Ford Profit Strategy Causes It to Fall to World's No. 3 Automaker - S&P Lowers Ford Bond Ratings

DETROIT, Nov 12, 2003; Justin Hyde writing for Reuters reported that standard & Poor's move to cut Ford Motor Co.'s credit ratings on Wednesday highlights an upheaval in the world auto industry that may push Ford from its perch as the world's second-largest automaker.

The rating agency reasserted that the entire U.S. auto industry was under pressure as it cut Ford's rating to "BBB-," or one notch above "junk." But what S&P found troubling was Ford's prospects for the next two years and beyond, where it's likely to become one of six or seven players scrapping for profits around the globe.

Ford's credit rating declines have forced it to rely less on traditional bond sales and more on asset-backed borrowing. Ford has so far had no trouble raising money this way, but if markets ever lost confidence in Ford, and it could not access those markets, it could face a funding crunch.

Over the past two years, Ford and General Motors Corp. have taken nearly opposite strategies to surviving in the 21st century. Both face the same fundamental problem of high fixed costs -- namely tens of billions of dollars in pension and health-care obligations -- that they have little power to change.

GM has chosen to spread those costs over as many cars and trucks as possible, pushing to maintain its market share in the United States and around the world, even if it means cutting prices and reducing profit margins.

Ford has gone after profits instead of volume, killing unprofitable vehicles, offering lower incentives than GM and emphasizing luxury brands, aiming to bring in enough money to keep the balance sheet afloat.

Since 2000, Ford's global production has fallen from about 7.4 million vehicles to roughly 6.5 million this year. A growing Toyota Motor Corp outbuilt Ford worldwide in the third quarter for the first time, and could pass Ford for all of 2003.

And according to estimates from industry analysis firm CSM Forecasting, Ford is expected to cut its North American production by 8 percent between now and 2008, more than any other large automaker.

THE 3 PERCENT SOLUTION

So far, in S&P's eyes, GM's strategy has worked better. S&P has reaffirmed GM's "BBB" rating, and S&P analyst Scott Sprinzen said GM appeared to have an edge over Ford in several measures, from cash flow and cost cutting to product development and overseas operations.

But he warned that both still faced the same hurdles to improving their profits.

Over the next two years, "It's going to be very challenging for (GM and Ford) to realize what would truly be satisfactory profitability," Sprinzen said. "Even to get to a 2- to 3 percent net margin as a norm ... would be big progress for these companies, and we don't necessarily see that."

Ford has touted its performance in 2003 as proof its turnaround plan is working. Ford has raised its earnings estimates for all of 2003 to roughly $1.8 billion, mostly on earnings at its Ford Credit arm.

But S&P questioned the quality of Ford's results, noting that Ford's auto business will break even thanks to about $3 billion in cost cuts, about $1.6 billion of which are reductions in funds set aside to pay for warranties and recalls.

"While we're expecting improvements, our expectations are modest," Sprinzen said. Given Ford's size relative to its revenue, "It's pretty hard to come up with a profitability measure where the level of performance could be considered good."

Burnham Securities analyst David Healy said given the pension and health-care costs and aggressive moves from foreign automakers, GM and Ford were making the right decisions.

"GM is further along on its recovery, and as the low-cost producer can make that last price cut," he said. "Ford is in the middle of a turnaround whose outcome is far from certain."

COMPANIES OF STEEL?

While an automaker with a debt rating just one notch above "junk" might conjure memories of Chrysler's financial troubles in the late 1970s or Fiat Auto today, Ford's situation is not so precarious.

Ford has some $180 billion in debt, but most of that comes from its credit arm, and the average maturity date is 26 years. The company has $45 billion in cash stockpiled, and another $32 billion in bank loans it could tap.

And although many parallels exist between U.S. automakers today and the U.S. steel industry before it collapsed under the weight of pension costs and foreign competition, S&P said automakers were not in the same state.

"These are still investment grade companies with a lot of financial resources," Sprinzen said. Unlike steel makers, "These are global companies. I think it's possible to make too much of the analogy."