Scoring the World's Carmakers


Here's Standard & Poor's Ratings Services' list of corporate

credit ratings, ratings outlooks, and short-term ratings for global passenger-vehicle manufacturers, along with a comment on each. Ratings information is as of Mar. 25, 2005:

BMW (--/--/A-1): Despite adverse currency and raw material cost trends, BMW posted strong 2004 results over 2003, with an 11% increase in industrial operating profits and a 24% hike in industrial cash flows. If the euro remains strong, however, it will increasingly affect BMW, as its earlier hedge positions are expiring.

DaimlerChrysler (DCX

; BBB/Stable/A-2): The weakening profitability of DaimlerChrysler's Mercedes Car Group in 2004 culminated in a dismal profit of only €20 million for the fourth quarter. This resulted from disappointing sales of the "Smart," a costly "quality offensive," and adverse foreign currency effects expected to extend into 2005.

On the other hand, Chrysler's profitability is also expected to continue, supported by a strong new-product pipeline. The group's commercial-vehicle division will keep on benefiting from the strong demand of the global truck industry, and financial services will likely remain a stable and significant contributor to earnings.

Fiat (BB-/Negative/B): Performance at Fiat Auto remained very weak in the fourth quarter of 2004, and the hoped-for turnaround isn't likely to occur until 2006 at the earliest. The group's car models face tough competition and won't benefit from high-volume launches until the new Punto comes to the market later this year. Despite the satisfactory results of Iveco and CNH Global, the group could face heightened refinancing risk in the medium term if the auto arm's recovery is further delayed. However, the cash infusion that resulted from the termination of the GM (GM) alliance does provide some near-term relief.

Ford Motor (F

; BBB-/Stable/A-3): Ford's sales performance has disappointed in recent months. Its U.S. light-vehicle unit sales during January and February were off 7.2% compared with the same period a year earlier. That figure would have further declined were it not for a surge in fleet sales. Ford's share of the retail market (excluding fleets) has continued to drop, and recently introduced major new products got a mixed reaction from the market.

Also, sales of Ford's high-volume SUVs, including the Explorer and Expedition/Navigator, continue to weaken precipitously. Although sales of Ford's new F-series pickups remain strong, management has indicated that these will decline in full-year 2005. Persisting high dealer inventories call into question whether Ford can sustain production at announced levels in the second quarter.

We believe there's downside risk in management's target of $1.4 billion to $1.7 billion pretax earnings (before special items) in North America in 2005. Still, we expect Ford's financial performance this year to hold up considerably better than GM's. Ford recently disclosed in its 2004 Form 10-K that it has agreed, on an interim basis, to provide extensive additional financial support to its ailing major supplier and former affiliate, Visteon (VC

; BB+/Watch Neg/--). We believe the final agreement under negotiation between Ford and Visteon could well involve measures that will prove costlier still for Ford.

Fuji Heavy Industries (BBB-/Negative/--): Fuji's performance remained weak for the nine months ended Dec. 31, 2004, attributable to the higher yen against the dollar and the company's weak product mix in Japan. We expect cash-flow protection to have weakened for the fiscal year ending Mar. 31, 2005, with funds from operations to total debt of about 20%, compared with 25% to 30% in the past few years. Fuji plans to announce a new three-year business plan after the fiscal year ends. The current rating assumes that it will improve profitability within the next one to two years. The rating could drop if prospects for improvement in profitability and cash flow diminish.

General Motors (GM

; BBB-/Negative/A-3): GM's outlook was revised to negative from stable on Mar. 16. Sales performance -- especially of its all-important SUVs -- has woefully disappointed in recent months, necessitating severe production cuts and, as management has signaled, a likely increase in price discounting. Management has dramatically revised downward the 2005 earnings and cash flow guidance it had disclosed publicly only two months ago. Net income is now expected to total only about $600 million to $1.1 billion (before such special items as anticipated restructuring charges related to GM's ailing European operations), suggesting the company would generate a substantial loss were it not for the earnings contribution of GMAC.

Given the poor cash flow, GM's automotive cash position is likely to decline by at least several billion dollars this year. We now view the rating as tenuous. The rating can tolerate several quarters of weak profitability and cash flow, but only under the assumption that financial performance will improve to more satisfactory levels thereafter. The rating could decline at any point if we come to doubt GM's upward trajectory. In keeping with our policies, the rating would not necessarily be placed on CreditWatch prior to a downgrade.

Honda Motor (HMC

; A+/Stable/A-1): Honda's financial performance remains robust, and we expect the company to post record sales and net income for fiscal 2004, ending Mar. 31, 2005. In North America, which accounts for a disproportionately high share of Honda's consolidated earnings, profitability remained solid during the quarter ended Dec. 31, 2004, owing to an improved sales mix despite the higher yen/dollar exchange rate.

Nevertheless, overall profitability has come under pressure in recent months. Operating margin (after depreciation) was 7.4%, compared with 8.5% in the same period a year earlier, owing to increased marketing and other expenses and the higher exchange rate -- factors that more than offset the benefits of increased sales in Europe and Asia and cost-cutting. In the Japanese market, Honda's sales have softened because of a lack of new-product launches over the past few months.

Hyundai Motor (BB+/Positive/--): Overall unit sales increased 11.7% during the first two months of 2005, vs. the same period last year. The export market, which accounted for 70.7% of unit sales for the first two months of 2005, continues to drive Hyundai sales. Exports should keep on contributing to significant portions of Hyundai's earnings if weak South Korea's domestic market conditions persist, as we expect.

Kia Motors (BB+/Positive/--): Kia, along with Hyundai, continues to benefit from strong overseas sales. During the first two months of 2005, unit sales increased 32% from the same period last year. Kia's export level exceeds even Hyundai's, with exports amounting to 79.1% of unit sales during the first two months of this year. We expect the domestic/import sales mix to persist until at least mid-2005, with South Korean domestic demand showing no real signs of recovery.

Mitsubishi Motors (MMTOF

; CCC+/Negative/--): On Mar. 22, 2005, the corporate credit rating was raised to CCC+. The hike followed completion of a large rescue package for MMC, which received a capital infusion totaling 284.2 billion yen, including debt-for-equity swaps, from the Mitsubishi group companies. On Mar. 10, we had lowered MMC's rating to SD (selective default) from CC, following a debt-for-equity swap by Bank of Tokyo Mitsubishi Ltd.

We viewed this debt-for-equity swap as tantamount to a default because the consideration received totaled less than par value. The CCC+ rating reflects the lower possibility of near-term default by the company after the capital infusion. Nevertheless, we feel pessimistic about MMC's viability, given the carmaker's deteriorated brand image and the serious sales slump.

Nissan Motor (BBB+/Stable/A-2): Nissan continued to demonstrate robust operational and financial performance during the nine months ended Dec. 31, 2004. Although operating margin (after depreciation) remained very strong, at 10%, it fell short of the record 11.2% in the same period in 2003. An unfavorable foreign exchange rate and increased marketing and other expenses contributed to the drop-off. We believe Nissan will find itself hard-pressed to sustain its financial performance at the level of the past year, given increasingly challenging industry fundamentals, including higher raw-material costs.

Starting in May, 2005, Carlos Ghosn will become a common CEO for both Nissan and Renault. Although this development may pose a conflict of interest, we don't deem the risk significant enough to affect Nissan's credit quality.

Peugeot (PEUGY

; A-/Positive/A-2): Despite a slight erosion of its market shares in Western Europe in 2004, Peugeot generated strong free cash flow and substantially improved its net cash surplus at the industrial level. Beginning this year, it should benefit from new-product launches and further improvements in operating efficiency. Despite continual pressure on selling price and the negative impact of raw materials, we believe free cash flow will maintained a strong level.

Renault (BBB/Positive/A-2): Renault's operating margin (up €1 billion compared with 2003), free-cash-flow generation, and financial profile improved markedly in 2004, paving the way for a potential upgrade of the group by yearend 2005. To meet this goal, Renault will need to maintain both its market shares in Western Europe and its conservative financial policy. We expect the group to continue generating a solid operating margin and substantial free cash flow despite intensifying competition and an increase in raw material prices.

Suzuki Motor (A-/Stable/--): Despite its product concentration on low-price minivehicles, Suzuki has maintained satisfactory profitability. Operating margins were 4.7% (after depreciation) during the nine months ended Dec. 31, 2004, compared with 4.3% in the same period in 2003, underpinned by its strong market position and high degree of cost-competitiveness. The solid profit contribution from the motorcycle business also helped Suzuki achieve relative stable profitability.

The company maintains a strong balance sheet, with a net cash position of about 193 billion yen at Dec. 31, 2004. Despite relatively large capital investment requirements for overseas production expansion, Suzuki is expected to maintain a strong balance sheet with a net cash position, thanks to its ability to generate solid cash flow from operations.

Toyota Motor (TM

; AAA/Stable/A-1+): Toyota's operating and financial performance remain extremely strong. During the nine months ended Dec. 31, 2004, operating margins (after depreciation) reached an impressive 9.4%, compared with 9.3% in the same period last year. Strong profitability has continued due to sales increases in all key global vehicle markets and ongoing cost cutting, more than offsetting the higher yen/dollar exchange rate and increased R&D and other expenses.

Toyota is expected to generate substantial free cash flow from automotive operations again for fiscal 2004 (ending Mar. 31, 2005) despite large capital investments for overseas production expansion. Liquidity remains substantial. As of Dec. 31, 2004, Toyota had about 2 trillion yen in cash and marketable securities, excluding other highly liquid securities investments of nearly 1.5 trillion yen classified as noncurrent securities investments on its balance sheet.

Volkswagen(A-/Negative/A-2): Volkswagen posted weak overall results in 2004, with an operating profit of €2.0 billion (before special items of €395 million), down 14% from the previous year. Nevertheless, automotive net cash flows grew to €1.9 billion, supported by reduced capital spending and working capital improvements. The "ForMotion" cost-savings program showed some success, but VW needs to attain longer-term sustainable cost savings. For 2005, it identified an additional €3.1 billion in cost savings and revenue enhancement potential under the ForMotion program. From Standard & Poor's Ratings Services


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