Auto Manufacturers Face Growing Risks as Governments, Consumers Seek to Reduce Emissions

The automotive manufacturing industry worldwide faces increased credit risks amidst shifting and more rigorous environmental standards and increasing demand for vehicles that run on alternative fuel sources.

“Given that the auto industry is one of the most significant emitters of greenhouse gases, there is a clear need for the industry to improve emissions-reducing technologies and adapt to the broadening emergence of AFVs [alternative fuel vehicles],” said Brian Cahill, a Moody's Investors Service managing director.

“We believe that major auto manufacturers face material risks, which are transmitted through four channels: rising policy pressure, with stricter emissions-reducing regulatory targets a likely outcome; increasing pressure on margins and cash flows; changing consumer preferences; and disruptive technological shocks,” said Motoki Yanase, a vice president with Moody's Corporate Finance Group and lead analyst for the automotive sector in Japan.

As manufacturers’ research and development, as well as capital spending, grows in the search to reduce emissions, and as new competitors emerge to meet these environmental challenges, their financial risk will increase, the Moody’s analysts said. Consumers’ preferences and governmental policies to incentivize the production of vehicles that emit less will also drive future sales.

Auto manufacturers also need to look out for unpredictable take-up risks driven by technological shocks. Producing alternative fuel vehicles requires changes to manufacturing processes, as well as increased coordination with auto-parts suppliers, Moody’s said. “Auto manufacturers without a well-developed technology strategy and ability to rapidly retool, or those with long product life cycles, will fare the worst as the need for manufacturing flexibility and speed-to-market rises.”

- Nicholas Stern, editorial associate

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