York

Wide variations in the economic health and prospects

of regional markets are making for a disparate outlook

for global automakers. Sales are rising in the U.S. and

likely will rise in China. Yet Europes economic woes

are contributing to weaker sales and pressure to cut

production capacity. Although Japans auto market has

rebounded from the effect of natural disasters, a

strong yen is making it tougher for Japanese makers

to compete on exports.

32 Can Global Heavy Truck Makers Downshift Fast

Enough To Ride Out Wavering Demand?

By Michael Andersson, Stockholm

The outlook for global heavy

truck markets is hazy due to

uncertainty over the global

economy. The slowdown in

the European heavy truck

market seems to be

worsening, in line with our

base-case scenario of a mild

recession in the eurozone in 2012.

A weak order intake in the U.S. and

increased economic uncertainty have made

the outlook for the North American truck

market similarly uncertain.

37Life In The Slow Lane: Adjusting To TheFall In Replacement Tire Demand

By Lawrence Orlowski, CFA, New York

As the world economy has slowed,

so has demand in the largest

segment of tire manufacturing: the

replacement industry. The

underlying reasons for this shift

in behavior include stubbornly high

unemployment, prevailing economic uncertainty, and

rising fuel prices. And theres not much hope that

demand will increase any time soon.

46 Global Rental Car Companies Have The

Resilience To Ride Out A Weaker Economy

By Betsy R. Snyder, CFA, New York

We dont expect the global slowdown in economic

growth to significantly hurt global rental car

companies earnings and cash flow or our ratings on

the sector. These companies have proven resilient to

past downturns and we expect them to respond

similarly this time around.

50 Can General Motors, Ford, And Chrysler Continue

Their Resurgence?By Robert E. Schulz, CFA, New York

Even as economic uncertainty persists in the U.S.,

recession looms in Europe, Chinas economy slows, and

evolving intra-Latin America trade issues persist,

General Motors, Ford and Chrysler demonstrated

that they can maintain and move beyond their

improvements in credit quality from late 2009 to 2011.

12

SPECIAL REPORT

FEATURES


3/100Standard & Poors Ratings Services CreditWeek | September 26, 2012 3

62 U.S. Auto Suppliers Could Largely Weather

Slowing Global Economic Growth

By Nishit K. Madlani, New York

Growing global economic

risks will likely slow

earnings growth among

U.S. auto suppliers this

year and into 2013, but

most should sidestep any

significant deterioration in

their credit quality.

71 U.S. Banks Affinity For Auto Loans Continues

74 The Recovery Continues For U.S. Auto ABS,

But What Risks Lie Ahead?

79 The U.S. Subprime Auto Loan ABS Market: Not Seen

Headed For A 1997-1998 Style Contraction

85 The U.S. Personal Lines Automobile Insurance

Sector Is On Credit Cruise Control Through 2013

88 How S&P Values The U.S. Auto Sector To Arrive At

Its Post-Default Recovery Ratings

93 The Aggregate Auto Sector Spread Tightened As

Sales Picked Up

CREDIT FAQ

95 How Sustainable Are Hyundai Motor And Kias

Gains In Market Share And Profitability?

98 Europes Speculative-Grade Volume Carmakers Are

Still Rolling, But Driving Conditions Are Becoming

More Precarious


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SPECIAL REPORTFEATURES

12 w ww. cr ed it we ek .c om


5/100Standard & Poors Ratings Services CreditWeek | September 26, 2012 13

The past five years have been tumultuous for the globa

economyand especially the auto sector. First came the

worst recession since the Great Depression of 1929, then

an earthquake in Japan and floods in Thailand, and now the

eurozone debt crisis. However, subdued consumer sentiment has

not yet dented healthy growth in demand for the auto industry inthe U.S., but some other markets are growing more slowly, and

European sales are falling year over year.

The Global Auto IndustryHolds Steady AmidEconomic Turbulence

Overview

Despite the tepid U.S. economic recovery, we expect U.S. auto sales in 2012 torise to their highest level since 2008 as a result of consumers replacing their

aging vehicles, as well as better credit availability.

We expect the eurozone economies to remain depressed, and although the

severity and length of the downturn will vary by country, the overall trend will

be a continued decline in auto sales in 2012.

The auto markets in the emerging markets, particularly China and India, have huge

growth potential, but as demand is directly linked to overall economic activity, it

will decline if the economy weakens further, as we expect it will in 2012.

Although the Japanese economy has bounced back since the earthquake and

tsunami that hit in 2011auto sales climbed 46.3% in the first half of 2012we

expect it to slow in the second half of 2012 as domestic consumption loses

momentum once the government incentives end and global economicuncertainty hurts its exports.


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Auto sales growth has turned out to be

a bright spot in the U.S. in the past

year, benefit ing from demand as

drivers replace their aging cars and

trucks, which are now a record 10.8

years old, on average. In Japan, the

industry has bounced back from last

years production losses resulting from

the tsunami. The governments incen-

tive for fuel-efficient vehicles has also

given a boost to the countrys auto

industry. Economic growth has slowed

in the emerging markets, especially in

China and India, primarily because of

these countries efforts to contain

inflation, as well as the impact of tepid

growth in the U.S. and the recession in

Europe. Although auto sales growth

rates in India and China have slipped

from their recent highs, they remainstrong relative to sales in some other

regions. Meanwhile, auto sales inEurope continued to drop in 2011 and

were down 7.1% through the first eight

months of 2012. The drop could be the

result of the simultaneous delever-

aging taking place in the public sector,

the household sector, and the banking

sector, which is holding back growth in

the region and hurting auto sales.

The U.S.: Making Its Way

Toward A Recovery

Light-vehicle sales in the U.S. were one

of the consistent bright spots in the

economy in 2011, rebounding to 12.5

million in 2011 from 11.8 million in

2010 and the depressed level of 10.6

million in 2009. Last years sales figures

could have been even higher if not for

the tsunami and earthquake in Japan

and flooding in Thailand. These disas-

ters forced not only Japanese

automakers, but also other companies

(to a much lesser extent), to curtail pro-

duction in virtually all of their assembly

plants around the world. These events

also disruptedand in some cases shut

down entirelyJapanese auto parts

suppliers, which hurt U.S. carmakers

(again, to a much lesser degree than the

Japanese automakers).

We believe that auto sales will

improve as the U.S. economy continues

its tepid recovery. In addition, pent-up

demand and better credit availability

should support year-over-year sales

growth for 2012.

We expect auto sales to reach 14.1

million units in 2012surpassing the

13 million-unit mark for the first time

since 2008. Nevertheless, we remain

watchful of potential weakening in the

recovery because of Europes eco-

nomic troubles, slower growth inChina, and the potential U.S. fiscal

showdowns late in 2012, which could

dampen fragile consumer sentiment

and, consequently, hurt auto sales.

The economic recovery in the U.S.

has continued to advance, albeit

slowly, since the first half of this year.

Also, an increase in pent-up demand

and a falling unemployment rate have

benefi te d U.S . auto sales, despite

higher gasoline prices (see chart 1).

These factors, along with stronger con-sumer confidence, helped lift auto

sales. In addition, high used-car prices

and an aging U.S. motor fleet have

boosted demand in the U.S.

A l l of t hi s wa s good ne ws for

automakers, especially those in the

U.S., which have restructured their

operations to be profitable at lower

volumes. The Michigan Three

General Motors, Ford, and Chrysler

gained market share at the expense of

the Japanese manufacturers and have

now posted strong operating perform-

ance for several quarters. As the U.S.

companies are focusing on producing

more attractive vehicles, they also

reached a new and mutually beneficial

four-year labor agreement with the

United Auto Workers in 2011. By

offering newly hired workers rates that

are comparable to those that Asian

transplants in the U.S. pay, these com-

panies have taken another important



Passenger car sales in the eurozone continue to face

strong headwinds, and we dont expect a pickup in

demand this year.


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step in narrowing the gap on manufac-

turing costs.

Europe: Still Heading Downhill

Passenger car sales in the eurozone

continue to face strong headwinds,

and as most economies are weak-

ening, we dont expect a pickup in

demand this year. Passenger car regis-

trations decreased in Europe for the

second consecutive year in 2011, by

1.7%, after fa l l ing 5 .6% in 2010,

according to the European Automobile

Manufacturers Assn. (see chart 2). The

number of registered passenger cars

in the region shrank to 13.1 million

from 13.35 mil l ion over the same

period. Most of the significant markets

reported declines, with decreases of

2.1% in France, 4.4% in the U.K. ,10.9% in Italy, and 17.7% in Spain. In

contrast, car sales in Germany rose as

demand for new cars grew by 8.8%.

The eurozone economies continue

to face turbulence as growth stalled in

the first quarter and then dropped in

the second. Financial market condi-

t ions also worsened in the second

quarter. The recent spike in risk pre-

miums for Italian and Spanish bonds

and concerns about the future of the

eurozone have caused capital to flowout from countries in the southern rim,

such as Greece, Portugal, and Italy. In

the first six months of 2012, new pas-

senger vehicle registrations in the EU

fell 6.8% year over year, though we

saw wide variations by country. The

two largest marketsGermany and

the U.K.were up, while the next

three largest markets (Spain, France,

and Italy) were all down.

In 2012, we expect austerity meas-

ures and the debt crisis to continue to

depress eurozone economies. Recession

set in for most eurozone economies in

the first half of 2012. We believe that

the severity and length of the down-

turn will vary by country, but that the

overal l t rend wil l be a cont inued

decline in auto sales in 2012. We

expect eurozone GDP to contract by

0.6% this year and to recover only

slightly in 2013, with growth of 0.4%.

Outside the zone, we forecast anemic

Standard & Poors Ratings Services CreditWeek | September 26, 2012 15

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012e

2013f

2014f0

2

4

6

8

10

12

(%)

1

11

1

1

2

(Mil

eEstimate. fForecast.

Standard & Poors 2012.Sources: Global Insight and Standard & Poors forecasts.

Unemployment rate (left scale) Auto sales (right scale)

Chart 1 U.S. Auto Sales And The Unemployment Rate

2006 2007 2008 2009 2010 20118

9

10

11

12

13

14

15

(Mil.)

(10

(8

(6

(4

(2

0

2

4

(%

Source: European Automobile Manufacturers Association. Standard & Poors 2012.

Change (right scale)New passenger car registrations (left scale)

Chart 2 New Passenger Vehicle Registrations In Europe

2006 2007 2008 2009 2010 20110

2

4

6

8

10

12

(Mil.)

(20

(10

0

10

20

30

40

50

60

(% change

*Fiscal year.

Standard & Poors 2012.Sources: Society of Indian Automobile Manufacturers, Japanese Automobile Manufacturers Assn., and Global Insight.

India % change (right scale) China % change (right scale) Japan % change (right scale)

India sales* (left scale) China sales (left scale) Japan sales (left scale)

Chart 3 Auto Sales In Asia


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GDP growth in the U.K. of 0.3% in

2012 and 1.0% in 2013.

The eurozone debt crisisnow in its

third yearhas sharply dented con-

sumer sentiment in the region. In fact,

the crisis is probably more severe and

deeper than ever, and it is threatening

the viability of the eurozone in its cur-

rent form. Moreover, some of the

strongest European countries, especially

Germany, have started to feel the strain

tooGerman manufacturing output

contracted at its fastest pace in three

years. The unemployment rate in the

eurozone reached a record high of

11.3% in July. It averaged 7.8% in 2007.

Eurozone consumer sentiment dropped

to 89.9 in June, far below its long-term

threshold average of 100. Also, the

threat of implementing new austerityplans further hampered the economies.

The slew of bleak data and politicalleaderships failure to come up with a

long-term solution for the European

debt crisis have eroded consumer con-

fidence. Markit Economics, which

computes the purchasing managers

indices (PMIs), noted that in second-

quarter 2012, the eurozone appeared

to be experiencing the strongest quar-

terly downturn in three years. The

composite indices point to the euro-

zone economies having contracted by

about 0.6% in the second quarter. And

the big fear is that a disorderly default

on sovereign debt, such as Greece,

could turn into a bigger financial crisis

that would spread to larger economies,

like Spain and Italy. Moreover, the

fiscal stimulus measures that offset the

impact o f the recess ion in 2009

(including offering payments for scrap-

ping older cars and buying new, low-

emission vehicles) wont be available

this t ime around. The European

Central Bank (ECB) has undertaken

new monetary policies, including its

potentially unlimited bond-buying pro-

gram called outright monetary transac-

tions (OMT), in an effort to stabilize

secondary sovereign bond markets and

strengthen the viability of the euro-

zone. The OMT initiative is a major

move to consolidate states and is very

different than the ECBs earlier initia-

tives, but it has yet to be tested, so

risks remain.

Emerging Markets: On

A Roller Coaster Ride

After making significant progress fol-

lowing the 2008 financial crisis, the

recoveries in emerging economies, espe-

cially China and India, have slowed con-

siderably as policymakers try to curbrising inflation. Auto sales growth in

China dropped sharply to a meager 2%

in 2011 from its high of 46% in 2009,

and in India, it fell to 2.2% in 2011 from

26.9% the previous year.

Growth in these economies deceler-

ated sharply in 2011. Chinas economy

slowed to 9.2% in 2011 after expanding

10.4% in 2010. Indias GDP growth

slumped to 6.5% from 2011 to 2012,

compared with an impressive 8.4% in

the previous fiscal year. The slowdownresulted from tighter credit policies, a

weak recovery in the U.S., and the reces-

sion in Europe. The slowdown in exports

to EuropeAsias largest export

markethas hurt industrial activity in

the region, especially in China. We

expect economic growth to continue to

declineto 7.8% in China in 2012 and to

5.5% in India in 2012 to 2013.

Following the 2008 financial crisis,

emerging marketsChina in partic-

ularseemed to have the potential to

lead a recovery in global auto demand.

But Chinas economy is rapidly losing

traction, and a series of steps to ease

monetary policy in recent months does

not appear to be making much differ-

ence (see chart 3). In addition, Chinas

manufacturing PMIone of the early

ind icator s of the state of the

economycontinues to signal weak-

ness, dropping to 47.6, the lowest level

since March 2009. In addition, major



The slowdown in exports to EuropeAsias largest

export markethas hurt industrial activity in the

region, especially in China.


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Chinese cities like Beijing are increas-

ingly resorting to stricter standards of

emission and restrict ions on the

number of passenger car registrations

per year to curb emissions and ease

traffic congestion, which have further

hampered auto sales. However, to stem

the drop in sales, the government has

initiated a package worth Chinese ren-

minbi (RMB) 6 billion (US$952 billion)

to provide subsidies on purchases of

fuel-efficient cars with engines of less

than 1.6 liters. In addition, the govern-

ment announced that it will spend $156

billion on building new subways, high-

ways, and other infrastructure projects,

which likely will support a resumption

of growth in the coming year.

Similarly, auto sales i n India have

slowed considerably because of tightermonetary policies. The Reserve Bank of

India has raised borrowing cost rates 13

times since March 2010 to cool inflation,

which has remained above 9%.

Moreover, a 21.1% increase in gas prices

since the beginning of 2012 has sharply

cut into consumer sentiment.

Nevertheless, the auto markets in

China and India have huge growth

potential given their large populations,

ongoing urbanization, and rising pur-

chasing power. But obstacles to autoindustry growth in the region remain.

Because demand is directly linked to

overall economic activity, it will decline

if the economy weakens further, as we

expect it will in 2012. Also, rising oil

prices and supply concerns stemming

from troubles in the Middle East could

cause inflation to climb, which likely

would erode consumers income and, as

a result, demand for autos.

Japan: Recovering From

Natural DisastersIn March 2011, the earthquake and

tsunami that hit Japan created havoc

throughout the country and brought

the auto industry to a standstill. Plant

outages and power shortages jeopard-

ized Japans auto productionwhich

accounts for about 13% of worldwide

auto productionand manufacturing

of many critical components. The nat-

ural disaster struck a powerful blow to

the nations economy, triggering a

0.7% contraction in real GDP for 2011

after a gain of 4 .5% in 2010. This

resulted in a 15.1% decl ine in

Japanese auto sales in 2011 following

an increase of 7.5% in 2010. However,

the Japanese economy bounced back

in early 2012. The economy grew a

solid 4.1%, primarily because of

strong consumer spending, especially

on car purchases, which received a

bo ost fr om te mp orar y go ve rnm en t

incentives. This led auto sales to soar

46.3% in the first half of 2012.

However, the Japanese auto market is

fairly saturated, and domestic demand is

unlikely to lead to a significant recovery

in 2012 once the government incentives

are rolled back. Japans growth depends

more on exports. It recorded a tradedeficit of more than $37 billion in the

first half of the year, and most of its auto

exports are to the U.S. and the EU, which

ran into economic turmoil in 2011. So in

2012, reconstruction spending will con-

tinue to support Japans economic

growth, while the slowdown in Europe

and China will hamper it. We expect

Japans economy to grow by 2% in 2012

and 1.4% in 2013.

Auto Sales Should Hold Up,But Struggling Economies

Will Remain A Drag

Although we expect global auto sales

to remain steady in 2012, the looming

fiscal cliff in the U.S. , intensifying

recessions in eurozone countries, and a

slowdown in emerging economies such

as China pose significant risks to the

global economy. Other issues include

increasing geopolitical risks in the

Middle East, which could cause crude

oil prices to rise. We think these factors

could keep some potential car buyers

on the sidelines through 2012. CW


Analytical Contacts:

Beth Ann BovinoNew York (1) 212-438-1652

Kaustubh PandeyCRISIL Global Analytical Center, an S&P affiliateMumbai

For more articles on this topic search RatingsDirect with keyword:

Auto Industry


10/100

SPECIAL REPORT | Q&A


FEATURES


11/100

Wide variations in the economic health and prospects o

regional markets are making for a similarly disparate

outlook for global automakers. Sales are rising in the

highly competitive U.S. market, and we expect sales to be up in

China this year as well. At the same time, Europes economic

woes are contributing to weaker sales and pressure to cu

production capacity in the region. Japans auto market has

rebounded from the effect of natural disasters last year, although

a strong yen is making it tougher for Japanese makers to

compete on exports.

The Global Auto Sector

Faces Obstacles AndOpportunities As RegionalEconomic Outlooks Diverge


Credit FAQ


12/100

Here, we provide insight into some of

the key issues for investors in the global

auto industry.

Q. What is Standard & Poors outlook forcredit quality in the global auto sector?

A. Standard & Poors Ratings Servicesoutlook for credit quality in the auto

sector is mixed: almost 40% of our out-

looks on the rated global automakers are

either positive or negative, reflecting

individual companies geographic con-

centrations and significant variations in

our regional economic outlooks. The

rated global automakers are navigating a

variety of conditions, including weak or

recovering markets and global economic

uncertainty. Some have more exposure

than their competitors to declining mar-

kets or a cost base that they cant easily

restructure because of their location.

20 www.creditweek.com

SPECIAL REPORT | Q&AFEATURES

2011 2012 2013

Units (000s) Units (%) Units (%) Units (%) Percent of the 2013 total

U.S.

General Motors 2,504 19.6 2,642 18.3 2,832 18.7

Ford 2,120 16.6 2,257 15.6 2,385 15.7Toyota 1,645 12.9 2,100 14.5 2,174 14.3

Fiat-Chrysler 1,369 10.7 1,643 11.4 1,669 11.0

Total Industry U.S. 12,748 14,459 15,174 Top 4 account for about 60%

Western Europe

Volkswagen 3,172 22.1 3,009 22.4 2,910 21.5

PSA 1,951 13.6 1,745 13.0 1,790 13.3

Renault-Nissan 1,945 13.5 1,632 12.1 1,666 12.3

Ford 1,208 8.4 1,168 8.7 1,182 8.7

General Motors 1,188 8.3 1,177 8.7 1,156 8.6

Total Industry Western Europe 14,375 13,453 13,510 Top 5 account for 64%

Eastern Europe

Renault-Nissan 1,186 25.4 1,180 24.4 1,272 24.5

Volkswagen 572 12.3 655 13.6 697 13.4

General Motors 485 10.4 488 10.1 485 9.3

Hyundai 448 9.6 496 10.3 453 8.7

Total Industry Eastern Europe 4,663 4,828 5,198 Top 4 account for 56%

China

Volkswagen 2,327 12.9 2,532 13.0 2,759 12.3

SAIC 1,396 7.8 1,508 7.7 1,806 8.1

Chinese Manufacturers 1,325 7.4 1,454 7.5 1,758 7.9

General Motors 1,301 7.2 1,405 7.2 1,529 6.8

Hyundai 1,247 6.9 1,343 6.9 1,552 6.9

Total Industry China 18,000 19,472 22,342 Top 5 account for 42%

Brazil

Fiat-Chrysler 781 22.2 790 22.9 798 21.2

Volkswagen 707 20.1 704 20.4 706 18.7

General Motors 643 18.3 615 17.8 674 17.9

Ford 312 8.9 327 9.5 341 9.1

Total Industry Brazil 3,515 3,449 3,766 Top 4 account for 67%

Source: LMC Automotive Ltd.

Table 1 | Top-Selling OEM BrandsLight Vehicle For Key Regions


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Accordingly, results in 2012 have

varied across regions and companies. In

Europe, for example, losses have been

the norm among volume automakers,

while luxury makers remain largely prof-

itable. We expect this variability to con-

tinue, and as such, some Europe-based

volume automakers have experienced

negative rating actions this year, while

the Korean automakers and some luxury

makers, along with U.S. automaker Ford

Motor Co. (BB+/Positive/), have seen

positive rating actions. We believe most

investment-grade automakers have room

within their ratings to weather some ero-

sion in performance, while most specula-

tive-grade automakers have less room in

their ratings for underperformance.

Standard & Poors base-case outlook

continues to forecast considerableregional differences in auto sales for

2012, and we believe the underlying fun-

damentals driving these differences

including economic and political uncer-

tainty in Europe, slowing economic

growth in China and Brazil, and fiscal

uncertainty in the U.S.could persist

into 2013. The mix of regional expo-

sures is a key aspect of automakers

credit quality and is unlikely to change

significantly over the next year or so

because of their established manufac-

turing and sales footprints. Table 1 illus-

trates the variety of regional exposures

among the global automakers.

Q. What are some of the major develop-ments Standard & Poors is watching?

A. Higher sales and stiff competition in theU.S. Competition in the U.S. market is

not abating, even as sales continue to

recover. The U.S. automakers halted the

trend of declining shares several years

ago, and their competitive position has

improved in many of their traditionally

weaker segments, such as small cars. At

the same time, Korea-based Hyundai

Motor Co. (BBB+/Stable/) and its Kia

Motors subsidiary have gained share

over the past few years, and in 2012 the

Japanese automakers have recoveredfrom 2011 inventory shortages: Toyota

Motor Corp.s (AA-/Negative/A-1+)

sales were up 46% year-over-year in

August 2012. Still, the Japanese

automakers share remains below its

peak. Nonetheless, we view the U.S. auto

market as highly competitive.

But beyond the established (and

reestablished) players, were also watching

how Volkswagen AG (A-/Positive/A-2)

executes its plan to gain share in the U.S.

Volkswagen is underrepresented in the

U.S. market relative to its share elsewher

in the world. However, the company ha

made inroads: Its market share has grown

steadily over the past few years, to 3.8% o

the U.S. passenger car market at the end

of June 2012 from 2.4% in 2008

Following the opening of a new plant i

Chattanooga, Tenn., in 2010 (with 2,500

employees and a current capacity o

150,000 vehicles), the U.S.-made Passa

has been the focus of the company

efforts to gain share in the U.S. The Jetta

Touareg, Tiguan, and new Beetle models

manufactured in Puebla, Mexico, as wel

as the Audi Q5 and Q7 models, added up

to some 440,000 vehicle deliveries fo

Volkswagen in the U.S. in 2011, a 23%

year-on-year increase.

Volkswagen targets sales of 800,00

vehicles annually in the U.S. by 2018 (and million units for North America altogether

as part of the companys strategy 2018

multiyear plan. Its U.S. 2018 target would

represent roughly 5.7% of our estimate

2012 U.S. industry sales. But even allowing

for a higher level of industry sales in 2018

Volkswagens plans to raise share in th

U.S. market, and its potential effect on

other volume makers, should not b

underestimated.

In Europe, fierce competition and weake

sales make for a tough market


Metric For a potential upgrade Actual*

Adjusted debt/EBITDA 2.5x 3.6x

Automotive-related FOCF to adjusted debt(excluding voluntary pension contributions) 15% 6.5%

Automotive EBIT profit margins Mid-single-digit area for total automotive and 5.1%high-single-digit area for North America

Prospects for sustained liquidity at the automotive parent More than $30 billion $38.5 billion

*Leverage and cash flow ratios as of 2011. Margins and liquidity as of June 30, 2012. FOCFFree operating cash flow.

Table 3 | General Motors Co.Quantitative Metrics For A Potential Upgrade

Metric For a potential upgrade Actual*

Adjusted debt/EBITDA 2.5x 3.5x

Automotive-related FOCF to adjusted debt (excluding voluntarypension contributions) 15% 12%

Automotive EBIT profit margins Mid-single-digit area for total automotive and 4.9% totalhigh-single-digit area for North America

Prospects for sustained liquidity at the automotive parent More than $30 billion $33.9 billion

*Leverage and cash flow ratios as of 2011. Margins and liquidity as of June 30, 2012. FOCFFree operating cash flow.

Table 2 | Ford Motor Co.Quantitative Metrics For A Potential Upgrade


14/100

Competition has become fiercer than

ever in the depressed European car

market, and all manufacturers are strug-

gling to preserve market share while con-

sidering how to cut excess production

capacity. General Motors (GM;

BB+/Stable/) Opel unit and Ford are

among the losers in share so far: Each

currently holds an 8% share of the EU

passenger car market, down from some

2 2 w ww. cr ed it we ek .c om


Toyota Motor Corp. Honda Motor Co. Ltd. BMW AG Volkswagen AG Daimler AGAA-/Negative/A-1+ A+/Stable/A-1 A/Stable/A-1 A-/Positive/A-2 A-/Stable/A-2

The ability to extend or protect retail market share in key markets by offering high-quality products desired by customers

Toyota successfully reversed Honda is the third-largest BMW is among the global With a share of 12.3% in the The group boasts leadingdeclining market share in automaker in Japan, leaders worldwide in the global auto market on positions in the niche, butthe U.S. after massive recalls following Toyota and Nissan, luxury car segment. The Dec. 31, 2011, VW is the highly profitable, premiumand supply chain disruptions in terms of revenues in group has solid positions global leading auto maker in segment through its reputedfollowing the earthquake that fiscal-year March 2012. With in Europe and the U.S. terms of market share. The Mercedes Benz brand. Inseverely challenged the 9.8% market share during group enjoys sizable market addition, it has significantcompany. In Japan, Toyota the first eight months of shares in most of the markets positions in trucks/vans/continues to enjoy dominant 2012, the company has an in which it competes, buses, as well as in the smallshare. Toyota also maintains established position in the including leading positions city car segments. Daimlervery strong position in U.S. In the Japanese in China, Brazil, and most sales volumes reachedAssociation of Southeast domestic market, Honda European countries. Recently, record levels in 2011 on the

Asian Nations countries. has the second-largest share the group has consistently back of double-digit growthof 14.6% (including mini- gained market share in China, in emerging markets.vehicles) in the first seven North America, and inmonths of 2012. several European countries.

Frequency of model replacement; ability to meet shifts, o ften rapid, in consumer preferences and perceptions

We believe Toyota has Hondas robust positions in The group has a solid track- Thanks to its multibrand Daimler reported an overallproven its ability to anticipate global auto and motorcycle record of successfully portfolio, products offered good model turnover in theand meet shifting consumer markets reflect the strong launching new brands and are wide and cover all premium segment andpreference reflected in its competitiveness of Hondas products with a reputation market segments with a demonstrated a goodtrack record in keeping a products. Hondas multiple for high quality. For example, clear focus on new products capacity to meet customersstrong lineup of fuel-efficient global core models (Civic, BMW introduced the MINI development. To support its taste in emerging markets.cars. Toyota also has Accord, Fit, and CR-V) are brand and enlarged the global growth strategy,demonstrated its outstanding of particular strengths that BMW family of products Volkswagen plans toability to create and develop contribute greatly to the with the inclusion of SUV increase the number ofa hybrid vehicle segment. companys performance models. The new challenge model launches per year to

despite increasing compet- is the BMWi brand, created about 40 from 30.ition from other automakers. for the sustainable mobility.

The first model will be

launched in 2013.

Ability to limit sales incentives because of brand loyalty and success in differentiating product on the basis of quality, style, or other consumer-driven measures

Toyotas incentive spending Honda has a proven track In line with the characteristics Despite its large exposure to The group benefits fromhas consistently been below record in its reputation for of the premium segment, the European volume market, high brand loyalty andthe industry average. We quality, technology, and BMW benefits from high Volkswagen continues to higher margins in the

believe Toyota will likely design of its products in pricing and higher margins gain market share and to premium segment. Highcontinue to refrain from many global auto and than its peers in the command a premium price pricing for Mercedes Benzaggressive incentives, which motorcycle markets. volume market. on its volume brands, has recently been suppor tedshould help sustain its key supported by its high brand by a high share of large-models strong residual value. recognition with customers. cylinder and luxury cars sold

Successful growth of the in 2011, notably in thegroups premium (Audi) and Chinese market.entry (Skoda) brands in therecent past is also asupportive factor.

Ability to generate consistent profits in key portions of the product lineup (retail and fleet) under most volume scenarios,along with prospects for breakeven results or better during a significant market slump

Toyota has a strong ability to Honda shows a return to a The BMW auto division Volkswagen reported an Since a steep decline inconsistently reduce costs steady growth path, which reported 11.8% EBIT margin operating profit for its auto 2009, Daimler has graduallythrough improving operating the company had to give up at year-end 2011, which is division of 6.9% in 2011, which improved its profitability onefficiency and other temporarily in fiscal 2011 among the highest in the is well above the average of the back of improvingmeasures. Nevertheless, the because of natural disasters. auto sector. We do not European peers in the volume pricing and increasing unitextremely strong yen against Hondas global unit sales of expect this level to be market. The group is profitable sales. In 2011 the groupsmajor currencies continues automobiles have shown a sustainable, but we believe in most of its segment/ operating margin in the autoto weigh on Toyotas steady recovery and the that EBIT margin of 8% to geography combinations and division reached 9%, whichprofitability given its figure has improved to 10% through-the-cycle its premium segment (Audi is well above the Europeanrelatively large yen exposure. about 1 million units in would be commensurate and now Porsche, will average, reflecting the

recent quarters. with the cur rent rating. represent some 50% of group groups large share of profitearnings going forward) generated in the higher-reports measures as strong margin premium market.as BMWs. Exceptions areoperations in the U.S. and Seat.

Table 4 | Key Credit Factor Peer Comparisons For Companies Rated AA- To A-


15/100

10% back in 2008 (according to ACEA,

the European Automobile Manufacturers

Association). Manufacturers with the

most exposure to southern Europe

namely Fiat SpA (BB-/Stable/B), Peugeot

S.A. (BB/Negative/B), Renault S.A.

(BB+/Stable/B), and the Japanese manu-

facturersalso experienced significant

declines during the first half of 2012. As

in the U.S., the Hyundai-Kia group is

gaining in Europe: Its share of the EU

market has almost doubled since 2008,

rising to 6% at the end of June 2012 from

3.4 % in 2008 (its U.S. share was 9% for

the eight months ended August 2012,

according to Wards AutoInfoBank). More

surprisingly, Volkswagen has also been

able to boost or maintain its market share

in several European countries while main-

taining a disciplined premium pricingstrategy across the continent. The com-

panys share of the EU passenger car

market has steadily improved since 2009

and stood at 23.3% at the end of June

2012, up from 20.6% in 2008.

Automa ke rs st rug gl e to cu t ex ce ss

assembly capacity in Europe. Ebbing

demand and excess production capacity

amid the eurozone crisis have battered

the European volume automakers,

leading to a discounting race among

these companies, along with operatinglosses and cash use. According to ACEA

data, total EU new-car sales totaled about

7.4 million vehicles at the end of June,

down 7.3% year-on-year (compared with

14.9 million vehicles in full-year 2011).

The overall decline to date masks con-

trasts between countries, however.

During the first half of 2012, car sales in

Germany and the U.K. remained broadly

flat (with upticks of 0.6% and 1.3%,

respectively), and most of the declines

were concentrated in southern Europe,

primarily Italy (with a 20.6% drop),

France (down 13.3%), and Spain (down

11.3%). Combined, those five countries

represent about three-quarters of the

overall EU auto market.

Our base-case outlook for full-year

2012 foresees no significant improve-

ment in demand in the European market.

In light of the weakening economies and

the austerity plans that several European

countries are adopting, we assume no

significant turnaround during the second

half of the year.

We now expect the Western European

market to decline roughly 6.5% to about

13.4 million vehicles in 2012, followed

by potential anemic growth of about

0.4% next year. Volume declines have

resulted in fierce pricing competition

and rendered some volume makers

unable to break even in their core auto-

motive operations.

In that context, the need to reduce

production capacity has returned to the

forefront of the industrys concerns.

Peugeot in France, Fiat in Italy, and also

Opel in Germany have all been vocal

about the need for a concerted effort to

shut down some capacity across Europe,

as the U.S. automakers did before and

during the 2008 to 2009 financial crisis.Ford has stated that the industry needs

to match capacity to demand, although it

has not yet commented on the timing of

any actions within Ford.

Estimates of excess capacity in

Europe vary depending on the study

and, as in the U.S., forecasts of the real-

istic levels of future sales vary as well.

With the big volume automakers

reporting capacity utilization rates below

80% for their main European operations,

we think excess capacity of at least 20%

is a safe estimate. The German manufac-

turers, however, have hardly suffered

from the depressed market so farif

anything, they have strengthened their

market shares. Much of this resilience

reflects their line-up of luxury products,

strong historical market share in the

better-performing German market, and

still-solid exports to China and other

regions. Not surprisingly, they have been

lukewarm about any concerted effort to

support capacity reductions under the

umbrella of the EU direction.

In our view, reducing capacity in Europ

is therefore likely to be a piecemea

(country- and company-specific), costly, and

politically tough process whereby capacity

will be shut down case-by-case, primarily

following individual carmakers initiatives

As such, we assume the timing, execution

and benefit of any actions will be uneven

Struggling Peugeot announced a restruc

turing plan in July that will lead to a ne

reduction of 8,000 jobs, primarily in France

and the closure of its plant in Aulnay (with

140,000-unit capacity) outside Paris

Peugeot will also cut capacity at its Brittany

based Rennes plant in the near future. Two

other manufacturers are undertaking simila

plans: General Motors has changed senio

management at its Opel/Vauxhall division

and earmarked the 130,000-unit Bochum

plant for closure, and Fiat shut down itTermini Imerese plant last year.

Altogether, we estimate the curren

planned reduction in European capacity to

be less than 600,000 vehicles, or less than

5% of current European production. Ford

has not announced how it will deal with it

overcapacity, but with the prospect of sev

eral more years of weak vehicle sales i

Europe, we believe the company will ac

with increasing decisiveness and commit

ment to restructure its European opera

tions to become profitable.

At the current pace of planned

capacity reductions, we think it will take

well into 2013, if not longer, to restor

healthy supply and demand in th

European mass marketeven if th

sales outlook for 2013 improved unex

pectedly. If sales in Europe do no

recover, as they have in North America

then excess capacity will persist longer.

Q. What impact would a hard landingfor Chinas ec onomy have on globa

automakers?


Reducing capacity in Europe is therefore likely to be

a piecemealcostly, and politically tough process

whereby capacity will be shut down case-by-case


16/100

A. With Chinas dominance in the globaleconomy increasing, any domestic eco-

nomic setbackincluding slower-than-

anticipated growthcould reverberate

throughout the world. Our base-case

scenario for China calls for 8% economic

growth, while our hard landing sce-

nario (to which we assign a one-in-10

chance of occurring) calls for 5% eco-

nomic growth.

We think automakers and auto compo-

nent manufacturers in the U.S., Europe,

and Asia (outside China) would face lim-

ited credit risk from a hard economic

landing in China lasting one year or less,

despite some companies significant sales

exposure to the worlds largest auto

market. Ratings on some speculative-

grade auto component manufacturers in

Asia may be more vulnerable, however.

And if our hard landing scenario lasted

two years, some investment-grade and

strong speculative-grade companies in the

auto sector could also be at risk of down-

grades. (For more details on our views see

The Credit Overhang: Implications For The

Global Automotive Sector Of A Hard Landing

In China, published May 29, 2012, on

RatingsDirect, on the Global Credit Portal.)

Q. What would it take for Ford and GMto achieve investment-grade ratings?



Toyota Motor Corp. Honda Motor Co. Ltd. BMW AG Volkswagen AG Daimler AGAA-/Negative/A-1+ A+/Stable/A-1 A/Stable/A-1 A-/Positive/A-2 A-/Stable/A-2

Production capacity utilization across the companys manufacturing footprint, in light of typically high industry operating leverage

Not disclosed, but a strong Hondas disclosures on BMW has achieved high Disclosures on capacity Daimler boasts very highrebound in production from capacity utilization are limited. labor productivity in utilization are scarce, but capacity utilization rates whensupply chain disruptions However, the significant Germany, where the bulk of this has not been a drag on compared with Europeanindicates a return to high increase in Hondas autombile its manufacturing facilities is VWs earnings profile, unlike peers. The group reportedcapacity utilization. production in recent quarters located, through high southern European players. plant utilization rates of 95%

supports its capacity operating rates for plants and The ability to command a in early 2011 for its Mercedesutilization at a high level. an innovative labor price premium may offset Benz division.Hondas flexible manu- agreement that provides dips in capacity utilization.facturing system, relative to flexible work schedules and The launch of the newits peers, may also support the deployment of workers modular toolkit strategy mayits productivity and efficiency. among production facilities. also play a role in terms of

cost-efficiency.

The extent of brand, geographic, and product line diversification

We believe Toyotas Although Honda has achieved BMWs revenues are well- With nine brands and Daimlers revenues arediversity is one of the best some product diversification diversified by region, and several models marketed in geographically well diversified,among global peers, in in its Acura brand in the North the U.S., Germany, and all segments, and large and and Europe and Northterms geographic and American automobile market, China are the largest three wide commercial vehicle America represent the groupsproduct line. Toyota also it uses the Honda brand in single markets. The coverage, VWs product largest single markets. Thehas the premium Lexus other regions in automobile, enlargement of its product offering is unmatched truck and van division

brand. Moreover, Hino, motorcycle, and other range has positively reduced among European carmakers. supports product diversity. Wecommercial vehicle maker, products. In terms of the groups dependence on The group has recently expect auto markets inand Daihatsu, mini-vehicle geographic diversification, the Series 3 models. increased its exposure to the developing economies tomaker, are consolidated North America has been the premium segment through support growth andsubsidiaries of Toyota. companys largest market, the consolidation of Porsche profitability in the

with Asia catching up in and has augmented its medium term.recent years in sales and presence in the truckprofit contribution to the segment through thecompany. Strengths in hybrid acquisition of MAN in 2011.and other fuel-efficient In terms of geographictechnologies are other key diversification, VW enjoys afactors that support Hondas strong position in Asia and a

product diversity and strong growing penetration incompetitive position. North America.

The scale, profitability, and funding efficiency of vehicle finance capabilities, through a captive unit or partnerships because of significantreliance on financing availability for the vehicle distribution and sales process

Toyota has extensive Honda has 100%-owned BMW Financial services is Volkswagen owns 100% of Daimler incorporates a 100%captive finance operations captive operations in the U.S. the fully integrated captive Volkswagen Financial owned financial servicesglobally. Toyota manages and Japan. In the U.S., Honda finance division of the group. Services AG and its division, which manages theits captive finance operates captive finance It is ultimately 100% owned subsidiary Volkswagen Bank captive finance operations ofoperations in a conservative operations through American by BMW AG and operates GmbH, the captive finance the group.manner and maintains Honda Finance Corp. (AHFC). globally through various arms of the group.strong asset quality. AHFC is a wholly owned locally registered Performance of the captive

subsidiary of American Honda banking operations. is in line with but hardlyMotor Co. Inc. (AHMC), which better than the group average.is a wholly owned subsidiaryof Honda.

Table 4 | Key Credit Factor Peer Comparisons For Companies Rated AA- To A- (continued)


17/100

A. Our BB+ ratings on Ford Motor Co.and GM are the highest weve assigned

to either company since May 2005, and

a one-notch upgrade would bring both

companies back to investment-grade.

We revised our outlook on Ford to posi-

tive in August 2012 but have stated that

an upgrade to investment-grade isnt

likely to occur until late 2013 at the ear-

liest. Our outlook on GM is currently

stable, so we dont see a one in three or

greater chance of an upgrade in the next

year. In the longer term, a restructuring

of its European operations for a return to

profitability, along with the evolution of

its U.S. Treasury ownership and long-

term capital structure, would be factors

for any eventual upgrade.

The U.S. light-vehicle market is recov-

ering, notwithstanding a cautious U.S.

economic outlook (including the so-

called fiscal cliff of early 2013), and both

companies have been generating profits

and cash flow in their North American

operations since late in 2009. However,

we would also look for sustainable prof-

itability in key markets outside of North

America to support an investment-grade

rating for either company. While other

factors could also support a higher rating

(see tables 2 and 3), sustainable, geo-

graphically diverse profitability is a char-

acteristic we often associate with invest

ment-grade global companies. On

reason we view diverse sources o

profits as an important credit factor i

that we anticipate the return, at som

point, of cyclicality (and volatility) in

sales and production in North America.

For Ford, beyond regaining contro

over its ability to be profitable in Europe

we will look for the following when con

sidering an upgrade:

The company sustains debt to

EBITDA of about 2.5x;

Pretax automotive profit to reach the

mid-single digits overall and the high

single digits for North America;


Hyundai Motor Co. and Kia Motors Corp. Nissan Motor Co. Ltd.BBB+/Stable/ BBB+/Stable/A-2

The ability to extend or protect retail market s hare in key markets by offering high-quality products desired by customers

HMC and Kias structural improvement in their product quality, such as fuel Nissan has been gaining market share in the U.S. and China in the pastefficiency and design, has led to a gain in their share in major markets such several years. In China, Nissans sales performance is remarkable despite itsas the U.S. and China over the past three years. Although the improved late entry, thanks to its strong lineup of fuel-efficient small cars, and strongquality is unlikely to suddenly deteriorate over the next one to two years, distribution network leveraging on its local partner.their market share is likely to moderate from the peak in 2011 because oftheir planned modest increase of production capacity.

Frequency of model replacement; ability to meet shifts, often rapid, in consumer preferences and perceptions

HMC and Kia served consumer preference and perceptions well, especially We believe that Nissan has demonstrated an ability to keep its productsince the weak economy in 2009. During that time, they focused on the lineup refreshed and that it is committed to actively introduce new models.small and medium car segment by launching several models whose fuel Nissan plans to launch 51 new models in its midterm business plan throughefficiencies are good and sales prices are competitive. As a result, they fiscal 2016.continued to gain market share during the period.

Ability to limit sales incentives because of brand loyalty and success in differentiating product on the basis of quality, style, or other consumer-driven measuresHMC and Kia are offering the fewest sales incentives in the U.S. among the Nissans solid profitability generation despite limited success in its premiumautomakers based on their much-improved brand as a result of better Infiniti brand reflects its ability to limit sales incentives because of itsproduct quality measures. success in maintaining a strong product lineup.


HMC and Kia have generated an elite profit margin among global Nissan has demonstrated stronger resilience to an external environmentautomakers in the past three years during the ups and downs of the global than Toyota and Honda in the past few years. Nissan has been profitable inauto industry cycle. Still, both companies lack more long-term track records all the geographic segments, including Japan, for the past two years.to generate consistent profits.


HMC and Kia have maintained more than 100% utilization rates in most It is not disclosed, but we believe Nissans robust sales performance andcountries in which they have manufacturing facilities over the past three solid automotive profit margins in the past three years indicate high capacityyears because of their good sales. Still, their Korean manufacturing facilities utilization overall.often undergo halts in manufacturing because of labor union strikes.


HMC and Kia have limited brand diversification without any subbrand such Nissan has good diversity in both geographic and product line. Nissan hasas a premium brand. However, their geographic sales and production better balance than most peers between sales and production in mostdiversification are good across the major markets such as U.S., China, regions. Nissan is further diversifying its brand by adding new brandsEurope, and India. Venucia in China and Datsun in emerging markets.

The scale, profitability, and funding efficiency of vehicle finance capabilities, through a captive unit or partnershipsbecause of significant reliance on financing availability for the vehicle distribution and sales process

HMC and Kia own the majority share of Hyundai Capital Services Inc. and Nissan operates captive finance operations and has maintained healthyfully own Hyundai Capital America, which serve HMC and Kias vehicle asset quality. While Nissan uses Renaults captive finance operations infinancing in Korea and the U.S., respectively. Still, HMC and Kias vehicle certain countries, Nissan provides financial services to Renault customers infinancing capabilities are relatively weak, albeit improving, given the small some countries.size of capital of the captive finance subsidiaries. HMC and Kia are likely toincrease the capital of the two captive finance subsidiaries given the parentsstrong financials and form partnerships to develop vehicle financingcapabilities in the regions other than Korea and the U.S.

Table 5 | Key Credit Factor Peer Comparisons For Companies Rated BBB+


18/100

Liquidity at the automotive parent

remains above $30 billion;

Automotive-related operating free

cash flow totals about 15% of debt;

The company successfully manages

the evolving competitive structure of

the global auto industry, including

continuing to develop and produce

2 6 w ww. cr ed it we ek .c om


Ford Motor Co. Renault S.A. General Motors Co. Tata Motors Ltd. Peugeot S.A.BB+/Positive/ BB+/Stable/B BB+/Stable/ BB/Positive/ BB/Negative/B

The ability to extend or protect retail market share in key markets by offering high quality products desired by customers

Fords traction with the Renault boasts a solid GMs U.S. light vehicle share Tata Motors commercial Peugeot is the second-consumer because it avoided market position in the small (excluding legacy brands) vehicle operations are largest player in Europe after

bankruptcy has helped its and midsize auto segments, has been fairly stable. Two expected to maintain Volkswagen in terms ofretail share since mid-2009, and in the entry segment of the top 10 selling vehicles dominant 60% market share market share. In Europe, the

but this effect is likely through Dacia. Selective for the first eight months of in the Indian heavy and light group has recently sufferedmoderating by now. Two of expansion in emerging 2012 were GMs. commercial vehicle market some market share loss,the top 10 selling vehicles countries (Mediterranean despite increasing driving down its share of thefor the first eight months of countries, Latin America, competition. Jaguar Land European auto market to2012 were Fords. and Russia) has been Rover, Tata Motors largest 12% at the end of first-half

sustained while fierce subsidiary, has slightly 2012 from 14.2% in 2010.competition has slightly improved its small market Outside Europe, Peugeot haseroded the groups market share in the luxury car heavily invested in China,

share in Europe. Its alliance market through its new and Russia, and Latin America,with Nissan is beneficial to refreshed launches. with moderate success inRenault in terms of joint R&D terms of volume gains, andspending, market coverage, so far no positive impactand model launches. whatsoever on earnings.


We believe that Ford has Renault has demonstrated a We believe that GMs ability We believe Jaguar Land There has been positivedemonstrated an ability to sound overall capacity to to keep its product line up Rover still has to make product mix evolutions inkeep its product line up anticipate market trends. fresh has improved, and it is significant investments to recent years, with Peugeotsrefreshed, and that it is The group has gradually committed to bolstering its refresh its product lineup product offer graduallycommitted to bolstering its reduced its reliance on the car lineup while lessening its and launch new products. We moving upmarket. Recentlycar lineup to lessen its Megane and Clio models, reliance on light trucks. view the companys Evoque announced restructuringreliance on light trucks. The adding new model families model as a step toward the plans may hurt PeugeotsFord Fusion and Escape to its offerings. The value- company developing new market positions in thehave been top 10 selling offer models sold under the models to meet changing coming quarters.vehicles during the past year. Dacia brand, e.g. the Logan- consumer preference. In our

Sandero family and the view, Tata Motors broadDuster family, have been commercial vehicle portfolio

particularly successful. is well equipped to meetcustomer demands, thoughits passenger vehiclesegment is behind the curvein this aspect.


Ford has been able to Intense price competition in GM has focused on keeping The incentive levels for Sales in Europe continue toremain disciplined about the European volume incentives under control Jaguar Land Rover be depressed by the intenseincentive spending because market continues to hamper and believes it is on track to significantly fell in fiscal price competition fromof past cost reductions and sales and profitability. meeting this goal. A lower 2012 because of excess European peers anda renewed ability to keep its cost base is a significant demand and supply increasingly by Asianproduct lineup renewed. factor in meeting this goal. constraints. Jaguar and Land competitors. The ability to

Rover are established niche retain any premium pricingbrands. Tata Motors India on any model will likelybusiness incentive structure be tested in theis in line with the industry coming quarters.average, in our view.


Ford has been profitable in So far Renault has reported We believe GM can be Jaguar Land Rover has After a rebound in 2010 andNorth America since the low but stable profits in profitable at its current U.S. improved its efficiency of first-half 2011, Peugeot hasthird quarter of 2009, and most regions and segments, industry sales volumes of operations over the past been generating losses fromwe believe the company with above-average earnings about 12 million unitsfar two yearswhich should its core automotivecan remain profitable at from its captive finance lower than before 2009. result in more stable profits, operations, largely as a resultcurrent U.S. industry sales operations. We expect also supported by good of its strong dependence onvolumesabout 12 million declining sales in Europe to demand. Tata Motors Indias the highly competitive andunitswhich are far lower weigh on the groups overall operations are cost- mature European volumethan before 2009. profitability in the competitive and the company market. The group, so far,

coming quarters. has generated profits even has failed to translate higherduring the global revenues outside itseconomic downturn. historical markets into profits.

Table 6 | Key Credit Factor Peer Comparisons For Companies Rated BB+ To BB


19/100

products that appeal to U.S. con-

sumers, and faces reasonable

prospects for profitability in devel-

oping markets, such as China; and

Ford Credit continues to be profitable

and demonstrates underwriting stan-

dards consistent with an investment-

grade rating.

For both companies, the challenges to

profitability outside of North America are

substantial. In Europe, the combination of

excess assembly capacity and recession-

like economic conditions are leading to

losses for almost all the volume

automakers there. We assume losses in

Ford and GMs European operations are

likely for at least a part of 2013, if not the

entire year (which contributes to our view

that a Ford upgrade isnt likely until at

least late 2013, assuming visibility into2014). In Latin America, especially Brazil,

trade restrictions and capacity additions

are creating challenges in the large

automakers established footprints. In

China, we assume sales will grow in the

upper single-digits this year. However,

Fords market share there is modest,

although the company is investing to

expand capacity. Ford China reported

that sales in the country were up 8% for

the first eight months of 2012, to 368,513,

compared with about 1.5 million in theU.S. for the same period. So the develop-

ment of sales in China sufficient to signifi-

cantly benefit Fords profit diversity will

be a matter of time and execution. GMs

presence in China remains strong.

Q. Could the French and Italianautomakers fall into the B category?

A. Following the downgrades of FiatSpA and Peugeot during the first part of

2012, some investors are wondering to

what extent further downgrades are pos-

sible, and at what point we would con-

sider the B category appropriate for the

three southern European volume

makers, namely Peugeot, Fiat, and

Renault. Fiat and Renault currently have

stable outlooks, so a downgrade in the

next year is not part of our current base

case. The negative outlook on Peugeot

indicates a one in three chance of a

downgrade over the next year.

In our view, these companies size and

diversification, their solid presence in sev-

eral markets outside Europe, and their

substantial share of the European car

market (which, though depressed, is still

bigger than the U.S. market) are anchor

points for their business risk profiles,

which we currently assess as fair. All

three companies also benefit from some

market positions outside Europe (e.g., in

Latin America for Fiat and the

Mediterranean countries for Renault),

harbor a fairly wide and well-accepted

product range, have good prospects for

compliance with tightening emission stan-

dards, and are all partners in wider

alliances to various degrees (Fiat through

majority-owned Chrysler, Renault through

43%-held Nissan and a more limited

working agreement with Daimler, and

Peugeot through GMs recent subscription

of a 7% equity stake in the company).Profitability is the key issue for all

three players. Peugeot is currently the

worst performer, with a negative 3.7%

operating margin in its core automotive

operations for the first half of 2012.

Renault and Fiat are currently breaking

even, but non-European operations are

supporting Fiat. A more pronounced

upturn in European profitability will

prove challenging, in our view, given

that German competitors remain

unwilling to take part in any concerted

capacity reduction.

Still, all three players are facing this

new round of crisis with relat ively

healthy balance sheets, adequate liq-

uidity, and long debt maturity profiles. So

far, we think these companies have con-

tinuing access to the capital markets and

bank funding, even if the cost of such

access has risen.

The ability to generate positive free

cash flow from operations (FOCF) is the

key differentiator among the three com

panies. Renault is the clear leader in thi

regard, generating positive FOCF in

2011 and likely to do so again this year

FOCF was negative for Fiat last year and

is likely to break even at best this year

while Peugeots FOCF was significantly

negative in 2011 and is likely to be even

worse in 2012; moreover, there is no sign

of a return to break-even cash flow fo

Peugeot in 2013.

Our current ratings assume that both

Fiat and Peugeots FOCF will turn posi

tive by 2014 at the latest. If we conclud

that such a turnaround is out of reach

we would consider downgrades to th

B category.

Q. What are the biggest challengefacing the Japanese automakers in thei

recovery?

A. Japanese automakers have beentrying to turn their businesses around in

fiscal 2012, as they did in fiscal 2011 to

recover from the effect of the Great Eas

Japan Earthquake and tsunami

However, these companies face a

number of obstacles, including the yen

appreciation, a potential global economi

slowdown, and intensifying competition.

Despite the strong yen, profits fo

Japans auto industry have rebounded

since the beginning of 2012 due to a rapi

recovery in production and sales. We

think profits for Japans auto industry wil

likely continue to recover in step with

improvements in the business environ

ment. We expect global vehicle sales to

rise overall in 2012 but that economi

conditions will vary by region. We expec

demand in North America to continue to

rebound and assume slower but still posi

tive growth in emerging markets, such a

China. We see demand in Europ


We think profits for Japans auto industry will likely

continue to recover in step with improvements in the

business environment.


20/100

declining more significantly in 2012 than

in 2011. In the U.S.the biggest profit

source for many Japanese automakers

light-vehicle sales increased almost 15%

year-on-year during the first eight months

of 2012. Strong performance in the U.S.,

where Toyota and Honda Motor Co. Ltd.

(A+/Stable/A-1) regained market share,

drove the recovery in profitability for the

quarter ended June.

On the other hand, the strong yen con-

tinues to weigh heavily on Japanese

automakers earnings and undermines

their global competitiveness. Although

the rated Japanese automakers have

generally enjoyed a significant rebound

in production and sales in recent months

and a recovery in profit margins, their

resilience to the strong yen varies based

upon how much production capacity

they have outside of Japan. We believe

the ability to achieve stronger profits

through increased sales volumes despite

unfavorable exchange rates will be a key

factor for Japanese automakers credit

quality. In our view, Toyota is likely to

retain its strong financial standing, but

the ratings may come under further pres-

sure if the company is unable to boost

profits sustainably.

Q. How sustainable is Hyundai-Kiastrack record of share gains and solid

financial performance?



Ford Motor Co. Renault S.A. General Motors Co. Tata Motors Ltd. Peugeot S.A.BB+/Positive/ BB+/Stable/B BB+/Stable/ BB/Positive/ BB/Negative/B


It is not disclosed, but Fords With a global capacity It is not disclosed, but we Jaguar Land Rovers During first-half 2012,N.A. profitability indicates to utilization rate of about believe GM is high in the U.S. capacity utilization has Peugeot reported a Europeanus that utilization should be 87% in 2011 (only about (based upon profits) and too significantly improved over capacity utilization rate ofmore than 80%. With losses 64% in Europe), Renault low in Europe (based on the past two years, and the 76%, a historical low.in Europe, we assume compares positively with losses). We assume some company is facing supplycapacity utilization is far direct peers in the European actions will eventually occur constraints on some of itstoo low. volume market. Renault in Europe. assembly lines. Tata Motors

has moved faster in moving Indias operations haveproduction out of high- traditionally maintainedcost Western Europe healthy capacity utilization,(e.g. to Romania, Turkey, though it occasionally cutsBrazil, or Morocco). production to manage

retail and wholesaleinventory levels.


Fords geographic diversity Renault has been able to GMs diversity of sales and Tata Motors geographic The group has average brandis not as good as GMs achieve some product product is the best among diversity is lower than most and geographic

because its presence in Asia diversification through its the U.S. automakers and at global peers. Tata Motors diversification. The group hasand South America is more three brands: Renault, Dacia, least as strong as the other Indias sales are almost two brands: Peugeot andlimited. Its product diversity and Renault Samsung large global volume entirely in the domestic Citroen, which target theis equivalent in the key Motors. In terms of automakers. But losses in market, though with a wide same market segments.North American market. geographic diversity, Renault Europe and weakness in product range across most Geographic diversification isIts ability to return to is still reliant on Western South America reduce segments. Jaguar Land too limited, with 73% of theprofitability in Europe could Europe, accounting for the benefits of Rover has moderate groups revenues generated in

be somewhat better than approximately 58% of its geographic diversity. geographic diversity but Europe. Some benefits stemGMs, although this remains unit sales and 70% of its weak product diversification. from the consolidation ofto be determined. revenues in 2011. Faurecia (auto parts) and

BPF, the fully owned captivefinance subsidiary.

The scale, profitability, and funding efficiency of vehicle finance capabilities, through a captive unit or partnerships because ofsignificant reliance on financing availability for the vehicle distribution and sales process

Ford has maintained full Renault owns 100% of RCI GM operates a captive but Tata Motors commercial Peugeot owns 100% of BPF,ownership of traditional Banque, which provides still fairly small scale unit vehicle operations are well which provides financing forcaptive finance unit Ford financing for Renault dealers though its growing. GM supported by its captive PSA dealers and retailMotors Credit LLC. It plans and retail customers in continues to use Ally and finance subsidiary. Because customers in PSAs major autoto increase leverage of Renaults and some of others for various financings, of good resale value, Tata markets. BPF represents acaptive as its ability Nissans major markets. RCI wholesale, and retail but commercial vehicles also substantial, relatively stableto diversify funding Banque provides Renault seems to be increasingly have diverse third-party source of earnings and cashchannels increases. with a substantial, relatively committed to expanding GM financiers providing vehicle flow for PSA.

stable source of earnings and Financial to other aspects of finance to customers. Jaguarcash flow not directly tied to auto finance beyond Land Rover doesnt havethe auto industr y cyclicality. subprime auto. captive finance operations

and is reliant on third-party funding.

Table 6 | Key Credit Factor Peer Comparisons For Companies Rated BB+ To BB (continued)


21/100

A. As we expected after our upgrades inMarch 2012, Hyundai and its Kia sub-

sidiary have maintained sound financial

risk profiles, owing in large part to their

good market positions (9% U.S. share, up

from to 5.1% in 2008) and solid profitability.

Still, we see some challenges emerging that

could hamper further improvement. For

example, the companies are likely to fall

short of our prior expectation of around a

9% combined share of the global auto

market in 2012 (versus 8.7% in 2011 and

8.1% in 2010). The companies also face

hurdles to further improvements in prof-

itability, such as various cost increases,

including for labor and utilities; weak

domestic demand for vehicles; and rising

sales of imported cars in Koreas market.

Nonetheless, we believe the compa-

nies solid progress will support stable rat-

ings this year. (For more information, se

Credit FAQ: How Sustainable Are Hyunda

Motor And Kias Gains In Market Share And

Profitability? published Sept. 17, 2012.)

Q. How do the rated automakers compare on selected key credit factors?

A. We compared similarly rated companies using a number of key credit factor


Jaguar Land Rover PLC Fiat SpA Chrysler Group LLC Mitsubishi Motors Corp. Aston Martin Holdings (UK) Ltd.BB-/Positive/ BB-/Stable/B B+/Stable/ B+/Stable/ B+/Negative/

The ability to extend or protect retail market s hare in key markets by offering high-quality products desired by customers

JLR is made of two The group lags somewhat Chryslers light vehicle share Although Mitsubishi Motor Aston Martin is a leader incompanies, Jaguar and Land behind its direct competitors is more heavily weighted to Corp. (MMC) has limited the niche segment forRover, and both compete in in terms of market share in light trucks, so the presence in the major high-end luxury sports cars.

the auto premium segment. Europe (8% of the European companys share is more vehicle markets, it has With sales volumes of aboutLand Rover (LR) has a strong market). This weakness is exposed as gas prices relatively good positions in 4,000 units, market sharestechnological recognition in partially mitigated by the fluctuate. One of the top 10 ASEAN countries with the relative to other players arethe off-road passenger cars. groups leading position in selling vehicles for the first strong Mitsubishi brand. not meaningful.

Brazil (20% market share) eight months of 2012 MMC is one of the firstand by its expansion in the was Chryslers. mass producers of electricU.S. following the June 2011 vehicles, but it appears toconsolidation of Chrysler. take time for the market to

meaningfully expand givenvarious challenges.


JLR has a limited range of Managements decision to Chryslers product line under Because of its limited size The company has a provenproducts when compared limit investments in new Fiats direction is evolving, and resources, MMC track record for designingwith its largest peers. modelsalthough beneficial but its ability to lessen its concentrates its business high-end and bespoke luxuryHistorically, the average life for cash flow in the near reliance on light trucks and resources in emerging sports cars that sets theof its LR products is higher termmay undermine the improve its standing with markets and environmental company somewhat apartthan average. The group has groups model diversity and consumers is still a work in initiatives. Although MMC from other premium makers.an ambitious model growth competitive position in the progress, in our view. has been active in

plan and the first new longer term. There has been introducing global smallproduct, the Range Rover limited success for Chryslers models and expanding SUVEvoque, has been well revamped products in lineup in emerging markets,received across Europe. Europe so far. it has decided to discontinueRebranding of Jaguar is region-specific models in thetaking more time. U.S. and Europe.


JLR benefits from a very While fast-declining in Chrysler reports that We believe MMCs ability to Aston Martin has strongspecific positioning of its Europe and Italy (a market average transaction prices limit incentive is high in brand recognition and highLR products: it is able to that experienced a double- have been fairly stable since ASEAN countries because of premium pricing policy. Itimpose a premium price on digit fall during the first half first-quarter 2011 and that its strong market position nevertheless suffers frommost of its models. Jaguar of 2012), consolidated average incentives have with strong brand strong positioning andis perceived as a luxury revenues are supported by been fairly stable as well. recognition. However, in the growing market shares of

brand but the brand appeal Chryslers robust performance U.S. or other established German brands in theis not yet as strong as it in the U.S. and sustained flows markets, MMCs weak sports cars segment.could be. from Latin America, Fiats presence and limited product

luxury segment (Ferrari), and pipeline likely limit

auto parts. such ability.Ability to generate consistent profits in key portions of the product lineup (retail and fleet) under most volume scenarios,

along with prospects for breakeven results or better during a significant market slump

JLR is taking advantage of Although loss-making in Chrysler has reduced its MMC has been unprofitable Aston Martin maintainedthe positive momentum in Europe, consolidated fixed costs significantly and in North America and positive operating profitglobal demand for premium earnings are supported by has reported profitability in Europe where it suffers from (EBIT) in 2009 when volumecars and its new products. Chryslers recently robust North America since the excess capacity and a strong dropped 48%. Since then,Unit sales are increasing, operating performance in the first quarter of 2011. yen. On the other hand, operating profitabilityand it has maintained its U.S. and sustained flow of Although we believe the MMC has been consistently deteriorated despitereported EBITDA in fiscal earnings from Latin America, company can remain profitable in Asia and posted improving volumes. A cost2011 and first-half 2012 at Fiats luxury segment profitableat U.S. industry double-digit EBIT margin in reduction program initiatedabout 15%. (Ferrari), and auto parts. sales volumes about 12 the past two years. in late 2011 may start

Excess capacity remains an million unitsits track bearing some fruit in 2012.ongoing issue for Fiats record is l imited,European operations. but growing.

Table 7 | Key Credit Factor Peer Comparisons For Companies Rated BB- And Below


22/100

(KCF) to provide investors insight into

each companys relative positioning (see

tables 4 through 7). The KCFs we selected

are each an input we analyze in deter-

mining a companys business risk profile.

Specifically, we compared:

AA or A category BMW, Toyota,

Honda, Daimler, and Volkswagen;

BBB category Hyundai-Kia and

Nissan;

BB+ or BB rated Ford, GM,

Peugeot, Renault, and Tata; and

BB- and lower-rated Aston Martin,

Chrysler, Fiat, Jaguar, and Mitsubishi.

Q. What is the relationship between yourratings on Fiat and Chrysler? When

could these ratings converge?

A. Although Fiat has a majority own-ership stake in Chrysler, and we ana-

lyze some aspects of the companies on

a consolidated basis, we do not cur-

rently align our ratings on the two

companies. The financing agreements

are separate, there is still a substantial

minority stake, and the operational

integration is a work in progress.

However, we dont expect the one-

notch gap between BB- rated Fiat and

B+ rated Chrysler to increase, and the

ratings could well equalize. For

example, in addition to a performance-

driven upgrade or downgrade of one

or the other company, the ratings could

converge because of further opera-

tional and ownership integration, even

if Fiat were to maintain less than a

100% ownership stake in Chrysler.

We consider Fiats core operations

and Chryslers when determining Fiatsbusiness risk profile, which we continue



Jaguar Land Rover PLC Fiat SpA Chrysler Group LLC Mitsubishi Motors Corp. Aston Martin Holdings (UK) Ltd.BB-/Positive/ BB-/Stable/B B+/Stable/ B+/Stable/ B+/Negative/

Production capacity utilization across the com

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