S&P Downgrades GM and Ford Credit Rating to Junk-Bond Status
06 May 2005
Standard & Poor’s (S&P) has lowered its credit ratings on GM and Ford to junk-bond status. S&P provides independent credit ratings, indices, risk evaluation, investment research, data and valuations for the financial community.
One of the key factors behind the downgrading of both was their over-reliance financially on SUVs.
“GM’s financial performance has been heavily dependent on the profit contribution of its SUVs,” said Standard & Poor’s credit analyst Scott Sprinzen. “Recently, though, sales of its midsize and large SUVs have plummeted, and industrywide demand has evidently stalled, partly because of high gas prices. Also, competition has intensified due to a proliferation of new SUVs.”
Moreover, competition could intensify in full-size pickups—GM’s only other major source of automotive earnings. Although GM will be renewing its pickups in one and a half years to two years, Toyota Motor Corp. will introduce a new full-size pickup during this period.
...Ford faces the prospect that its overall sport utility vehicle (SUV) business will not be able to generate the profitability it has enjoyed historically. Ford’s financial performance has been heavily dependent on the earnings of its SUVs. Recently, though, sales of its midsize and large SUVs have plummeted.
“Ford has suffered from the aging of its SUV product line, which will be replaced by a family of new products starting late this year through 2007—the same time that GM will be doing the same,” said...Sprinzen.
Moreover, competition could intensify in full-size pickups—which we believe is Ford’s only other major source of automotive earnings. Ford has benefited from the highly successful renewal of its pickup trucks that began in late 2003. However, GM will be renewing its pickups in one and a half years to two years, and Toyota Motor Corp. will introduce a new full-size pickup during this period.
The two automakers now have the dubious distinction of being the biggest companies to have their credit lowered to junk status.
Hydrogen is highly unlikely to save GM in time. (It’s not just selling the hydrogen fuel cell cars that go into that vision—it’s the implications for streamlined and simplified production and infrastructure. )
Now would be an excellent time for one of these automakers to get radical. To stand up and say something along the lines of:
We’re going to hit a wall with oil. We know it, you know it. Hydrogen, as much as we believe in it for the future, isn’t going to be here in time.
As an intermediate strategy, we are embracing the recommendations being made by an increasing number of eminent scientists, engineers and analysts. We will roll out a line of plug-in hybrid vehicles in every class of vehicle we manufacture, and will begin implementing the technology across all models as soon as our design, engineering, production and supply chains allow.
We are not new to this. Almost 15 years ago, we, and the other domestic automakers, began working with the DOE Office of Advanced Automotive Technology on technologies for vehicles that would be delivering 80 mpg by now. Hybrid technologies, electric technologies, alternative fuel technologies, and, yes, fuel cell technologies.
As our new benchmark, we’ll pick up the standard we dropped back then: a six-passenger sedan that achieves 80 mpg on the market by 2008.
We can do this. We will do this for sustainability, we will do this for the environment, and we will do this for our business.
It couldn’t hurt. Business as usual for both leads down a scary path.
Business Week: “ Why GM’s Plan Won't Work ”
Forbes: GM’s Wild Gamble
Advanced Automotive Technologies Annual Report to Congress Fiscal Year 1996
Yes, my eyes are narrow, and I'm smiling...
Ha, So am I, YA!
Posted by: frizzigoon | 06 May 2005 at 01:12 PM
Here's an interesting counterpoint to the above post:
Even used, some Prius hybrid cars selling for above sticker price
By ALICIA CHANG, Associated Press Writer
"Sheila Catoira wanted a fuel-efficient Toyota Prius hybrid so badly, she found a used model online and paid $1,000 more than the car would have cost new.
With the demand for a gas-electric Prius far outstripping supply, some buyers are plunking down a premium for cars that are thousands of miles old. The trade-off: They don't have to wait for months on dealers' waiting lists.
Posted by: meander | 06 May 2005 at 02:42 PM
I wonder how bad German safety and emission rules are compared to our own. If gas prices go higher, I'd think Detroit could go to congress and ask for emergency permission to import (or launch production here) of European models.
I think that's what we should have done in the 1970's, rather than go for Japanese "voluntary restrictions."
That bit recently, about the Japanese raising their prices to "help Detroit" was one sick joke.
(as a consumer, I'd love to see compatible markets between here and Europe, what a great bunch of choices ...)
Posted by: odograph | 06 May 2005 at 04:33 PM
"One of the key factors behind the downgrading of both was their over-reliance financially on SUVs."
Bwahaha! I'm really savoring that one...
Posted by: Mikhail Capone | 06 May 2005 at 04:51 PM
Mike linked to the BW week article about GM, and I highly recommend it. It barely touches on the price of gasoline, and focuses instead on issues like the wildly inappropriate mgmt culture at GM and how hamstrung they are by past labor contracts.
In the best of circumstances GM was never an enlightened, nimble organization. In the current situation I think they're in really deep trouble. I wouldn't be surprised to see them in chapter 11, killing Pontiac and Buick, and selling the Saab division to DC or BMW within three years.
Posted by: loudGizmo | 06 May 2005 at 08:25 PM
"Now would be an excellent time for one of these automakers to get radical." Actually, I think that time was probably a decade ago. But, for whatever reason, everyone stayed reactionary. You'd think that after scoffing at Edward Deming's TQM (and getting owned by Japanese competition) the American auto industry would have adopted more forward thinking strategies.
Though I live in an area that would benefit most from a BMWization, Greenville SC (http://www.bmwusfactory.com/), I can't help but feel shame that two large American corporate staples stumbled and fell because they failed to do what Americans are supposed to be good at--innovate.
Posted by: Evan | 08 May 2005 at 09:31 PM