Zacks Industry Outlook Highlights: Volkswagen, Meritor, Tenneco and Magna International

For Immediate Release

Chicago, IL - January 23, 2017 - Today, Zacks Equity Research discusses the Autos, part 3, including Volkswagen AG (OTCMKTS: VLKAY - Free Report ) , Meritor Inc. (NYSE: MTOR - Free Report ), Tenneco Inc. (NYSE: TEN - Free Report ) and Magna International Inc. (NYSE: MGA - Free Report ).

Industry: Autos, part 3

Link: commentary/101823/auto-sector- challenged-by-high-safety- recalls-slower-us-sales

Strong sales volumes in all major markets have been a boon for the auto sector lately. However, there are many challenges being faced by automakers as well. Chief among these are the high expenses related to auto recalls. Sales growth in the U.S. and Europe is also slackening.

While there are several positives such as low gas prices, record U.S. sales and impressive China sales, there are also plenty of reasons to be careful about the auto industry in both the short and the long term. Below, we discuss some of the key challenges that investors in the auto sector should watch out for in the coming months and years.

HighCost of Safety Recalls

Safety recalls and related costs have turned out to be major issues for most automakers. Per the National Highway Traffic Safety Administration (NHTSA), automakers recalled 51.26 million vehicles in the U.S. in 2015, setting a new record. In total, automakers announced nearly 900 recalls for safety issues in 2015, also a new record.

The previous record for both the number of recalls and the number of vehicles recalled was set in 2014, when automakers announced 803 recalls covering 50.99 million vehicles. Notably, these figures only cover the recalls in the U.S. and the global recall numbers are much higher.

Auto recall figures for 2016 are also expected to be high due to defective Takata airbag inflators, which resulted in significant recalls in 2014 and 2015, as well. Per Consumer Reports , the number of vehicles that need to be recalled by 2019 for defective Takata airbag inflators is over 100 million globally. It is the largest auto recall in the U.S.

Volkswagen AG's (OTCMKTS: VLKAY - Free Report ) emission scandal is also responsible for a significant number of recalls, although these are not included in the figures given by the NHTSA as this is a standards' violation and not a safety issue. Recently, the EPA also accused Fiat Chrysler (FCAU) of using software to manipulate emissions in vehicles that would have otherwise violated the Clean Air Act. This may again lead to a large number of recalls.

Strict implementation by the government and high fines imposed in recent years on many automakers for delay in reporting safety issues prompted many companies to proactively announce safety recalls. Recall-related repair costs increase the financial burden of auto manufacturers. A massive recall can also hurt sales volumes, as consumers question brand safety.

U.S.Sales Set to Plateau

Following two years of record volumes, most analysts believe that U.S. auto sales are reaching a plateau. Sales are expected to be significantly high this year, but lower than 2016.

Pent-up demand from the recession period, which drove sales in the last few years, seems to have nearly satisfied. Moreover, with several rate hikes planned by the Fed, interest rate on auto loans may also rise. This will have a direct impact on sales volume.

Risk of Border Tax

President-elect Donald Trump is planning to impose taxes as high as 35% on imports of Mexico-made vehicles. While the policy is aimed at encouraging production in the U.S., most automakers have been producing a significant proportion of their vehicles in Mexico for a long time to take advantage of lower costs. This allows them to reduce the cost of production, which ensures profitability of the low margin vehicle segments. A hefty border tax may force these automakers to reduce or completely stop production in Mexico, which can affect their bottom lines.

Slower Sales Growth in Europe

Although the European auto market is recovering, it is expected to witness slower growth this year. Per the European Automobile Manufacturer's Association , passenger car sales are expected to increase only 5% in 2016 compared with 9.3% growth recorded in 2015.

Market Share Concentration

The majority share of the automobile market is held only by a few leading automakers. This makes the automobile sector highly competitive. The top 10 global automakers account for nearly 81% of total vehicles sold, according to .

Moreover, high dependence on these automakers makes auto parts' suppliers vulnerable to pricing pressure and production cut. Pricing pressure from automakers constricts margins of parts suppliers. Simultaneously, frequent production cuts by automakers to cope with market adjustments affect suppliers' operations.

Some auto industry suppliers that are dependent on a few major automakers are Meritor Inc. (NYSE: MTOR - Free Report ), Tenneco Inc. (NYSE: TEN - Free Report ) and Magna International Inc. (NYSE: MGA - Free Report ). The full list can be seen in this auto supplier page: industry-rank/auto-truck-orig- 10

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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