GM, Ford confront tall challenges in 2006, S&P report says

By Jennifer Chiou

New York, March 9 - Automakers General Motors Corp. and Ford Motor Co. will face unprecedented financial and operational challenges in 2006 as they fight to turn around their ailing performance in the critical North American market, Standard & Poor's said in a report.

The report titled "GM And Ford Need Traction On North American Turnaround in 2006" said the companies will answer to the same triple threat that produced poor results in 2005: excess capacity, high legacy costs and changing customer preferences, as evidenced by the declining sales of higher-profit SUVs.

Additionally, while both companies grapple with those problems, they will be preparing for what seems likely to be tough bargaining with the United Auto Workers, whose labor contract with the automakers ends in 2007, S&P added.

"These turnarounds will be difficult and time is short," said S&P credit analyst Robert Schulz.

Both Ford and GM have already begun broad multiyear restructurings to cut costs, the report noted, adding those efforts will be critical in further evaluating both credits.

"The degree of success Ford and GM achieve with their new products and the restructurings that they have already announced will determine their cash generation levels and be a key factor for us in their rating," Schulz added in the report.

S&P said GM and Ford must be considering the implications of the labor negotiations, adding that these contract negotiations will have to address many of the changes and cost savings already announced by the automakers.

The agency highlighted that it would not be surprised to see some sort of work stoppage at one of the automakers and added that it does not incorporate such a negative event into its current GM or Ford ratings.

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