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S&P Lowers Credit Rating for U.S. Automakers General Motors and Ford

May 6, 2005 at 12:00 AM EDT

TRANSCRIPT

TERENCE SMITH: One by one, cars rolled off the assembly line, and as they did, two American industrial icons were born.

COMMERCIAL: The star, the brilliant new 1957 Cadillac.

TERENCE SMITH: General Motors and Ford, once synonymous with American economic strength and vitality, the manufacturers have good years and bad.

Lately, the trend has been mostly downward. When the markets closed yesterday, General Motors stock had tumbled nearly 6 percent and Ford was down 4.5 percent.

That came after Standard & Poor’s cut their credit ratings to junk status, which is below investment grade, a move that will make it harder for both companies to borrow money. This is just the latest in a slew of troubles to hit the top two U.S. automakers.

Both are losing market share at home to hard-hitting competitors like Toyota, Nissan and Honda, who are also making inroads in the American-dominated truck category. Ford and GM’s most profitable SUV models aren’t moving off car lots as quickly as they once did due, in large part, to the escalating cost of gasoline.

Another problem: Both companies face huge health care and retirement costs for their massive and aging workforces. General Motors is the largest private health care provider in the country.

After releasing poor earnings reports recently, GM came under more pressure this week when billionaire Kirk Krikorian made a bid to purchase nearly 9 percent of the company’s stock.

The stakes for both companies are high. More than 1.1 million Americans make a living off the auto industry, and GM and Ford have more than 45 percent of the American market between them.

TERENCE SMITH: For more, I’m joined by Dan Beucke of BusinessWeek. He co-wrote the cover story in the current issue of the magazine about the troubles at General Motors and the U.S. auto industry.

Dan, welcome to the broadcast. When we look at this downgrade of the credit status of these companies and look overall, what are the biggest and most serious problems facing them?

DAN BEUCKE: Well, in a sense, the most serious problem facing these two companies is the unknown. This problem has been building up for quite a while.

In GM’s case especially they have a cost structure that really was built to support a company with perhaps a third of the auto market. They’re down to about a quarter of the U.S. auto market now.

What’s unknown is how they’re going to reshape that cost structure in a way that makes sense and also how they’re going to stop this slide in sales. Their share of the U.S. market has been dropping fairly consistently for the last couple of years and if you go back, you know, several decades, it’s fairly dramatic.

So I think one of the things that scared Wall Street before Krikorian showed up was the sense that GM’s executive staff had not really got an handle on how they were going to stop this slide.

TERENCE SMITH: Are they actually losing money on many of the vehicles that they sell?

DAN BEUCKE: Yeah, they are. The way to look at is they make money on the big trucks and the sports utility vehicles. They lose money on a lot of the passenger cars and, of course, they’ll tell you that they — you know, you have to look at the healthcare costs and that that’s a big consideration for where they’re losing money.

But the fact of the matter is the part of the business that they do well and that they make money at is the part of the business that’s shrinking, that’s the big trucks and SUV’s.

TERENCE SMITH: And is there an explanation for that? I mean, I wonder if, for example, the decline in sales you were talking about relates to a perception problem about the products coming out of Detroit and how they stack up vis-à-vis let’s say the Japanese manufacturers?

DAN BEUCKE: Yeah, it’s interesting because in a sense, we went through a horrible period in the ’80s and the ’90s when it seemed like a U.S.-built car was, you know, ipso facto of less quality than Japanese-built cars.

I think the U.S. car companies kind of got past that point and some of the quality surveys were showing that people were starting to give them credit for that.

The problem is that they missed out on a couple of the really important fast-growing car segments, one of them being the smaller sports utility vehicles, the crossovers, if you will, more car-like sports utility vehicles. And the other one, of course, is hybrid cars.

You know, nobody in Detroit really expected hybrid cars to do as well as they’re doing now. That’s still a tiny piece of the overall market, but it’s growing fast. And Toyota and Honda are doing very well with that.

TERENCE SMITH: You referred earlier to the so-called legacy costs, the healthcare, the pensions, the tremendous burdens they have.

DAN BEUCKE: Right.

TERENCE SMITH: How big a factor is that and have they got any solutions to that problem?

DAN BEUCKE: Well, you know, you can look at this one to two different ways. If you talk to people in the unions, they’re going to tell you that what General Motors and Ford provides is what all Americans should have, which is a high-quality healthcare plan which, you know, employees don’t have to pay an arm and a leg for.

The other side of that, however, is that the competition does not have the high costs of the retirees and some of the high costs of healthcare that GM and Ford do.

So it’s a situation where relatively speaking, they are at a disadvantage. Whether the solution comes from within the company and the union or is solved in some larger national way is really the question.

I think, you know, the more immediate question will be what the company asks the union to do because there are signs that the executives at General Motors at least are planning to ask for some sort of a break, although until the contract comes up in a couple of years, it’s doubtful the union’s going to give them a lot of help.

TERENCE SMITH: And this downgrade of their credit status, does this threaten either company or can they absorb it and go on?

DAN BEUCKE: Well, it’s not going to put either one of them by itself – it’s not going to put them into bankruptcy. They both have a ton of cash on hand and in General Motors’s case, for instance, the auto operation does not borrow a lot of money right now.

So by downgrading the rating on their debt it should not affect the auto borrowings that much. It does affect GMAC, which is the financial operation of General Motors, and that has had higher borrowing costs over the last few months as the market has anticipated the downgrade.

You know, the markets are smart, they saw this coming. They saw the downgrades coming. I think it was a little bit of a surprise that GM got downgraded a couple of notches and, you know, in a sense it’s more of a recognition, an institutionalization of what the market already knows which is that these guys are in a lot of trouble.

TERENCE SMITH: And this move by Kirk Krikorian to increase his stake in GM, given his past track record, when he moves into a company, what does that portend?

DAN BEUCKE: Well, of course, in Detroit’s mind, the big example is Chrysler ten, fifteen years ago. And Krikorian came in at first in a very friendly way, at least that’s the way he described it, and was very supportive of the Chrysler management, and this is before they got bought by Daimler.

So what happened, though, was as the value of his shares didn’t go up or dropped later on; he became very active. And I don’t think anybody really expects him to sit passively and watch his GM stake stagnate or drop.

I think the expectation is that he is going to provide some fire behind the GM executive staff to do some of the things and perhaps do more aggressive restructuring than they might have otherwise.

TERENCE SMITH: Well, that leads sort of to the final question which is: Does either one of these companies, do they have a strategy or new products or something that hold out the promise of turning the situation around?

DAN BEUCKE: Well, Ford I think gets a little more credit in the markets and maybe in the public’s eye because it has gone out and it has a fairly successful sports utility vehicle that’s a hybrid, a gas-electric hybrid.

And so it is appearing to embrace some of that and, frankly, it’s had a little more luck with some of the new cars, the new Mustang, for instance.

I think General Motors is the one that has to prove that it has a plan; they really have not laid out what they plan to do on the cost side and they have to give car buyers and the markets a little more sense that they have some new product coming along that’s going to be exciting.

TERENCE SMITH: Dan Beucke of BusinessWeek, thank you very much.

DAN BEUCKE: Thank you.