How Recent Constraints in Production Stand to Shift the Automotive Sales Model Going Forward

DBRS Morningstar published the commentary titled, “How Recent Constraints in Production Stand to Shift the Automotive Sales Model Going Forward.” The commentary focuses on how profitability in the automotive sector has remained at solid levels despite protracted production shortages that have now spanned more than two years.

Some of the highlights include:
-- Through the challenges imposed on the automotive sector, initially by way of the Coronavirus Disease (COVID-19) and subsequently the global semiconductor (and other supply base) shortages, demand for vehicles has remained favourable (further taking into account significant pent-up demand stemming from the protracted shortages).
-- With volume constraints being more than offset by higher pricing and firmer product mix (the latter reflecting the deliberate allocation of limited semiconductor chips to higher margin vehicles), sector profitability has trended favourably.
-- While vehicle shortages will eventually improve, inventory levels are unlikely to revert to historical norms; this is supportive of ongoing firm vehicle pricing. However, cost headwinds (that notably include investments associated with the progressive electrification of the global automotive fleet) threaten to pressure margins going forward.
-- Additionally, demand may also soften in line with inflationary pressures, rising interest rates, and weaker consumer sentiment (the latter being a function of increased geopolitical uncertainty).

“While firmer margins, potential volume growth (assuming the prevailing supply base challenges eventually moderate), and increased gross profitability are credit positive, DBRS Morningstar notes that these appear to be considerably offset by cost and demand headwinds anticipated to be facing the sector; the overall credit outlook, therefore, appears to be relatively neutral,” notes Robert Streda, Senior Vice President, Credit Ratings – Diversified Industries.