Auto Parts Suppliers, Tire Manufacturers All In For Tough Year

Continuing troubled times for automotive industry drags down others.

Four sectors are under close watch, in the newly released Euler Hermes ACI report that is looking at the overall health of the automotive industry. For the second year in a row the automotive industry is facing hard times and as a result auto part suppliers, auto parts retailers and tire manufacturers are struggling

Highlights of the report include:

Auto Parts Suppliers: Foreign automakers are increasing vehicle production in North America, but Detroit's "Big Three" (Ford, GM, and Chrysler) continue to cut back. That, coupled with rising raw materials costs, is pinching auto suppliers. The outlook remains bleak for suppliers closely aligned with domestic manufacturers, while those that serve foreign manufacturers are much better placed to take advantage of their vehicles' popularity.

Auto Parts Retailers: Short-term prospects are adversely affected by the recent high fuel prices, as customers' spending habits change when their disposable income gets squeezed. However, vehicle maintenance cannot be postponed forever, so demand for auto parts should not change appreciably. The outlook for auto parts retailers is mixed, depending on the timeframe, but overall the sector is probably one of the more stable of the automotive industry.

Tire Manufacturers: Tire manufacturers directly feel the effects of the recent higher oil prices because nearly 60% of a tire's cost is related to oil. Raw materials costs at Goodyear, the largest U.S. tiremaker, have risen 16% since last year, and that has held back the company's turnaround plans. While oil prices have come back down from recent record highs, the decreased costs will take a while to filter through the tire manufacturers' bottom line. Additionally, OPEC recently hinted that production may decrease, which could bring the average price of a barrel of oil back up in 2007.

Auto Manufacturers: The U.S. automotive market, like most other developed markets, is largely saturated, so competition is expected to intensify. However, industry sales in North America in 2006 remain favorable compared with historic levels. U.S. manufacturers Ford Motor Co. and General Motors Corp. bear the brunt of the tough industry conditions as their market shares continue to erode. Also, intense competition increases the use of price incentives and drives down profit margins. The outlook for domestic manufacturers remains tough, requiring more progress in the companies' restructuring efforts. Foreign manufacturers continue to outperform the market and their outlook remains positive.

The complete automotive industry report is available upon request in the latest issue of Foresight.

Euler Hermes ACI

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