UPDATE: Moody's Lifts Outlook For European Auto-Parts Suppliers

Ratings agency Moody's Investors Service Wednesday lifted its outlook for European auto-parts makers to stable from negative as the companies successfully streamlined costs to prepare for the widely expected market slowdown in coming months.

"Moody's believes that measures recently implemented to reduce costs and adjust operations are far reaching and will more than offset a likely slowdown in European car production," analyst Rainer Neidnig said in a statement.

The outlook refers to Moody's expectations for the industry's fundamental credit conditions over the next 12 to 18 months.

Additionally, Moody's raised its forecast for European car production. It now expects a low single-digit increase in production volumes for 2010, driven by a strong first half of the year. Moody's previously had anticipated that car production volumes would decline by 3% year-on-year in 2010.

"Moody's still expects the phase out of government-sponsored scrapping schemes to have a negative impact on car production volumes in Europe, leading them to decline by approximately 10% in (the second half of) 2010," Neidnig said. "However, we believe these incentive-induced market distortions will taper off by the end of 2010, and that output volumes will largely be flat in 2011," he added.

Moody's said it expects the temporary decline in European car production to be mitigated by a positive mix effect through a greater share of larger and more profitable cars as well as solid exports.

Moody's views a significant deterioration in the overall economic environment as the biggest potential threat to the industry. "Although concerns about the downside risk have recently heightened, we believe that such a significant economic deterioration is still unlikely to occur," Neidnig said.

Auto makers and their suppliers were hard hit by sharply contracting demand for cars and trucks last year. But sales volumes recovered faster than expected in recent months, fueled by soaring demand in China.

-By Christoph Rauwald, Dow Jones Newswires; +49 69 29 725 512; christoph.rauwald@dowjones.com

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