That’s the verdict from Moody’s in a new report entitled ‘Expanding Operations in China Bring Rewards, But Also Risks, For European Auto Industry’.

The report reinforces that China is now the largest automotive market worldwide and its long-term growth potential for European auto manufacturers and suppliers remains substantial. Moody’s estimates that 15% of all cars produced by European automotive manufacturers (original equipment manufacturers, or OEMs) in 2010 were sold in China, including vehicles sold by joint ventures with Chinese companies.   

However, although China’s booming car market provided an important cushion for the European auto industry in 2009 when car demand elsewhere collapsed, Moody’s has expressed doubt that growth in China would be able to offset another decline in European or US car demand.

It added that car sales growth in China slowed for the first half of 2011 to an average monthly rate of 5.9%, mainly due to the withdrawal of tax benefits for certain cars and drivers. In addition, car as well as the recent imposition of quotas on new car registrations in Beijing (and possibly other big cities) in order to reduce traffic density.

Looking ahead, Moody’s baseline forecast for light vehicle sales in China in 2012 is 7% growth, which would continue to be above the global average.

Should there be a temporary setback in auto sales demand in China, Moody’s expects Volkswagen, BMW, Daimler and Peugeot’s earnings to be most affected. In contrast Fiat would be minimally affected, and Renault would only be affected through its shareholding in Nissan.

Moody’s has added that the ratings for Volkswagen, BMW, Daimler, Peugeot, and of European suppliers could withstand an isolated slump of 25% in light vehicle unit volumes, if markets in the rest of the world remained stable. Only a steeper demand contraction in China, which Moody’s thinks is very unlikely, or a simultaneous decline in other regional markets would put pressure on ratings.