After having posted multibillion-dollar losses and announced plans to lay off thousands of workers this week, General Motors (GM) and the Ford Motor Company have said they are on the road to recovery.
Neither, however, would forecast how long it would take to return their struggling North American units to profitability, and many analysts are warning there is more trouble ahead.
GM’s $8,6-billion loss in 2005 was significantly larger than expected and prompted Moody’s Investors Service to warn on Thursday that it could downgrade the world’s largest auto maker’s credit rating even deeper into junk status.
”Cost-cutting efforts, health-care concessions and restructuring should help GM narrow [North American] losses in 2006, but they will remain substantial,” warned Merrill Lynch analyst John Murphy in a research note. ”We believe things are going to get worse before they get better.”
While Ford managed to surprise investors with better-than-expected financial results — it posted a $2-billion profit in 2005 despite a $1,6-billion loss in its North American automotive unit — the lack of detail in a restructuring plan announced on Monday raised questions about the likelihood of its success.
”We do not believe the restructuring will meet all of Ford’s objectives and we think that not all benefits will accrue to the bottom line,” said Efraim Levy, of Standard and Poor’s Equity Research.
Two main issues dog the auto makers: lifting lagging sales of their increasingly unpopular products and obtaining concessions from their union in order to reduce costs.
Both GM and Ford are expected to show a further decline in market share to Asian auto makers when January sales figures are announced next week, and because of the time it takes to get new models to the market, neither is expected to see a big boost in sales until at least the middle of 2006.
While GM and Ford have neglected their small cars for years, the trouble really hit when gas prices spiked and consumers shied away from the highly profitable sport utility vehicles (SUVs).
The two auto makers were also slow to come to market with hybrids and the increasingly popular car-based crossover SUVs introduced by Asian competitors.
”Asian makers particularly are exploiting Detroit’s $2 000-per-vehicle cost-of-production disadvantage (which largely stems from the United States manufacturers’ enormous legacy costs) to offer stylistically and technologically more advanced vehicles,” wrote Burnham Securities analyst David Healy in a recent research report.
Both Ford and GM have recently obtained major concessions from the United Auto Workers’ Union to reduce their health-care obligations.
But it is unlikely they will see any savings from their plans to lay off a combined 60 000 workers until their contracts are renegotiated with the union in the fall of 2007.
Workers who are laid off under the current contract enter a job-retraining facility where they are paid 90% of their wages and receive full benefits.
On Thursday, GM said it has taken an $800-million charge in the fourth quarter to cover that cost. And since the union has said it intends to ”rigorously enforce those programmes”, it is likely Ford will take a similar charge.
The real question is whether the auto makers are able to negotiate concessions in the new contract, Brian Johnson, an analyst with Sanford Bernstein in New York, said.
”They’re going to have to shed idle workers, get benefit cuts and more flexibility around labour,” he said. ”If they don’t, I could see bankruptcy on the cards.”
Johnson isn’t the only analyst to raise the spectre of bankruptcy at GM, despite repeated assurances from the company.
”We’ve said in the past that we don’t believe it’s a winning strategy for GM and we see no reason to change this position today,” GM spokesperson Jerry Dubrowski said on Thursday following GM’s announcement of staggering losses.
Thursday’s results showed that GM still has sufficient cash on hand to support its massive operations in the near term, a good thing considering President George Bush warned that a bail-out is unlikely for the struggling auto makers.
”In terms of competitiveness, we live in a world in which a Ford or GM has got to compete with other manufacturers that are able to deal with costs in a different way than they are, as well as coming up with product that is relevant,” Bush said in an interview with the Wall Street Journal.
Former president Jimmy Carter offered Chrysler a $1,5-billion loan guarantee in 1979 in order to prevent a bankruptcy.
Ford, which is in better financial shape than GM, responded by saying it has no interest in a government bail-out.
”We plan to compete and win by driving American innovation and building cars that consumers want,” the auto maker said in a statement. — Sapa-AFP