DETROIT, US - An abrupt downturn in European auto demand represents the latest hit to U.S. auto suppliers, already struggling with the fallout from a U.S. auto market that has plunged to 15-year lows and could drop further.
In the span of a week, TRW Automotive Holdings Corp, Johnson Controls Inc and Lear Corp cut their financial outlooks, blaming the credit turmoil for a downturn in European auto sales over the past month.
The possibility of a merger between General Motors Corp and Chrysler LLC further complicates the picture for suppliers, given uncertainty regarding what models and brands a combined automaker might choose to build.
Sources familiar with the situation have said Chrysler has held talks with GM and other automakers including Renault about a sale of all or part of its assets.
Europe had provided a silver lining for many leading U.S. auto suppliers such as TRW, which supplies auto safety products including airbags and electronic stability controls.
But the slump that started in the United States is fast spreading to other key markets, as a global credit crunch rocks consumer confidence.
Analysts say more suppliers will be forced to cut financial outlooks and slash jobs in coming weeks. Stock prices for those top suppliers could also be at risk for steep falls after outperforming rivals that rely more on U.S. sales, they say.
"Europe has softened in the last 45 days," Johnson Controls Chief Executive Stephen Roell told Reuters. "I would characterize the last 45 days as a significant softening." The company said on Tuesday it expected earnings for the fiscal year ending next September to decline up to 16 percent, sending its shares down 7 percent.
Western Europe is feeling the same "liquidity crunch" that is hurting U.S. demand, and Eastern Europe is also likely to slow, Roell said.
September auto sales in Western Europe fell 10 percent to 12.75 million units on the annualized basis - the weakest monthly result in 11 years. That represents an abrupt downshift in the market, which is down 5 percent through September.
BorgWarner Inc, which has increased the number of planned U.S. job cuts, said on Friday it was also shrinking its temporary work force in Europe.
"I think it's directly attributable to consumers, even in Europe, (being) not confident enough to buy new vehicles," BorgWarner Chief Executive Tim Manganello told Reuters.
"The value of their investments, their home, their ability to get credit, a number of inputs all add up to become a negative backdrop and impact consumer appetite," he said.
TRW became the first major supplier to warn on results earlier this month. The Livonia, Michigan-based supplier withdrew its 2008 outlook and forecast a third-quarter loss.
TRW makes 57 percent of its revenue in Europe, which has allowed it to outperform peers in a weak market. Its shares were down 8 percent through August, versus a 26 percent drop in the Dow Jones U.S. automobiles and parts index.
The stock has since lost 58 percent versus the index's 38 percent decline.
NEXT IN SIGHT
JPMorgan analyst Himanshu Patel said more suppliers could cut their outlooks while reporting quarterly results.
Next in sight include Magna International, Gentex Corp, Tenneco Inc and ArvinMeritor, which rely on Europe for 33 percent to 43 percent of revenue, Patel said. He cut his 2009 profit estimates 5 percent to 20 percent on those companies to reflect falling European volumes.
Most major automakers including GM, BMW, Toyota Motor Corpand Volkswagen slashed production schedules for Western Europe this month.
"We are facing an unprecedented set of economic challenges due to the global economic crisis," GM Europe President Carl-Peter Forster said.
"The credit crisis and inflation from surging oil and commodities prices have seriously hurt consumer confidence." The production cuts add to the woes surrounding the U.S.
supply base, already at a breaking point amid plunging U.S. demand and high commodity prices.
While Asia also faces a slowdown as the global economy falters, the impact of the credit crunch is more muted because of the lower level of auto financing, industry forecaster Global Insight said. About 60 percent to 80 percent of new cars are bought using credit financing in Europe, against 10 percent to 15 percent in China and 30 percent in Japan.
"While mature markets are being impacted more severely than emerging markets, no country or region is completely immune to the turmoil." said Jeff Schuster, executive director of forecasting for auto market tracking firm J.D. Power.
