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Announcement:

Moody's: European Auto's Expansion in China Bring Rewards, But Also Risks

 The document has been translated in other languages

22 Nov 2011

Frankfurt am Main, November 22, 2011 -- European automotive manufacturers and suppliers with operations in China are expected to continue to benefit from the market's substantial long-term growth potential, but investors also need to be aware of the potential impact any significant decline in sales in China could have on those companies, says Moody's Investors Service in a Special Comment published today.

"The Chinese automotive market has boomed for years -- it is now the largest automotive market worldwide and its long-term growth potential for European auto manufacturers and suppliers remains substantial," says Rainer Neidnig, a Vice President -- Senior Analyst in Moody's Corporate Finance Group.

"However, historical automotive sales patterns in other countries suggest that periods of exceptional growth are likely to encounter some bumps along the way," explains Mr. Neidnig. "While we do not currently foresee a downturn in the Chinese market, we believe an assessment of theoretical downside scenarios could be helpful for investors in the European auto sector."

Moody's estimates that 15% of all cars produced by European automotive manufacturers (original equipment manufacturers, or OEMs) in 2010 were sold in China, including vehicles sold by joint ventures with Chinese companies. However, the importance of China varies significantly across companies. While Volkswagen Group sold 27% of its cars in China in 2010, Fiat still has virtually no revenues derived from China.

Moody's also estimates that European-based suppliers generate approximately 15% of their total revenues in China. Since automotive suppliers usually work with several OEMs, the degree of reliance on China varies less for individual auto suppliers than for the OEMs.

"Because of the high profitability of the Chinese activities, Moody's assessment is that their relative contribution to European OEMs' EBIT is approximately twice as high as their share in unit sales," says Falk Frey, a Senior Vice President in Moody's Corporate Finance Group and co-author of the report. "In addition, they contribute considerably more to European auto suppliers' earnings than to their revenues," adds Mr. Frey.

China's booming car market provided a much needed cushion for the European auto industry in 2009 when car demand elsewhere collapsed. Moody's notes that macroeconomic risks for the automotive industry are increasing again in Europe and the US. In the rating agency's view, it is unlikely that growth in China would be able to offset another large decline in European or US car demand.

Should there be a temporary setback in the European companies' auto sales in China, Moody's expects that the earnings of Volkswagen, BMW, Daimler and Peugeot would be most affected. This is because the Chinese market accounts for a significant proportion of their total vehicle sales. In contrast, Fiat would be minimally affected, and Renault would be affected only through its shareholding in Nissan. Moody's believes that the impact of lower sales in China would have a similar impact on all European automotive suppliers.

Moody's auto analysts expect market growth in China to continue to be higher than most other markets, with a 7% increase in light vehicle sales in 2012. However, auto markets globally have a history of substantial volatility. To assess the potential impact of falling sales in China on auto industry companies, Moody's has stress-tested the ratings of Volkswagen, BMW, Daimler, Peugeot, and of European suppliers. The rating agency believes that current ratings could withstand a 25% slump in the companies' sales in China, if markets in the rest of the world remained stable. This theoretical scenario could reflect a contraction of the market, loss of market share by the European companies, or a combination of both. Only a steeper decline in the companies' sales in China, which Moody's considers very unlikely, or a simultaneous decline in other regional markets could exert pressure on ratings.

Moody's report, entitled "Expanding Operations in China Bring Rewards, But Also Risks, For European Auto Industry", is available on www.moodys.com.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Rainer Neidnig
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: European Auto's Expansion in China Bring Rewards, But Also Risks
No Related Data.
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