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Ford Puts Visteon on Life-Support

After Downgrade, GM Announces New Round of Cutbacks

U.S. Economic/Financial News

Ford Puts Visteon on Life-Support

Visteon, America's second-largest auto parts producer, has deteriorated to a near-death situation, which epitomizes the situation of the whole U.S. auto parts sector, the which employs hundreds of thousands of workers. The March 14-18 turmoil has worsened Visteon's prognosis.

Visteon was created as a spin-off from Ford Motor Company in mid-2000. During that time, it has out-sourced some of its work to Mexico and other lower-wage countries. Between mid-2000 and the end of 2004, Visteon lost $3.2 billion. In February 2005, Moody's Investors Service downgraded its credit rating of Visteon to Ba1, i.e., two levels below investment grade. In 2004, Visteon, which has a worldwide workforce of 70,000, sold $24.5 billion worth of goods, of which a full 70% were sold to Ford.

When Visteon was separated from Ford, a very unusual agreement was reached by which Visteon virtually leases its workforce from Ford. Further, under this agreement, Ford agreed to rescue Visteon if it got into financial trouble. This became necessary in December 2003, as Ford decided to pay $1.65 billion to cover the retiree benefits of Visteon's workforce. As Visteon's condition rapidly broke down this year, during the week of March 7, Ford agreed to pump an additional $369 million into Visteon. Ford made an agreement with the UAW whereby Visteon would pay the Ford workers at Visteon collectively $25 million less per month. Ford will also spend $150 million to acquire machinery and equipment for Visteon, because Visteon is unable to pay for needed improvements at its plants.

In an article in the CarConnection.com, "Visteon Faces Restructuring," author Joseph Szczensy made clear that Ford is not doing this out of altruism: Ford "executives have concluded Visteon is too important to Ford to fail our even go bankrupt." Were Visteon to fail, Ford would be crippled.

On March 16, the Van Buren Township, Michigan-based Visteon filed "revised" financial statements with the SEC, showing that it had understated its losses during the past four years, which brought its total losses to the full $3.2 billion reported above.

Standard and Poors reported in its March 16 conference call that Ford likely will need to pump additional cash into Visteon this year.

The biting irony of the situation is that Visteon is being kept on life support with cash infusions by a Ford Motor Company, which itself is in critical condition. Ford finds it increasingly difficult to pay its $170 billion in debt; its credit is headed toward junk bond status.

After Downgrade, GM Announces New Round of Cutbacks

After Standard & Poors announced its downgrade of General Motor's credit rating, Fitch, the second of the Big Three rating services, also downgraded GM, keeping it barely above junk bond status, the Detroit News reported March 17. In an internal e-mail to its 38,000 salaried, white-collar employees, GM announced that they will not receive merit pay increases this year, and that GM is reducing its matching contribution to these employees' pension plans by 60% starting April 1.