Bleak Forecasts for Ford and GM
Just in time for the New York Auto Show this week, and a major investors' conference, General Motors (GM) and Ford (F) shares are trading at 52-week lows with further declines in sight.
GM shares on Mar. 17 fell 7.2% to $17.83, which is lower even than the drop in 2006 when whispers of bankruptcy were swirling around the world's biggest automaker. Ford shares closed at $5.11. On Mar. 18, shares of both automakers were nosing upward, along with the broader market, after the Federal Reserve moved to bail out investment bank Bear Stearns (BSC) and its announcement of a 75-basis-point cut in the federal funds rate.
The share prices of the two publicly traded U.S. automakers, though, reflect terrible fundamentals and a bleaker outlook for consumer confidence and auto sales for the rest of the year. February auto sales reflected what automakers and research firms forecast as a 15.2 million rate of sales for the first half of the year. The same rate is projected for the second half, but some analysts say sales could slip further for the year even after tax rebates from the U.S. government stimulus package and regular tax refunds end up in mailboxes in May and June.
Challenges in the Months Ahead
On Tuesday, J.D. Power & Associates (which, like BusinessWeek, is a division of The McGraw-Hill Companies (MHP)) forecast 2008 auto sales to fall to 14.95 million, the lowest level of sales since 1994. "While the automotive industry's slow performance in January and February certainly contributes to the anticipated drop in new-vehicle sales, declining consumer confidence and spending, as well as turbulent financial and economic market conditions, are primarily driving the decline," said Jeff Schuster, executive director of automotive forecasting for J.D. Power & Associates.
"The downturn in retail sales—coupled with declines across the fleet market—also contributes to the overall reassessment of new-vehicle sales for 2008," said Bob Schnorbus, chief economist at J.D. Power & Associates. "Unfortunately, the current economic environment is fraught with uncertainty and risk—with the financial crisis, worsening oil prices, and weak housing and stock markets steadily impacting other sectors of the economy. As such, our revised forecast is better positioned to reflect the challenges automakers will face in the months ahead."
General Motors' plight is exacerbated by a strike at one of its key suppliers, Detroit-based American Axle & Manufacturing Holdings (AXL), which supplies parts for GM's pickup trucks, SUVs, and some of Chrysler's vehicles as well. GM has had to idle 30 plants for want of parts. The interruption in production could cost GM around $300 million in the first quarter.
GMAC Caught in Mortgage Mess
Standard & Poor's (also owned by McGraw-Hill) said Mar. 17 that it is reviewing the credit ratings of GM and three of its large suppliers that are also affected by the strike. Robert Schulz, an S&P analyst, said the strike by 3,650 United Auto Workers union members, which began on Feb. 26, "has gone on long enough to possibly begin to affect the financial resources of GM and those suppliers most exposed to the automaker."
GM also is contending with troubles at Troy (Mich.) auto parts supplier Delphi, which may need more cash from GM, its former parent, to emerge from bankruptcy later this year. Also weighing on the automaker is financial turmoil at GMAC, the financial-services company, of which GM still owns half. GMAC lost $2.3 billion last year as more U.S. borrowers struggled to repay home and vehicle loans. GMAC's mortgage unit, Residential Capital, alone lost $4.3 billion as high-risk borrowers defaulted on mortgages, a trend that's shaking the lending industry.
Ford and GM are both trying to build some momentum in a new product renaissance at both companies. A flock of new, highly acclaimed passenger cars and crossover SUVs are emerging from GM under the guiding hand of GM product chief Robert Lutz. The Saturn Aura and Chevy Malibu earned North American Car of the Year honors the last two years, besting new designs of the Honda Accord and Toyota Camry. At Ford, the Ford Edge and Lincoln MKX crossovers and the Ford Fusion have been catching on with car buyers.
And while both companies would like to enjoy the aftermath of getting the UAW to manage its own health-care benefits—saving the automakers billions—the increasingly suffocating economic conditions of the subprime mortgage crisis in the financial markets, and worsening consumer confidence, are making it difficult for both Ford and GM to generate the profits they have forecast.