Fitch Ratings says European manufacturers enjoy stronger credit profiles and higher ratings than their US counterparts but remains concerned that the downtrend in the US may be replicated in Europe. Although the outlook for the auto industry is stable in Europe, this stability is fragile. The main common themes and differences between the western European and US automotive industries are reviewed in a special report issued today.

"Many of the issues faced by US manufacturers are not present in Europe, or at least not to the same extent," says Emmanuel Bulle, Director in Fitch's European Industrials team. "Not only do the European and US markets differ structurally but USEuropean manufacturers have also reacted more quickly than their US counterparts to increasing industry challenges, implementing the necessary restructuring measures."

The first structural difference is that Western Europe ("WE") is a highly fragmented market, whereas US brands still account for the majority of sales in their domestic market. As a result, European original equipment manufacturers ("OEMs") have had to adapt their marketing, sales and industrial strategies to a multi-player environment. European manufacturers serve various countries with different cycles, helping to mitigate the auto industry cyclicality, while US groups will immediately suffer from a sales slump in their national market. Ford, GM and to a lesser extent DaimlerChrysler's Chrysler, are also heavily burdened by legacy issues. Healthcare and pension liabilities put the US groups at a significant disadvantage to foreign competitors. This situation has been aggravated by the deteriorating relationship between the US Big Three and their suppliers. In contrast, European OEMs globally enjoy better relations with their suppliers and benefit from lower stress in the global supply chain.

Fitch notes that some of the issues facing US and European OEMs, including aggressive and increasing competition from Asian brands, and the need to cut costs and delocalise production, were first present in the US. European manufacturers were therefore able to see the extent of the challenge and react accordingly.

As a result of these historical, structural and strategic differences, European manufacturers are now better positioned than their US counterparts, with stronger cash generation and higher operating margins. Nevertheless, Fitch views that the weakening of the US auto industry is a strong indication that continuous efforts are needed in Europe. Fierce competition, high raw material prices, unfavourable foreign exchange rates and European regulations remain challenges. In particular, Fitch expects competition from Asian players to continue unabated. The offensive by Japanese and Korean brands may have started in the US but is becoming protracted in WE. The deterioration in the Big Six's market shares in Europe since the end of import quotas in 2001 demonstrates the pressure being put on domestic players by Asian manufacturers. Fitch expects Asian brands to accelerate their market share growth as they develop diesel technology and as consumer acceptance of Asian brands increases.

Fitch will comment further on the outlook for the European auto industry in January 2007.