Market Monitor Automotive Czech Republic 2016

• Still booming, but there are downside risks on the horizon
• Profit margins expected to remain stable in 2016
• Steel suppliers face more troubles

The automotive industry plays a pivotal role in the Czech economy, accounting for 7.4% of GDP, 24% of manufacturing production and 23% of exports (mainly to EU countries). The Czech Republic hosts three major car production companies with Škoda, Toyota Peugeot Citroën Automobile (TPCA) and Korean Hyundai. There are many local suppliers, and the Czech steel/metals and plastics industry depends heavily on the automotive industry´s performance.

In 2015 car production increased 4.1%, to 1.3 million units. That said, producer prices decreased 2% due to higher input costs, currency volatility and stronger competition in the market. Export is the main driver of growth, with export sales increasing 110% since 2010, while domestic sales rose 29%. New orders increased 20% in H1 of 2016, and the short-term performance outlook for automotive remains benign, with value added growth of 5.6% and 4.1% expected in 2016 and 2017 respectively.

Due to robust sales, profit margins of car manufacturers and suppliers are expected to remain stable in the coming months. Payment behaviour is generally good with a low number of non-payment notifications, and this is expected to remain unchanged in the coming months. The insolvency level in this industry is expected to remain low.

Our underwriting stance remains open, given increasing orders, revenues and low payment default and insolvency cases in this industry. However, we are more cautious with steel producers and steel service centres, as many businesses in this segment suffer from low sales prices, sharp competition, very low margins and elevated bank debts.

While the market conditions are expected to remain favourable for the time being, some downside risks could materialise in the course of 2017: a slowdown of eurozone growth, the negative consequences of Brexit for automotive exports to the UK, and an end of the Czech koruna cap imposed by the Central Bank (which currently prevents appreciation of the koruna). At the same time, increased pressure on prices from original equipment manufacturers like the VW Group (Škoda is part of the VW Group and many Czech suppliers deliver to other VW OEMs) could have a negative effect on Czech automotive businesses.