DUSTIN WALSH

Could suppliers handle a double-dip recession? After what they've been through ...

Dustin Walsh covers auto suppliers for Crain's Detroit Business; an affiliate of Automotive News.Dustin Walsh covers auto suppliers for Crain's Detroit Business; an affiliate of Automotive News.
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DETROIT -- Over the past year, we've heard threats of a double-dip recession. Luckily, they've gone unanswered. But macro economic struggles in Europe and a slowing growth in Asia continue to plague the U.S. economy.

Credit-rating agency Standard & Poor's forecasts a 40-percent chance of a double-dip recession in 2012, according to a study reviewing a recession's affect on the auto supply base. That figure is the highest it's been in 2011.

Economists from S&P speculate that a double-dip would drop U.S. auto sales down 7 percent in 2012 to 11.7 million vehicles, compared to the 2011 forecast of 12.6 million.

S&P assumes a 15-percent hit on revenues to suppliers and a 150-point decline in EBITDA margins on the 11 auto suppliers studied (American Axle, BorgWarner, Dana, Exide, Federal-Mogul, Harman International, Johnson Controls, Lear, Stoneridge, Tenneco and TRW) in this scenario.

Don't panic.

The auto supply base sliced overhead in the 2009 recession and break even points are much, much lower than in 2007.

Sales of 11.7 million are still considerably higher than 2009's 10.4 million units, something S&P recognizes.

"We believe that many suppliers can sustain most of the cost reductions they implemented and perhaps cut further, if sales were to decline," the report said.

Richard Hilgert, automotive equity analyst for Morningstar Inc., agrees.

"With the breakeven points being so much lower today than they were back then, I think the industry could handle a 7-percent decline with a yawn," he said.

The stock watchers are confident because they see the cash flow statements. Supplies have stockpiled a war chest of cash, preparing for whatever new hell the economy could muster.

"At the end of the day, suppliers have maintained control of their balance sheet," said Mike Wall, director of global financial services for IHS Inc. "They've been stockpiling cash because they are aware of the headwinds and with breakeven points are still low, they'd breeze through a double-dip.

More importantly, people are buying cars. U.S. sales were up 8 percent in October -- and 10 percent for the year to date -- despite the toils of the world economy.

Pent up demand from the last recession is playing a large role, Wall said.

"Those customers that delayed or deferred purchase during the last downturn are reengaging the market," he said. "Even if we see a quarter or two of negative growth, I don't think we'd lose those buyers. They're not buying for show, they're buying for necessity."

Incentives are also up as much as 5 percent from last year, with the average $2,699, according to TrueCar.com.

However, credit will play a role. S&P warns of credit downgrades in the event of a double-dip -- making it harder for companies to borrow and fund operations.

If corporate credit tightens, so does consumer credit. Without the availability of credit, auto sales grind to halt, no matter how much pent up demand exists in the market.

Auto suppliers will continue to walk the financial tightrope entering 2012, bullish or bearish, but the industry is prepared to survive no matter what doomsday scenarios economist speculate.

You can reach Dustin Walsh at dwalsh@crain.com.

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