Archive for May, 2005

GM, Ford, vow to advertise “more, faster, harder” in response to Junk Bond status

Friday, May 6th, 2005

I knew something was up. The guy on the corner of Bay and Yonge shouting into his cell phone about dumping his GM stock was one clue. Later, in an email from “Doug,” a confederate in the international bicycle conspiracy, I read “Is it time yet to buy shares in a bike factory?”

The story in the Guardian newspaper Doug refers to follows:

The scale of the financial crisis facing Ford and General Motors was underscored yesterday when a key credit agency cut its rating on the automakers to “junk” status.

The announcement by Standard & Poor’s is a punishing blow to both. The change in rating could sharply increase borrowing costs and hamper their ability to raise further capital at a time when their finances are under intense pressure.

Shares in both groups fell sharply on the announcement. The move had been feared on Wall Street for months. GM is the biggest firm to date to have its debt cut to junk; its debt stands at $290bn (£152bn), while Ford’s is $160bn.

Both Detroit carmakers face dwindling market share at home amid intense competition, a worsening product mix as petrol prices climb and sports utility vehicles (SUVs) fall from popularity, rising raw material costs and the soaring cost of providing healthcare for their American workers.

Ford Motor Company last month reported a 38% slide in first-quarter profits to $1.2bn. GM fared even worse: the world’s largest automaker fell to a $1.1bn loss in the first three months of the year, its worst performance in over a decade.

GM said it was “disappointed” by S&P’s decision but added that it has enough cash on hand and liquidity to continue funding the business.

S&P said its decision to lower GM’s rating to below investment grade “reflects our conclusion that management’s strategies may be ineffective in addressing GM’s competitive disadvantages”. The most immediate concern cited, however, was that GM’s SUVs will no longer be as profitable.

“GM’s financial performance has been heavily dependent on the profit contribution of its SUVs,” said analyst Scott Sprinzen. “Recently though, sales of its mid-size and large SUVs have plummeted and industry-wide demand has evidently stalled, partly because of high gas prices.” Mr Sprinzen cited the same pressing reason for the Ford downgrade.

The GM crisis has attracted the attention of legendary corporate raider Kirk Kerkorian. On Wednesday, he said he had was making an offer that would give him a stake in GM worth nearly 9%.

His lawyer told reporters that his investment would be a “passive” one. Anyone familiar with Mr Kerkorian’s history, however, sees it as unlikely that he will be inactive. There was speculation that he could try to force some kind of break-up of the business, selling its mortgage lending unit for instance, or attempt to exert some management control.

Ford is considering selling its Hertz rental division in an effort to strengthen its balance sheet.

Arguably the biggest long-term problem facing both firms is the cost of healthcare. GM is one of the largest providers of healthcare benefits in the US. It has more than 1 million people, including employees, their families and the company’s pensioners, sheltering under its financial umbrella. The burden equates to an average of $1,500 for every car it sells in the US. With pension costs the total tops $2,000, according to GM.

David Cole, the director of the Centre for Automotive Research in Ann Arbor, Michigan, argues that Mr Kerkorian could put pressure on GM and the United Auto Workers union to cut jobs and close plants in order to sharpen its competitive edge. “I would be really, really, concerned, particularly if I were the union.”

GM and Ford more fundamentally, have been criticised for failing with new products. Their domestic sales have fallen by roughly 5% this year. In April, Toyota and Nissan reported US sales had risen by more than a fifth, and Chrysler sales have risen month on month for more than a year.

GM’s chief executive, Rick Wagoner, has seized control of the daily running of the firm’s North American operation in a seemingly desperate attempt to turn the division around.

Other parts of GM are not in a position to make up for the declines in the US. GM has been unprofitable in Europe since 1999, and the division’s losses this year are expected to be substantial.

Rising interest rates are also dampening revenue from GM’s cash-cow finance arm.

S&P cut GM by two ratings levels to BB from BBB-, and lowered Ford one notch to BB+.