Auto Parts makers could be caught in an “airline-style cycle” and be forced to return to bankruptcy court as the industry Worm gear struggles to rebound, according to a recent report from Fitch Ratings.
The rating agency is projecting a 7.8% increase in U.S. vehicle sales next year, but it said modest growth may not be enough to Copper sleeve prop up auto suppliers that have recently emerged from Chapter 11 protection or out-of-court restructurings.
Narrow margins and heavy competition have locked suppliers in a cycle that requires them to bolster their businesses enough in growth periods to cushion against the next industry decline. A similar trend among airlines caused some carriers to make a second stop in bankruptcy court earlier this decade.
“Like we saw with airlines, auto suppliers might not be able to produce enough cash flow and strengthen their balance sheets in the up cycle to survive the next downturn,” said Mark Oline, a managing director in Fitch’s Corporate Finance group.
The expected growth in vehicle sales will increase suppliers’ revenue, but profits will remain small.
Even though auto suppliers shuttered plants and laid off workers in the past year, there is still excess production capacity in the industry. That, combined with stiff competition from foreign parts makers, will hold down the prices U.S. suppliers are able to charge manufacturers.
