Auto sales continue to be strong in the U.S., but numerous industry risks pose ongoing challenges, according to Fitch Ratings. Weak market conditions in a number of regions outside the U.S., labor contract negotiations in the U.S., fallout from the Volkswagen AG (VW) emissions scandal, and threats from new business models are all pressuring the sector despite a relatively strong demand environment in the U.S.

After a weaker-than-expected first quarter, light vehicle sales exceeded Fitch's expectations through the second and third quarters. As a result, Fitch is raising its full-year U.S. light vehicle sales forecast to 17.2 million, which assumes that the seasonally adjusted annual rate of sales moderates a bit in latter part of the fourth quarter.

Against this strong U.S. market backdrop, the United Auto Workers and FCA US LLC (FCA US) reached agreement on a new four-year labor agreement in October 2015 that begins the process of closing the gap between Tier 1 and Tier 2 wages, which has been an important contributor to lower costs in the U.S. Workers are currently voting on a similar agreement reached between the union and General Motors Company (GM) that also closes the Tier 1-Tier 2 gap. Negotiations with Ford Motor Company (Ford) will resume once the agreement with GM has been ratified.

Outside the U.S., we have concerns that an accelerated industry shift away from diesel in Europe as a result of the VW emissions scandal could be negative for certain U.S. suppliers, particularly if it is offset by increased vehicle electrification. However, a shift to electrification could also drive opportunities for certain suppliers of electrical architecture products. A move away from diesel could also lead to more consolidation among suppliers as companies with significant diesel exposure try to acquire technologies that might become increasingly relevant with more electrification.

Longer term, a number of new entrants are looking to disrupt the traditional auto business, from established technology companies to electric car manufacturers and ride sharing services. Although these new entrants have not yet had a discernable effect on traditional automakers' sales, the incumbents nevertheless see them as a potential competitive threat, and their influence is already being seen in several automakers' strategic plans around the future of mobility.