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More small and mid-sized German automotive suppliers could be hit by the car sector crisis which has already triggered a wave of profit warnings and gloomy outlooks in the sector.

Deutz, which makes diesel and petrol engines, Leoni, maker of wiring and cables, and gaskets specialist ElringKlinger have all had to slash their full-year outlooks.

Elmos, which supplies semiconductors to the car industry, also had to lower its guidance, while Mahle has said it expects a considerably slower rate of growth in the second half of the year. Knorr-Bremse sees a difficult market environment in 2009.

For the German economy it's an important area -- in terms of sales, the industry is bigger than those of Italy, Spain, France and Britain combined, according to the German VDA auto industry association. In 2007, it generated sales of 75.4 billion euros ($99.5 billion), 44 percent from exports, and employed 328,000 as of March 2008.

The question for equity investors is how vulnerable are others such as Rheinmetall and Grammer?
"We have seen profit warnings at Leoni, Deutz and ElringKlinger and given the current situation, we cannot rule out that this will also happen to other suppliers," said Commerzbank analyst Gregor Claussen.

Like peers around Europe and in the United States, German suppliers are being hit by a marked decline in consumer appetite for automobiles. New car registrations in Europe fell 8.2 percent in September.

Major carmakers such as General Motors, Ford, Daimler and BMW have either slashed production in Germany or announced plans to do so, while French car parts maker Valeo warned on Tuesday it was preparing for a big drop in car production in 2009.
"Every supplier which depends on the automobile market must expect a relatively weak fourth quarter," said Tim Schuldt, an analyst at Equinet, adding it was unlikely this trend will be reversed in the first quarter of 2009.

DOWNSIDE RISKS

Rheinmetall supplies pistons, valves and pumps to the automotive industry, but WestLB analyst Wolfgang Fickus believes it may cope better than some with the industry crisis since it generates close to half of its annual revenue from the sale of armoured vehicles, weapons and ammunition to the military.

"Still, the downside risks are so high at the moment that we have reduced our rating on the company (to "hold" from "buy")," he said. "Since we are expecting a two-year-long automotive recession, a swift change is rather unlikely."

Rheinmetall's automotive division posted a slight 1.2 percent drop in first-half sales to 1.15 billion euros, which the company attributed to a weak U.S. market.

The company, whose shares have fallen by about half in 2008 and have underperformed the German midcap index, down about 43 percent, trades at 6.1 times 12-month forward earnings, according to StarMine, which weights analyst estimates by their track records.
Grammer, which makes seats and interior components and is listed in Germany's small-cap index, trades at 4.6 times 12-month forward earnings.
"The probability that reduced volumes in the automotive division due to the ... (carmakers') production cuts will take their toll on Grammer's earnings, particularly in the fourth quarter of 2008, is quite high," UniCredit analyst Christian Aust wrote in a note last week.
He added that reduced guidance from Grammer -- whose share price has plunged more than 40 percent this year compared with a 46 percent drop in the small cap index -- was likely but was priced in.

A spokesman for Grammer reiterated the company's outlook for 2008 earnings before interest and tax of about 32 million euros.
Grammer's automotive segment generated about 64 percent of total sales in the first half of 2008, but contributed only about 16 percent of EBIT.

The fate of automotive suppliers depends on the extent of the carmakers' crisis and downbeat expectations for that industry spell a prolonged period of weakness.

"The European car industry is heading into a perfect storm in 2009/10, we believe," Goldman Sachs analysts wrote in a recent note, adding they saw a "modest" recovery in 2011.

This will also filter through to suppliers, UniCredit's Aust wrote, saying it is inevitable for most suppliers to "follow the path of their customers".

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