Fitch Ratings says in a special report issued today that the credit profiles of auto manufacturers in Asia, Western Europe and the US are extremely diverse with varying outlooks for 2007. The outlook for the Japanese auto industry is positive, while that for the U.S. car industry remains negative. The outlooks for the South Korean and Chinese auto industries are stable despite challenges expected in the domestic and overseas markets. European original equipment manufacturers ("OEMs") also face a broadly stable outlook, although this is at risk from unfavourable foreign exchange rates, heavy regulations and high raw material prices.

"The rapid growth of Japanese and Korean brands in the US and Western Europe is supportive of Asian manufacturers' credit profiles but weakens those of European and American OEMs," says Emmanuel Bulle, Director in Fitch's Automotive team.

In addition, US groups face weakening economic conditions, such as a stressed supply base, and event risk when the United Auto Workers contract reopens in September 2007. In South Korea, domestic demand should remain stagnant owing to sluggish economic conditions, weak consumer confidence and increased fuel costs. South Korean groups also face the risk of a strengthening South Korean won.

"Restructuring is the name of the game against this deterioration, particularly in Europe and the US," says Mr Bulle. In 2006, GM ('B'/Rating Watch Negative) and Ford ('B'/Negative) started a new round of deep restructuring actions while European groups have introduced cost-cutting and revenue-enhancing measures in the past couple of years. All manufacturers will also continue to look for growth in developing regions such as China, India and Latin America. In parallel, Japanese and South Korean manufacturers will maintain intense pressure on their US and European competitors in the latter's respective home markets. In particular, Fitch expects European and US OEMs to suffer further market share erosion in their home markets. In China, local car manufacturers should record further growth while Japanese, South Korean, European and US groups are expected to continue their battle to gain share.

US car manufacturers' financial metrics have deteriorated, with negative cash flows projected to continue at GM and Ford through 2007 due to continued share losses, restructuring costs and working capital outflows. The financial profiles of European groups should continue to broadly improve in 2007 as they increasingly benefit from recent restructuring measures. However, the difficult business environment will make this improvement a challenge. In Japan, Fitch expects continuous solid operating performances, especially at Toyota ('AAA'/Stable) and Honda ('A+'/Stable) while the financial profile of Chinese car manufacturers should continue to improve on higher cash generation and stable operating margins.

Fitch continues to see limited M&A activity in 2007. Although manufacturers are expected to continue collaborating on specific projects and selective partnerships, Fitch does not anticipate major tie-ups like the Renault ('BBB+'/Stable)/Nissan ('A-' (A minus)/Stable)/GM project discussed in 2006. Similarly, share buy-backs are likely to be limited and free cash generation should be directed towards industrial investments and cash savings.