Chrysler LLC's bankruptcy may be more protracted than the U.S. government expects and could result in more failures among the company's supplier base, Moody's Investors Service said in new report.
Though the Obama administration is attempting to contain fallout from Chrysler's bankruptcy and to provide a template if General Motors (GM.N) follows suit, both companies' restructurings will likely result in heightened consolidation among suppliers, with a number going out of business, Moody's said in a report published this week.
Suppliers' troubles, in turn, could disrupt vehicle production, the agency said.
"With the down cycle gaining pace, even well known Tier 1 auto suppliers could face severe funding and liquidity issues," Moody's said.
GM moved closer to filing the largest U.S. industrial bankruptcy on Wednesday after a crucial bond exchange failed, while Chrysler faced a key court hearing on its plans to sell stronger operations to a "New Chrysler" owned by Fiat SpA.
Chrysler's sale to Fiat would be part of a fast-track schedule set by President Barack Obama's administration.
Hurt by an unprecedented drop in demand, the majority of global auto manufacturers will likely post auto operating losses this fiscal year, Moody's said.
Though governments have made efforts to boost sales, they will only bring forward demand, not create new demand, Moody's said.
"The decline in demand in many key markets just started in the second half of 2008 and is still gaining pace in most countries," the rating agency said. "Moody's expects global volumes to decline by double-digit percentages, with little hint of relief on the horizon."
After a 9 percent drop in global auto sales in 2008, Moody's said it expects 2009 volumes to range from unchanged in China to a 24 percent drop in the United States.
Demand in North America will be substantially below industry plans established earlier in the year, and profits will remain under pressure until the major auto manufacturers make substantial cost cuts, the agency said.
"Further cuts in production levels will be necessary. This continued market weakness will result in increasing pressure on the cash flows and financial condition of the Detroit Three...and the North American supply base," Moody's said.
Weak global economies and capital markets will also hurt the operating performance of auto manufacturers' finance companies for several more quarters, Moody's said.
Facing a contraction in the credit markets, finance companies have had to reduce the volume of loans they extend, making it harder for auto companies to stimulate sales, Moody's said. Car buyers are finding few alternatives to the automakers' finance arms, as many banks and other finance companies have scaled back activity in the sector as well.
"The ability of the industry to recover from its present slump depends in no small degree on how new car sales can be financed," Moody's said. But as credit remains constrained, consumer access to new car financing remains limited, the agency said.
