General Motors and Ford will face unprecedented financial and operational challenges in 2006 as they fight to turn around their ailing performance in the critical North American market, according to credit ratings agency Standard & Poor’s.
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The two giant automakers will continue to face the same triple threat that produced poor results in 2005: excess capacity, high legacy costs, and changing customer preferences, as evidenced by the declining sales of higher-profit SUVs.
And, while both companies grapple with those problems, they will be preparing for what seems likely to be tough bargaining with the United Auto Workers (UAW), whose labour contract with the automakers ends in 2007.
Both companies currently have substantial liquidity but also prospective calls on that liquidity.
Standard & Poor’s believes that if they cannot reverse the negative trends that have buffeted them, General Motors could ultimately have to restructure its debt and contractual obligations, while a somewhat healthier Ford could suffer from the price actions of its competitors.
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By GlobalDataThese are some of the conclusions detailed in a recently published special report, “GM And Ford Need Traction On North American Turnaround in 2006” by Standard & Poor’s.
“These turnarounds will be difficult and time is short,” said Standard & Poor’s credit analyst Robert Schulz, author of the report. “Both Ford and GM have already begun broad multi-year restructurings to cut costs. Those efforts will be critical in further evaluating both credits.”
“The degree of success Ford and GM achieve with their new products and the restructurings that they have already announced will determine their cash generation levels and be a key factor for us in their rating,” added Schulz.
Even now, S&P said, GM and Ford must be considering the implications of the labour negotiations. These contract negotiations will have to address many of the changes and cost savings already announced by the automakers.
“We expect the negotiations to be difficult. While it is impossible to foresee the state of the industry 18 months hence, so much is at stake for both labour and management in these talks that we would not be surprised to see some sort of work stoppage at one of the automakers. Clearly, neither company nor the UAW is likely to prefer that outcome.
“As such, Standard & Poor’s, while cognisant of the possibility of a strike, does not incorporate such a negative event into our current GM or Ford ratings.”
