Automotive manufacturers in Europe, the Middle East, and Africa (EMEA) are investing heavily in capital expenditure (capex) and research and development (R&D) to achieve their growth ambitions.
A report published today, titled “EMEA Automakers’ Capital Expenditure Motors Ahead,” identifies the following trends in capex and R&D:
EMEA automotive manufacturers are investing in capex and R&D at approximately twice the average annual growth rate of revenues.
This contrasts to neutral capex growth for Western European corporates as a whole.
As a proportion of revenues, spending has risen to about 12%, up 2 percentage points since 2008, with spending by issuers rated investment grade (IG) growing far more quickly than that of speculative-grade (SG) issuers. There is a growing spending gap between them, which we do expect to narrow in the near term.
“The opening up of this gap between IG and SG companies suggests that IG automakers may be pulling away from their SG peers, and thereby strengthening their product offerings and relative competitive positions,” said Standard & Poor’s credit analyst Alex Herbert.
In aggregate, the 10 rated automakers in EMEA spent about €68 billion on capex and R&D in 2013 (split about two-thirds capex, one-third R&D), which represented about 12% of aggregate revenues. Those companies rated investment grade accounted for about 72% of the total spend.
Standard & Poor’s Ratings Services’ sees this spending as credit positive over the long term, although it can drag down cash flows and weaken leverage metrics if not fully financed by operating cash flow.
We expect the trend of high spending to continue, based on the need for automakers to continuously develop and launch new models, respond to and anticipate changing consumer demand, upgrade existing assets to raise productivity and improve profitability, and expand capacity outside Europe to be close to growing markets and limit cost-base mismatches. Importantly, EMEA automakers also need to meet stringent environmental CO2 emissions standards.
Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.
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