Ford Motor Co. and General Motors Co. will face heavy pressure on their profitability in 2012 from their exposure to Europe, according to the financial agency Fitch Ratings.
Europe has become the weak link in the global sales network of the U.S. automakers, Fitch said in a statement on Monday. Pressure on the companies will increase next year if European demand dips further after a downturn already evident in the third quarter, Fitch said.
GM's European operations drove approximately 17 percent of the automaker's global net sales last year, excluding its Chinese joint ventures. Ford derived about 27 percent of global sales from Europe in 2010, putting it at greater risk of margin pressure over coming quarters if a European recession cuts sales further, Fitch said.
Ford's pretax losses in Europe increased to $306 million in the third quarter from $197 million in 2010. GM Europe halved its third-quarter loss to $300 million. GM said its European operations will fall short of a breakeven goal for the full year.
Automakers face restrictions on cost restructuring in Europe, including labor market rigidity and significant obstacles to plant closures that make it more difficult to respond to a prolonged slump in regional auto sales through capacity reduction and stable pricing.
"Greater reliance on customer incentives and tougher competition with European automakers could keep revenue and margins under heavy pressure in 2012," Fitch said.
Tougher financing conditions for European auto buyers point to further erosion in sales volumes next year, the agency warned.
"We expect both Ford and GM to continue an emphasis on cost reduction and pricing stability, rather than volume growth, as the keys to European operating performance in 2012," Fitch said.
European automakers are also suffering from their home region's weak market. Last month PSA/Peugeot-Citroen issued a profit warning, saying it sees a close to breakeven" result for the full year.
Earlier this month, Standard & Poor's rating agency said European automakers' credit quality is better insulated against a recession in Europe than in the last recession in 2009 because they have increased their presence in higher growth regions such as China and have implemented cost-saving and efficiency measures.
Standard & Poor's expects the auto industry will experience a slight decline in light-vehicle sales in 2011 and 2012 in western Europe, but automakers' revenues and margins on average could gain modestly, based on the credit defenses manufacturers built since the 2008-2009 crisis.