Industry Report: May 29, 2006

May 29, 2006

  Ford Credit Rating Under Fire AgainFord Motor Co.'s slow turnaround has prompted Standard & Poor's to placing both the automaker and Ford Motor Credit Co. on CreditWatch with negative implications, which could lead to another downgrade that would quickly drive up the company's borrowing costs. In addition, the "BB-" long-term rating for FCE Bank PLC, Ford Credit's European bank, also was placed on CreditWatch with developing implications, while its "B-2" short-term rating was placed on CreditWatch with negative implications. Analysts for S&P indicated that the announcement reflected "increasing concerns about the performance of Ford's North American operations this year while the company's product mix and market share inNorth America continue to deteriorate.""We will consider the effect of the continuing pressure on Ford's mid-size SUVs (sport-utility vehicles), as well as prospects for the health of the crucial full-size pickup segment," said Robert Schultz, an S&P credit analyst."The remainder of Ford's automotive operations and Ford Credit are performing in line with our expectations and so are not central factors in this review. But the performance of these units is not sufficient to offset the problems the company faces in its North American operations."Ford, which will have a chance to make its case next month, insisted the company's turnaround effort is on track. Becky Sanch, a Ford spokeswoman, said the company's problems have been brought under control and the automaker is making plans to maintain leadership in the full-size pickup segment as well as introduce new products.The review of the automaker and its financing company is expected to be completed towards the end of June, at which time S&P could cut Ford's rating. Before making a final decision on the company's rating, analysts will meet with the company's management to discuss their plans for the balance of the year. -Joe SzczesnyFlint: Ford's Graveyard Fills Up by Jerry Flint (5/22/2006)Anybody makes mistakes, but so many?  GM Shares Rise on Buy RecommendationsWith General Motors still struggling to sell its buyout plan to blue-collar workers, and struggling to avert a strike at its major supplier, Delphi, times are still tough for the ailing automaker. But GM got a strong vote of support Wednesday from at least one corner of the investment community. Merrill Lynch analyst John Murphy announced that he was morphing from bear to bull, switching his recommendation from Neutral to Buy. The big brokerage set a share price target price of $37, a whopping 50 percent premium over the day's opening price.The bullish forecast sent buyers rushing to their e-brokers, driving shares up $2.02, or 8.25 percent, for the day, to a closing price of $26.50. That's still well below GM's peak, which nudged $38 last summer, during the height of the company's employee discount program. On the other hand, it marks a sizable recovery from GM's mid-winter blahs, when shares dipped below $20.There are several factors driving renewed interest in the automotive giant. GM got a lot of attention for its new, $1.99-a-gallon gas promotion, announced earlier this week. But analyst Murphy's motivation appears to have been growing acceptance of the GM employee buy-out offer, which should significantly drive down operating costs. As of May 3rd, leaders of the United Auto Workers reported 12,400 workers had agreed to the offer."The take rate will accelerate into the June 23rd deadline," Murphy predicted, in an e-mailed analysis. "We estimate that there will be about 30,000 buyouts."Merrill Lynch has now raised its earnings forecast for 2007 from $1.90 to $4.10 per share, and its 2008 EPS estimate from $3.15 to $5.25.-TCC TeamTheCarConnection Drives Chevy's Camaro by TCC Team (5/22/2006) Detroit concept inching closer to production. Keogh Heads to Audi Audi of America Inc. on Wednesday named Scott Keogh, 37, a former Mercedes-Benz manager, to the post of chief marketing officer. It's a new position. Previously, the top marketing post at Audi was director of marketing. That post has been held by Stephen Berkov, 37, who now takes on the title of director of brand marketing and innovation and moves to California. Keogh is an experienced marketer, having run public relations as well as advertising at Mercedes. He also was the U.S. chief of Smart USA, but the launch of the DaimlerChrysler brand in the U.S. was scuttled when losses at Smart prompted new management at DCX to question the viability of the project. Berkov is an up-and-comer. His move to California comes at a time when Audi is trying hard to seize the opportunity it sees to gain sales and market share with new product and a much improved brand image. Audi sales are up 5.2 percent through April at 25,296. Berkov will continue to manage day-to-day advertising, dealer marketing and product integration into movies, TV and the like.-Jim Burt2007 Audi RS4 by Conor Twomey (5/15/2006)A faithful point-to-point supersedan - but is it better than the M5? Ford Issuing New Bonds Ford Motor Co. confirmed it is making a private bond offering that seems to spotlight that the automaker is concerned about its short-term cash reserves at Ford Motor Co. and Ford Motor Credit.Under terms of the offer, which is being made privately, holders of about $2.5 billion in bonds with coupons as low as 4.95 percent coming due this fall can swap them for bonds that pay as much as 10.6 percent. The deal, which will allow Ford to hold on to more of its cash this year, will cost the finance unit an estimated $90 million per year.A Ford spokesperson said the company could not comment about the strategic reason for the bond swap. But analysts say that the only reason a company delays paying off bonds in the near term in favor of paying off debt later at a dramatically higher interest rate is because it is concerned about its cash reserve and cash flow in the near term.Ford Motor Co. has about $21 billion in cash, according to its first quarter financial statement. And the finance unit had $16.6 billion in cash at the end of March. The finance unit has $21 billion in bonds coming due this year.Casting a shadow over the automaker and its finance unit now are its junk-rated bond ratings and the slowness of progress in Ford's Way Forward turnaround plan. Ford plans to spend $250 million this year to cover the cost of shedding unionized workers and $220 million to close plants. But Ford is closing a total of 14 plants between now and 2012 and plans to cut 30,000 workers, and that will cost hundreds of millions for years to come.Ford's goal this year was to stop market share decline. But Ford executives have had to back off that target, because higher gas prices have hammered sales of Ford's SUVs. Sales of Ford branded cars and trucks are off about 4 percent this year, and its market share has dropped by more than a half-percentage point through April, according to Autodata. Market shares of Jaguar and Volvo are down too. The Ford brand's share of U.S. light vehicle sales fell to 14.8 percent in April, compared with 15.7 percent a year earlier and 25.7 percent a decade ago. Ford plants are operating at only about 75 percent of capacity today.Ford shares closed Wednesday at 6.93, up 1.2 percent. Ford shares are trading 40 percent below their 52-week high.-Jim Burt  DC To Face $640m Fine?DaimlerChrysler AG could face fines of up to $640 million in the aftermath of the probe of allegations by the U.S. Department of Justice and the Securities Exchange Commission. The German newsmagazine Der Spiegel reported over the weekend that the German automaker was facing a fine that could total $640 million for violating U.S. anti-bribery laws. DaimlerChrysler officials, however, have noted the bribery charges are still under investigation by the American authorities, which have not made any move to impose fines on the auto giant.In March, DaimlerChrysler disclosed that it had fired or suspended employees for making improper payments in Asia, Eastern Europe, and Africa. The U.S. Securities Exchange Commis­sion had been investigating the bribery charges, according to the annual report.The report did not name the exact number of employees involved in the illicit conduct but noted that 13 employees had been cited by the SEC for improper conduct related to the oil-for-food program in Iraq."We are voluntarily sharing with the DOJ and the SEC information from our own internal investigation of certain accounts, transactions, and payments, primarily relating to transactions involving government entities, and are providing the agencies with information pursuant to outstanding subpoenas," DaimlerChrysler noted at the time. -Joe SzczesnyZetsche Focuses on Bribery Scandal by Joseph Szczesny (3/13/2006)New CEO sets the Schrempp era aside. Detroit's Budd Plant Will CloseThyssenKrupp, the German steelmaker, recently announced closing of its historic Budd steel stamping plant in Detroit, and the termination of 350 employees, most of whom will retire. Once, the plant provided thousands of jobs. The ultimate trigger for closing, when no other new business could be signed for the facility, was Ford's discontinuance of the large Excursion SUV toward the end of last year.The historic Budd plant dates back to the World War I era, when it became home of the Liberty Motor Car Company. Liberty was founded in 1916 as a medium-priced car with a standard six-cylinder Continental engine. The plant was built in 1919, but Liberty fell on hard times in the postwar depression: production peaked at a mere 11,000 cars in 1921, and the company went into receivership in 1923.Budd Manufacturing Company, originally a Philadelphia firm that built steel railroad cars, got into the auto-supply business in 1912 when it pioneered production of all-steel bodies for Oakland and Hupmobile cars. By 1915 it was making all-steel bodies for Dodge. Budd bought out the bankrupt Liberty Company in 1925, acquiring the 86-acre plant to move production of steel wheels, body panels, and bodies closer to its Detroit automotive customers.The location at Conner and Charlevoix on Detroit's east side was in the midst of the city's auto manufacturing. Nearby were the Chrysler - once Chalmers - East Jefferson Plant, Hudson Motor Car Company, and Continental Motors, which supplied engines to many auto and aircraft manufacturers. In the 1930s, the area became a hotbed of UAW organizing. Across

Conner Avenue
from the Budd plant are the modern headquarters of two historic UAW Locals, 7 and 51, for separate Chrysler plants. The Budd plant's local was 308.The Hudson plant was the first to go, in 1954 when Hudson merged with Nash and production moved to Kenosha, Wisc. The historic Hudson offices were torn down. By that time, Continental Detroit operations were on the skids, too. Continental's largest customer was Kaiser-Frazer and production of Continental-powered Kaisers at the Willow Run plant west of town also had wound down when U.S. car assembly was discontinued the same year as Hudson. The 1906 vintage Chrysler East Jefferson plant was finally knocked down in the Nineties to make way for a new Jeep assembly plant in the same neighborhood.Budd kept on plugging along through it all. I can recall Detroit's dark days of 1958, when auto production was nearly half what it had been in the boom year of 1955. Yet Budd was busy making Thunderbird, Lincoln, and Continental bodies for Ford, trucking them to the new Wixom plant for final assembly. Generally Budd got its business from smaller production runs, those not economical for the Big Three to build themselves, or with an uncertain future.Then, in 1978, the German Thyssen steel company took over Budd, one of many such Detroit company acquisitions by outsiders. Ironically, the Budd offices in front of the plant are designed to resemble America's Independence Hall in Philadelphia, once site of the Budd Company's home office. In 1999 Thyssen merged with Krupp, and Budd has since been a subsidiary of the German conglomerate's automotive division.Over the years, Budd has made body stampings, complete bodies, chassis frames, or other parts for a variety of automakers. Newer plants have been built closer to North American customers DaimlerChrysler, Ford, General Motors, BMW, Isuzu, Mazda, Nissan, and Toyota.Although Chrysler Detroit North and the Budd plant are still pumping out products, basically the area is a wasteland of empty parking lots, overgrown grassy fields where once cars and parts were built, trash-filled streets, desolate shopping centers, and occasional groups of the obviously unemployed hunched around street corners.Closing the Budd plant is just another coffin nail for the once proud MotorCity. -Mike Davis 

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