Chennai: The industry-wide pressure on retail prices, the intense competition offered by General Motors Corporation and the reduced demand in North America are set to negate the benefits of revitalisation plans of the global auto major Ford Motor Company.

Ford is pursuing the revitalisation plans following a dismal performance last year. Part of the plan is to deliver pre-tax profit of $7 billion per year by mid-decade; bring the North American operations to profitability and transform the European operations; grow the premium brands offering better margins (the Lincoln, Jaguar, Land Rover and the Volvo); and cut costs and improve quality.

Significant progress has been made in certain areas, such as enhancement of product quality measures. According to Ford, next 18 months will see a slew of new launches. The Asia Pacific region will witness new launches like the Ford Falcon, Ford Everest, Ford Fusion and the Ford Escape.

In terms of cost reduction, the company has reduced $2-billion corporate non-product costs. The European operations saw a turnaround.

Furthermore, largely reflecting stronger-than-anticipated industry demand, Ford has been exceeding its modest initial goal of consolidated pre-tax breakeven earnings in 2002. Although an important element of Ford’s long-range plan has been expansion in relatively high-margin luxury vehicles, the performance of the brands within its Premier Automotive Group has been mixed.

On 25 October 2002, Standard & Poor’s (S&P) Ratings Services lowered its long-term ratings on Ford and Ford Motor Credit Company (Ford’s financial subsidiary) to BBB from BBB+, and removed these ratings from CreditWatch, where they had been placed few days before.

The A2 short-term ratings on the company, which were not placed on CreditWatch, were affirmed. Long-term ratings on Ford’s 100-per cent owned Hertz Corporation remain on CreditWatch with negative implications.

According to S&P, the downgrade primarily reflects concerns about the adequacy of restructuring measures being implemented by Ford to restore the competitiveness its core automotive operations.

Moreover, Ford’s financial leverage has increased as a result of growth in its unfunded pension liability. Ford recently disclosed that, as a result of poor investment portfolio returns, its US plans are now under funded by $ 6.5 billion. Taking the deficit in Ford’s non-US plans into account, S&P estimates Ford’s total under-funding is well in excess of $10 billion, compared with the under-funding of only $2.5 billion at year-end 2001. The company’s consolidated debt outstanding totalled $162 billion on 30 September 2002.

According to S&P, though Ford Credit does face substantial near-term debt maturities, it continues to enjoy good access to the asset-backed securities (ABS) market, and also has $40 billion of committed bank credit and securitisation facilities. Yet, exaggerated public perceptions concerning Ford’s woes have contributed to significant widening of Ford’s and Ford Credit’s credit spreads in recent months. If this persists, it could cause Ford Credit to become disproportionately dependent on the ABS market as a funding source.

Ford Credit is changing the business lanes. From becoming the global auto financing super power, the company is now focussing on financing Ford brand vehicles. Ford Credit will also reduce its exposure to used car and lease markets.

“The downgrade primarily reflects concerns about the adequacy of restructuring measures being implemented by Ford to restore the competitiveness its core automotive operations,” says S&P’s credit analyst Scott Sprinzen.

According to S&P, the ratings on Ford could be lowered further if at any point the rating agency comes to doubt that Ford will be able to sustain some earnings improvement, including the achievement of at least breakeven pre-tax earnings in its automotive operations (excluding Ford Credit) in 2003.

Meanwhile, reacting to S&P’s downgrade, Ford’s Allan Gilmour, vice-chairman and chief financial officer, says the credit rating does not reflect the fundamental strength of the company’s business. “Our revitalisation plan is on track. On the automotive side, we have strong liquidity with nearly $26 billion in gross cash, less than $1 billion in debt coming due within five years, and a manageable pension liability with no mandatory contributions due before 2006.”

According to him actions by Ford Credit to reduce assets are ahead of targets and its profit performance continues to improve. Ford Credit has reduced its leverage while paying a dividend to the parent company, and liquidity and funding flexibility remain very strong. “Earnings continue to exceed expectations. Our US market share has stabilised and, importantly, our retail share is up. And we have accelerated our cost reduction efforts to eliminate waste and enhance efficiency throughout the business.”