Auto Parts Suppliers Earnings for Electric Cars Could Be Limited by Competition from Semi-Conductor Firms

Auto parts suppliers of powertrain parts for electric vehicles may be excited about the rising popularity of the product and potential for earnings in the sector, but analysts with Moody’s Investors Service see competition from semi-conductor companies selling components limiting such growth.

"GKN Holdings plc, Valeo S.A., ZF Friedrichshafen AG and Continental AG could enjoy a revenue boost from the growing adoption of alternative fuel vehicles (AFVs) with hybrid or all-electric powertrains," said Scott Phillips, a Moody's vice president and senior analyst. "This shift is fairly positive for their revenues. However, semi-conductor companies are also looking to capture the value of key components so the uplift in auto suppliers' earnings is likely to be much smaller than expected."

Some car producers may wish to manufacture the electrification equipment on their own, but Moody’s expects suppliers to begin taking advantage of growth opportunities in this sector. “Industry observers expect AFVs to account for 15%-20% of total vehicle production by 2025, supported by tougher carbon regulations, the decreasing popularity of diesel vehicles and growing consumer acceptance. Additionally, government financial incentives will boost this fledgling market,” analysts said.

Until batteries become more inexpensive, hybrids will continue to dominate the market. Value is concentrated in key AFV components like 48 volt DC/DC converters, chargers, inverters and electric motors—all of these play to the strengths of semi-conductor companies like Infineon, STMicroelectronics and NXP Semiconductors, Moody’s said. “If mass production and competition were to commoditize the manufacture of power electronics components, this could erode the profitability of the European auto parts sector. However, Moody's believes it is more likely that auto suppliers will earn low single-digit EBITA margins on electrical components, which would leave them all net beneficiaries of electrification.”

– Nicholas Stern, senior editor

E&P Sector Set to Benefit from Federal Environmental Regulatory Rollbacks

The proposed shelving and delays in implementation of federal environmental regulations should provide a boost to the cost structure of some parts of the U.S. exploration and production (E&P) industry. Still, Fitch Ratings analysts, in a new report, think the short-term benefits derived from regulatory easing will likely be eclipsed by efficiency measures and hydrocarbon pricing as economic drivers for the industry.

Regulations targeted for delay or diminishment include methane emissions control reporting requirements, loosening of flaring rules and requirements to retrofit wells to limit methane emissions, Fitch notes.

The ratings agency anticipates E&P capex and rig counts to grow substantially this year. “Rising capex and output should continue to be largely driven by efficiency gains, including the ability of operators to further increase lateral drilling lengths along with an increase of proppant loadings and conducting acreage swaps or acreage acquisitions to further core up and optimize techniques for developing multiple stacked pay zones from a single location simultaneously,” analysts said.

The U.S. Energy Information Administration just updated its U.S. crude production projections to 10 million barrels per day in 2018, a high water mark for the industry not seen since 1970. Yet the ratings agency sees environmental restrictions as an ongoing factor that could add risks to the E&P sector. “Fitch believes the U.S. withdrawal from the Paris Agreement may create offsetting risks for the industry, which are difficult to quantify, including the risk that opposition becomes more entrenched at the state and local levels even as it eases at the federal level,” analysts said. “The response from mayors and governors around the country to the Paris Agreement exit underscore there is substantial political support for emissions regulation on both the state and local level.”

– Nicholas Stern, senior editor

China Sees Rise of Fintech E-payment Tech Firms

The rise of electronic payments providers in China is facilitating more online consumption and “omni-channel retailing” and may serve as a source of competition to traditional retailers and banking operations going forward.

"The rise in the usage of e-payments is positive for internet companies and most service and consumer-related companies, although it could also be negative for some companies in traditional retail channels," said Lillian Li, a Moody's Investors Service vice president and senior analyst in a new report. "And while it will not have a near-term significant impact on the profitability of Chinese banks, it will increase competition and drive the banks to transform their business models in the payment business."

The country’s foray into fintech is also viewed as credit positive by Moody’s, as it helps China obtain its goal of rebalancing the economy away from investment and toward consumption. Such third-party fintech firms have grown in China at an annual rate of more than 100% since 2015. China’s relatively brief history of bankcard use has also facilitated the quicker adoption of fintech.

“As indicated, internet companies as well as service companies along the supply chain are benefitting from fast growth in third-party e-payments, and small businesses in the service sector could also benefit from easier access to credit from third-party platforms at reasonable costs,” Moody’s analysts noted.

– Nicholas Stern, senior editor

Stronger Demand from Emerging Economies, Macro Policies in Advanced Improve Global Growth Forecast

Global economic growth is expected to pick up pace this year. The rate will be next to the highest since 2010, according to a recent Global Economic Outlook report from Fitch Ratings. Growth worldwide is anticipated to reach 2.9% this year and 3.1% in 2018.

"Faster growth this year reflects a synchronized improvement across both advanced and emerging market economies,” said Brian Coulton, Fitch's chief economist. “Macro policies and tightening labor markets are supporting demand growth in advanced countries, while the turnaround in China's housing market since 2015 and the recovery in commodity prices from early 2016 has fuelled a rebound in emerging market demand."

The forecast for the eurozone showed the most improvement as stronger incoming data, improving external demand and enhanced optimism that the European Central Bank’s quantitative easing is gaining traction resulted in 0.3pps to the 2017 eurozone forecast to 2%, analysts said.

Ongoing growth, however, is also dependent on monetary and fiscal policies, which are considered key factors in the short-term improvement of the global growth predictions. China’s recent tightening of credit conditions may impact growth later this year, while the U.S. Fed is expected to raise rates several times through 2019.

"With the Fed now signaling that QE will start to be unwound later this year, these monetary policy adjustments could spark some volatility in global financial markets attuned to persistent monetary accommodation," said Coulton.

A recent uptick in demand from large emerging economies like Brazil and Russia is also positive news that is expected to continue in the near term, Fitch analysts said. "The two key downside risks identified last quarter—eurozone fragmentation risk and aggressive U.S.-led protectionism—have not gone away, but have certainly diminished somewhat in recent months," Coulton said.

– Nicholas Stern, senior editor

Fed Raises Rate for Second Time This Year

The Federal Reserve’s Open Market Committee decided yesterday to raise the federal funds rate to a target range of 1% to 1.25%, the second increase for this year. In a press release, the Fed said that its monetary policy remains accommodative in support of strengthening labor market conditions and a sustained return to 2% inflation.

“Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability,” according to the release. “The committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2% in the near term but to stabilize around the committee’s 2% objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely.”

Economic activity has risen moderately since the beginning of this year. Job gains have been solid and the unemployment rate has declined. Household spending has increased in recent months and business investment has expanded, the Fed said. Inflation has declined recently and is running slightly below 2%.

The committee asserted that it will assess realized and expected conditions in future decisions concerning the interest rate, with the continuing objective of maximum employment and 2% inflation. Information taken into account will include labor market conditions, indicators of inflation pressures and inflation expectations, and financial and international developments. The Committee anticipates that economic conditions will warrant gradual increases in the federal funds rate, though it is likely to remain “below levels that are expected to prevail in the longer run,” according to the release.

– Adam Fusco, associate editor

High-Flying Optimism Continues for Small Business

For six straight months, optimism among small business owners has been at an historically high level. A record level was reached last November that continued through May, according to the National Federation of Independent Business (NFIB) Index of Small Business Optimism.

“The remarkable surge in optimism that began last year right after the election shows no signs of slowing down,” said NFIB president and CEO Juanita Duggan. “Small business owners are highly encouraged by the president’s regulatory reform agenda, and they remain optimistic there will be tax reform and health care reform. This is a policy-driven phenomenon.”

Five components in the index showed a gain, four declined and one remained unchanged. Employment appears to be a large factor. Hiring activity in May was near the highest levels in the 43-year history of the index, the NFIB said. A majority of owners, 59%, reported hiring or trying to hire in May. Among those who tried to hire, 86% said that they found few or no qualified workers. In fact, finding qualified workers was the second-largest concern among small business owners.

“The tight labor market has been a persistent problem for small business owners for the past several months, and the problem appears to be getting worse,” said NFIB Chief Economist Bill Dunkelberg. “It’s forcing small business owners to increase compensation, which we’re seeing in this data, to attract new workers and keep the ones they have. But it also means a lot of small business owners are short-handed. They can’t keep up with customer demand because the labor pool isn’t producing enough qualified workers. It’s a significant structural problem in the economy that policymakers will have to watch.”

Just 28% of respondents have plans for capital outlays, a slight rise from April but below historical levels for periods of growth, the NFIB said.

“Typically, in a strong economy, we see a lot more spending on capital,” Dunkelberg said. “We’re seeing increased hiring activity and some other positive signs, but the capital-outlays component is the missing ingredient for robust economic growth.”

– Adam Fusco, associate editor

Annual Credit Congress Open for Business in Grapevine, Texas

The 121st Credit Congress & Expo is officially open. The NACM board of directors and credit professionals from around the world were in attendance Monday for the general session at the Gaylord Texan Resort & Convention Center outside of Dallas.

Attendees were introduced into the world of unmarketing by keynote speaker Scott Stratten. He took them through a tour of the nontraditional approach to marketing and the perceptions surrounding millenials and business/customer relations. Stratten’s presentation included the philosophies behind marketing, selling and branding, using recent examples of “bad press” throughout his show. He described the generation gap as an allowed bias, but showed there is very little actual difference.

Branding in real time can affect a business, but it is important to remember to work with clients and customers, Stratten said. Communication that matters relates back to the medium the customer wants. Companies have been in the news due to this “bad press,” yet they can turn this into a positive interaction with customers with the quality and speed of an apology.

The general session also included NACM’s 2017 honors and awards winners, as follows:

•    Emerging Leader Award: Kevin Stinner, CCE, CCRA, Crop Production Services Inc.
•    CBA Designation of Excellence: Rianne McIntosh, CBA, Summit ESP LLC
•    CBF Designation of Excellence: Julie Anderson, CBF, CCRA, Stoneway Electric Supply Co.
•    CCRA Designation of Excellence: Theresa Lawler, CBF, CCRA, The Chamberlain Group
•    CCE Designation of Excellence: Melissa Kobus, CCE, Walters Wholesale Electric Co.
•    O.D. Credit Executive of Distinction Award: Larry O’Brien, CCE, ICCE, PotashCorp
•    GSCFM Student Leadership Award: Charles Edwards, CCE, Ferguson Enterprises Inc.

Among the other speakers at the morning's session was NACM Economist Chris Kuehl, Ph.D. He shared his thoughts on the Credit Managers' Index, which he joked makes him famous. Many indices are accurate and fast, but not both, Kuehl said. The CMI is both and "it is all because of you," he said, referring to the crowd of credit professionals. "Please participate. It is a valuable tool."

NACM Chairman Jay Snyder, CCE, ICCE, returned to the stage to welcome and thank the board, Stratten and everyone for attending the expo. Breakout sessions will be held through Wednesday, including valuable information on credit applications, bankruptcy, construction credit and cash flow.

To read more about our newest award winners, make sure to pick up the July/August issue of Business Credit magazine. It features a more in-depth profile of O.D. Glaus Award-winner Larry O'Brien.

– Michael Miller, editorial associate

Mexican Businesses to Face Issues If NAFTA Changes

Mexican business will be exposed to risk if a change to the North American Free Trade Agreement (NAFTA) comes to fruition. The alcoholic beverage, automotive, manufacturing, property and real estate, and retail industries could be the most affected by a change in U.S. policies, said Fitch Ratings.

“A heightened degree of uncertainty regarding the impending renegotiation of the treaty remains and the prospect of disruption to the status quo over the short- to medium-term is evident,” according to a release from Fitch. Mexico could see a moderate deterioration in trade terms, said Fitch, but an impact to credit could be avoided.

“Operations abroad generate hard currency revenues and provide flexibility for a material portion of the portfolio and thus can mitigate the credit impact of potential trade disruption, though exporters are more exposed.” More than 40% of Mexican corporates operate abroad.

Initial issues would hit manufacturers while the second wave could slow the Mexican economy and have an effect on the exchange rate, among other things. “We believe these factors are likely to lead to a softer operating performance across the corporate sector until economic conditions start to pick up and a higher visibility of a potential outcome from trade negotiations is reached,” said Fitch, referring to a lower economic growth and higher inflation.

Fitch rates more than 80 companies in Mexico, and 85% of them have a stable outlook, while only one in 10 has a negative outlook. The other 5% have a positive outlook.

– Michael Miller, editorial associate

Moody’s Maintains Stable Outlook for Indian Corporates

A gradual recovery in India’s corporate sector is expected by Moody’s Investors Service and its Indian affiliate, ICRA Limited, and goes hand in hand with the country’s sustained economic growth. Nonfinancial corporates have a stable outlook from Moody’s for the next 12 to 18 months.

“Almost 23% of all nonfinancial corporates that Moody’s rates in India carry positive outlooks and 53% carry stable outlooks,” said Kaustubh Chaubal, vice president and senior analyst in Moody’s Corporate Finance Group.

In a recent release, Moody’s said that negative rating actions have bottomed out, though recent downgrades exceed upgrades. A total of 23% of the rated portfolio has a negative bias, down from 34% in June 2016. EBITDA growth of from 6% to 12% for corporates over the next 12 to 18 months will be supported by capacity additions and stabilizing commodity prices, as well as GDP growth forecasts of 7.5% for fiscal year 2017 and 7.7% for fiscal year 2018.

With better access to capital markets and large cash balances, most corporates are able to handle their refinancing needs this year, Moody’s said. Also, the capital expenditure cycle for Indian corporates has peaked, with projects nearing completion and declining investments putting the brakes on borrowing.

Expansion in earnings is expected for the metals and mining sector due to stabilizing commodity prices, as well as completion of capital expenditure and the resulting increase in production capacity. Stressed assets in the sector could lead to debt-financed acquisitions, which will weigh on ratings, Moody’s cautioned.

The stable outlook for the power sector reflects improvement in domestic coal production, which moderates the fuel supply risk. The ratings agency’s outlook for the auto industry is stable, due to improving customer sentiment, new product launches and dropping prices. The telecommunications industry maintains a negative outlook, as earnings may come under pressure from an increase in competition.

– Adam Fusco, associate editor

More Finance Professionals Using New Commercial Credit Card Tools

The vast majority of corporate finance professionals surveyed recently by Capital One’s Commercial Card Group plan to implement new commercial card tools or services this year.

More than 90% of survey respondents said they planned on doing so, marking a 36% higher adoption rate than reported in a similar survey conducted by Capital One the year prior. Sixty-three percent of respondents said their top consideration when selecting a commercial card provider is finding one that provides for their firms’ needs, combined with an all-in-one intuitive interface that permits management of all payments in a single space. The next most important consideration—15% of respondents—is a program that supports vendor enrollment and card acceptance.

“We are seeing a big jump in demand for commercial card tools among corporate finance professionals in just one year, which demonstrates the demand for more customized and specialized offerings that support our clients’ varied business needs,” said Rick Elliott, head of the Commercial Card Group at Capital One Bank in a press release. “We are working in close partnership with our clients to better understand the daily challenges they face and provide creative solutions for these problems,” he said.

Another finding of the survey is that use of the latest digital tools is increasing. Of those surveyed, 88% said they have access to a commercial card mobile app that allows them to manage and submit travel expenses remotely, which is a 54% increase from 2016. More respondents said they use a single card for procurement and travel and expenses.

For those with companies without a commercial card app, half said the primary barrier to the commercial card app is figuring out their companies’ bring-your-own-device policy, while 50% said their companies’ didn’t want to use a mobile app yet.

– Nicholas Stern, senior editor