Over the last six months, emission manufacturers have struggled to sustain margins through higher prices, as tightening their belts only partly compensated for a sharp decline in vehicle production. In its results published in August 2009, Tenneco attributed its quarterly turnaround to cost reduction efforts, a $1m restructuring investment and improved cash generation (inventory reductions), which in turn led to improved liquidity and a $65m reduction in net debt. This corporate reshuffle has helped offset the unsettling impact of lower original equipment (OE) production volumes worldwide and related manufacturing fixed-cost absorption.

The internationally recognized parts manufacturer struggled in the more mature Western markets, as high-growth regions have recovered much quicker, helped along by the high level of small cars produced in countries like India. Tenneco's European aftermarket sales decline of 22% in Q2, versus a decline of only 4% in the US, raises questions regarding market dynamics.

Across the European aftermarket industry, at product level, Datamonitor forecast that shock absorbers will see market value growth surface in 2010 (to reach E1.65 billion). This succeeds an immediate decline in volumes of 4.3% in 2008 following the recession. Similarly, emission volumes tumbled, down 13.9% last year, translating into a 4.4% dip in value. This stalled the market in the first half of 2009; however, the recovery of raw material prices and the reopening of production facilities will ease the decline over the next few years.

As the industry faces a return to increased production volumes, Tenneco is mindfully playing down a significant recovery in auto sales for the remainder of 2009. Despite 'on-tap' government stimulus, a promising lift in new car registrations and the emergence of some key economies from the recession, the overall conditions in the global automotive industry remain weak. One industry motivation will be that the majority of vehicle inventories were amended during H1, paving the way for strengthened OE production volumes in the second half of the year. Some optimists would further argue that the downturn has been a timely catalyst for much needed change with respect to streamlining both operations and costs.

With financial results from several auto firms pointing to a transpiring recovery in the industry, skeptics question whether or not it will be a sustainable one. With key markets emerging from the recession in chorus, sustainability seems realistic. However, it will be interesting to note which countries are left behind as this once prescribed industry is shaken up.

A service of YellowBrix, Inc.