Standard & Poor's Take On GM And Ford (F, GM)

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Includes: F, GM
by: Douglas McIntyre

Today, Standard & Poor's (www.standardandpoors.com) did its conference call on GM and Ford and issued its new CreditWeek report on the global automotive industry. I listened to the call live.

The outlook for the industry was at near and medium term.

The first point was that the car market is saturated and cars are lasting longer. Share is, therefore, the key. So is price leverage. The cars need to be more expensive and more profitable. Oil prices have hurt this move because the more expensive cars tend to be less fuel efficient.

S&P has a fairly gloomy view of GM and Ford North American operations. Their opinion is that consumers still perceive GM and Ford cars as having poor quality, whether this is true or not. The Delphi situation is clearly a major concern, as is the possibility that Tower Automotive workers could go on strike. An interruption of parts from either or both of these suppliers could cripple any turnaround effort.

S&P sees retail sales dropping slightly for 2006 in North America.

S&P sees GM and Ford losing more share this year and also see margins dropping on high end cars like SUVs.

JD Power (www.jdpower.com) was also on the call. They made the point that their research shows that the quality of U.S. cars is quite good. The quality of service for cars by Big Three dealers should help U.S. manufacturers hold their 60% share of the market. Dealer service satisfaction may be the tipping point for keeping share. U.S. luxury brands score particularly well in these rankings. Powers concluded that if they can keep an edge in this arena, the Big Three can keep a North American share between 55% and 60%.

S&P believes that GM is actively looking at selling a portion of GMAC. They believe this as positive as long as the process continues.

On the negative side, GM and Ford may lose leverage with suppliers like Dana and Tower. There is no room for these suppliers to "give back" on the price of their products when negotiating with the automakers. Net net, this is not good news for the U.S. car companies.

What is the perfect storm that could put either GM or Ford into Chapter 11? If there is no improvement during 2006 in financial performance, staying our of bankruptcy court could be very difficult. A Delphi stike could also be the factor that pushes them to the brink, especially GM.