Friday, May 06, 2005

GM, Ford, Bond Rating Downgraded to Junk Status


The two biggest U.S. automakers had their bond ratings slashed to junk status yesterday by Standard & Poor's, as the rating service released a grim report on the business outlook for General Motors Corp. and Ford Motor Co.

The slip might have been expected after weeks of financial trauma at GM and Ford, but yesterday's announcement caught Wall Street off guard and caused both companies' stocks to drag down the whole market.

"It's a big psychological impact on the bond market and on investor psychology," said David B. Healy, an auto industry analyst at Burnham Securities Inc.

The news humbled two proud symbols of U.S. industry, both of which have lost market share to Asian competitors and are struggling with health care and production costs. The biggest single cause of the companies' financial problems, S&P said in its report, is the mighty sport-utility vehicle. Both Ford and GM make much of their profits on SUVs and relied on the nation's appetite for them to hold off overseas competition during the 1990s.

But high gasoline prices and consumer whims are turning the market against large SUVs, and GM and Ford have been caught flat-footed, with "severe ramifications," S&P said in its report.

You don't have to be into business and finance to say, ouch! It just doesn't sound good. There is a dinosaur quality about the big three. Somehow they need to either revamp their business practices and products, or their image. I think of them as lumbering giants trying to escape an asteroid the size of New Mexico.


Blogger Ambrose said...

When I was in the automotive industry, there was a time when Chrysler was the envy of many of their competitors. At the time of the aquisition, Chysler had five times the earnings per employee than Daimler Benz with one fifth the employees. What Chrysler was doing very right at the time was that they were the least vertically integrated of the Big 3. Ford and GM were still in the ancient model of vertical integration. While Ford and GM have tried to move away from those business practices, so much of it still lingers. Both Ford and GM have effectively spun-off their component divisions (Ford's is called Visteon and GM's is mostly Delphi). I am very pro-union, almost to the point where I feel like a throw-back to Norma Rae. However, the UAW contracts that are negotiated by Ford and GM brass are still required to be honored by most of the Visteon and Delphi plants in the U.S. Where this gets the componenet groups as well as the operations still managed by Ford or GM into trouble is when they realize a particular part of system is more economically purchased than built in house. For instance, fuel pumps--at one time Ford and GM built the motors, wound the armatures, assembled the pump section--the whole thing. Other manufacturers can sell them even U.S. made pumps for less than they can be built in-house. No brainer, right? A lot of the UAW contracts stipulate sourcing decisions to be restricted to technologies not already existing in house , something completely unheard of in most other industries. It is meant to protect jobs from being eliminated from outsourcing, but what it does is tie the corporation's hands. So that same fuel pump that can be purchased for less money from someone else cannot be because the UAW has defined certain operations of the manufacture of fuel pumps as protected. These are long-term problems that have made them vulnerable.
As for the SUV being both boon and bust for the Big 2 (chrysler techinically isn't part of that 3 because they are foreign owned, or so they used to say), that is very true, too. High margin products hide a lot of productivity sins; manufacturers can fool themselves that everything is okay when they are making money. It will even wake a manufacturer lazy and not work on improvements that will cushion the inevitable fall. For Ford and GM, they devote entire plants to the assembly of one type of vehicle. SUV's are built in Truck and Bus plants. Sedans are built in sedan plants. The Corvette can only be built in Bowling Green Kentucky. Flexible tooling for Ford in a Truck plant might mean that they can change from one color to another in a matter of hours, or maybe even less than a day to go from making Escapes to making Explorers. The most profitable and productive assembly plants in this country are transplants---Toyota's in Eastern Kentucky and Nissan in Canton, MS, for instance. Nissan's is exeptional. First of all, all inventory is completely supplier managed, meaning Nissan does not pay a penny for the product until it is physically in the car. The plant receives two shipments a day from the suppliers. It is a zero-inventory system. Second, and much, much more novel is the Nissan flexible tooling. On the same line, one after the other, the plant can make a Green altima, followed by a white Quest, then a blue Quest, then a black Maxima, and so on, all with completely unique features. No time is wasted in changeovers, and the robots do almost everything. That plant make so much money it is sick.
The third enormous problem for Ford and GM is that their pension programs are (I think) completely self-financed (if not just mostly). Today that is just plain silly. GM pays out more salary to retired workers than they do for all its active workforce. (The secret socialist that lives in me says good to that, but the capitalist in me says what the ---?)
It would not surprise me that if in the near future, Ford and/or GM file bankruptcy protection in order to nullify UAW contracts (a big Automotive supplier, Valeo, did that only a few years ago with mixed results). Once they have to re-negotiate the contracts, they will outsource even further, maybe even turn over assembly of cars to some sort of CM whose plant is based on the Nissan model. still U.S. produced, but without the UAW contracts. This won't necessarily be bad for workers (Nissan employees still make so much more than equivalent-skilled jobs in the JAckson, Miss, metro area), but it won't be as good for them as the UAW.

11:36 PM  
Blogger Ono said...

Wow, great observations. You should copy this comment to your blog because I have a couple of questions and it might be easier for you to respond there:

1. What is vertical v horizontal integration in the automotive industry? Is it centralization v de-centralization?

2. Are you suggesting that the Unions are a bulk of the problem, at least as they currently configured? (I'm pro-union too, but a tad pro-corporate too)

3. IN biz school for undergrad I studied some of these Japanese auto strategies for avoiding unions. Would you say that the big difference b/w the US auto industry and the foreign industry is the union issue (i.e, flexibility). I know south Koreo has some very strong somewhat inflexible unions, and they produce Daewoos, I wonder how that's going.

10:36 AM  
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