Auto market will stabilize in 2010: Moody's

PARIS (Reuters) - The worst of the automotive industry crisis is over, and world sales are set to stabilize next year, a Moody's analyst told the Reuters Auto Summit on Wednesday.

However, European manufacturers, which have been brought back from the brink by government support measures, still need to solve the problem of excess production capacity and take steps to improve operating profitability if they are to keep their investment ratings, Falk Frey, senior vice president corporate finance, said.

"Our concern is that price pressure will accelerate because of oversupply and overcapacity and the negative price effect resulting from the underlying trend toward cheaper, smaller cars, as well as the need to reduce CO2 emissions and tax schemes that favor cars with lower emissions," Frey said.

OVERCAPACITY STILL AN ISSUE

He said the European auto industry would fall short of a 75 percent to 80 percent breakeven capacity utilization rate this year. The average rate in 2009 will be below 70 percent in a market where political concerns make job cuts and plant closures virtually impossible, he said.

"In Europe we have seen some capacity reductions. However, there has been new capacity being built up locally in those markets where labor is cheaper -- Eastern Europe -- in expectation of strong demand and also to be imported into (Western) Europe"

"The European industry is facing formidable challenges," Frey said, although he held back from predicting the wave of consolidation that many expect as carmakers look for ways to reduce costs and generate economies of scale.

"We do not anticipate big mergers. Companies are looking more toward cooperation, joint ventures with regard to certain technologies," Frey said.

Consolidation in the supplier sector is more likely, he said, with several big deals -- like Schaeffler's Continental (CONG.DE) bid -- already done.

Earlier this week France's Faurecia (EPED.PA) said it would buy into the clean-emissions technology segment with its purchase of EMCON Technologies.

"One issue is trying to get more volumes on single platforms, to save R&D costs and get economies of scale on purchasing and production," Frey said.

WORLD MARKET STABILISING

Moody's expects the world auto market to stabilize next year, rising 2 percent, following an 8 percent fall expected for 2009. But different regions will show large variations.

The European market is expected to fall 9 percent as scrapping incentive schemes fade and signs of economic recovery take time to boost consumer confidence.

"I think the effectiveness (of scrapping schemes) will decline rapidly and don't see a real positive impact in 2010," said Frey.

France, Italy and the UK are expected to fall 5 percent each next year, while Germany, where an extremely generous scrapping scheme ran out in September, will drop 25 percent, Frey said.

"You should see it as part of an overall package -- our expectation is that out of this additional demand roughly 50 pct has been newly created demand -- buyers of new cars that would normally have gone for used cars."

In China, which is expected to grow 35 percent this year, the 2010 market is seen stable, compared with a very high year-on-year comparison. The country's low vehicle penetration rate means that Moody's is not expecting a dramatic fall-off in demand when incentive schemes run out.

Moody's says it will be 2011 before a true global recovery kicks in. It predicts an 11 percent increase in the world market that year.

(Reporting by Gilles Guillaume and Helen Massy-Beresford; Additional Reporting by Lionel Laurent; editing by John Wallace)