TURIN -- The accelerating cash burn by Europes automakers in 2009 could drive them deep into debt and put their income statements into the red.
In 2007, the European auto industry held a 30 billion net cash position. But that is expected to swing to a combined 42 billion of net debt by the end of 2010, Morgan Stanley predicts.
Combine that with slowing sales, and Europes automakers are expected to swing from a collective 17.5 billion operating profit in 2007 to a 2.3 billion loss in 2009.
As a result, major capital expenditures, product development and dividend payments are being postponed or suspended in a desperate effort to conserve cash.
Cancelled, delayed programs
In my view, 2009 is going to be the toughest year ever, Fiat Group CEO Sergio Marchionne told a conference call with analysts. I dont think weve ever seen a combination of factors coming into play at this speed.
Among measures carmakers have taken to save cash are:
-- BMW cancelled its new flagship CS model and a larger X7 SUV.
-- Fiat cancelled its dividend payment and delayed the redesign of the Alfa Romeo 147, Fiat Panda and Lancia Ypsilon by a year.
-- Renault and Nissan are delaying their participation in joint venture plants in India and Morocco. Renault has postponed the Espace minivan replacement.
-- Many automakers are cutting back on marketing, such as pulling out of expensive auto show displays.
Despite these measures, the lack of ready credit is accelerating the cash burn by automakers.
We anticipate the European auto industry will, as a whole, burn more than 90 million of cash per day in 2009, said Adam Jonas, analyst with Morgan Stanley. Jonas expects the pace of the daily cash burn to be worst in the final quarter of 2008 and in the first quarter this year.
Automakers need cash to fund operations, especially when financing customers new-vehicle purchases.
About 70 percent of vehicle sales in western Europe are made with financial services, either leases for fleet sales or loans for private buyers. Of that total, about half are
financed by automakers captive finance subsidiaries, says auto analyst Arndt Ellinghorst of Credit Suisse.
European automakers share 230 billion of their financial arm debt, which is becoming more difficult -- and more expensive -- to refinance, Ellinghorst said.
If automakers financial arms cannot manage to refinance their debt, European sales could fall even more.
Lack of consumer credit is the second reason which is currently slowing down sales, Ellinghorst said.
Government aid sought
Government support in various European countries lessens the risk of insolvency for the sector in the short term. But with global and European sales forecast to fall in both 2009 and 2010, the auto sectors massive cash burn is likely to continue.
The French government has already given captive finance arms at Renault and PSA 500 million each in low interest loans, to keep vehicle financing activity at stable levels. The French government announced in mid-January plans for an additional 5 to 6 billion in auto industry aid. Insiders say a sizeable chunk of that will aid the captive finance arms.
The German government also is considering low-interest loans to domestic automakers financial arms, as part of a new economic stimulus package under discussion.
Customers are not buying cars until they feel confident in their ability to pay for them, Ellinghorst said. But customers cannot buy cars until credit is available to help finance the purchase.