U.S. Automotive Pension Gap Pegged At $30 Billion.

The pension funding gap for U.S. workers in the automotive sector will increase from $13.9 billion in 2001 to in excess of $30 billion by the end of fiscal year 2002, according to a new Fitch Ratings report.

The new report highlights the perspective of fixed-income investors and notes that the impact of increased pension funding requirements must be taken within the context of the company's operating performance.

"The impact on corporate income statements, the true economic impact on a company's credit position, cash funding requirements, and flexibility in the timing of these requirements are all areas which may be both very volatile and difficult to ascertain," said Chris Struve, director, Fitch Ratings.

"As quickly as the problem has developed for a number of these companies, particularly those that have swung from an overfunded to an underfunded position, the problems may be alleviated over the longer term in the event of higher asset returns, company contributions and/or increases in the discount rate."

Ford Motor Co. and General Motors Corp. lead the trend of increasing pension funding gaps. DaimlerChrysler is in the best position of the Big Three, principally from the strong operating performance of its Mercedes brand.

Pension difference between global OEM's has to do with their respective histories. Ford, GM and DaimlerChrysler, have lost substantial market share over the past 20 years. As a result, domestic OEM retiree bases are substantially larger than their transplant competitors (adjusted for current volume differences),according to Fitch.

The largest deficit is GM's position, which the company said is a $17 billion pension legacy gap to its competitors. This gap leads to increased costs for GM vis-a-vis its competitors and can, if not effectively managed, lead to lower capital investment that could impair future product development.

The potential effect is best viewed in light of the Big Three's U.S. pension plan contributions of $7.1 billion in the past three years. Lower capital investment, in turn, could lead to additional market share losses, thereby perpetuating a vicious cycle, Fitch added.

Other OEMs such as BMW and Toyota have histories that are more supportive of their pension plans, namely that these companies are continuing to grow. Given their growth rates, these OEMs have substantially higher revenue per retiree to cover future pension costs, according to the Fitch report. Until such time as their operations either age substantially or falter, pensions will not be a problem with companies such as these.

In the end, the Big Three pension backdrop is one of greater obligations to employees based on history and greater requirements for prefunding due to regulations, Fitch said. This leads to a competitive disadvantage associated with both cost and operational flexibility.

The Automotive Suppliers Although suppliers compete within much the same backdrop as the OEMs, there are subtle differences, with the two principal differences being that of plant location and the relative level of unionization.

In an effort to keep down costs, many suppliers have extensive overseas plant operations. Most of these operations are in relatively low-cost areas. These areas often do not have strong pension regulations or a history of providing sizeable pensions to their employees, Fitch stated.

Asia, Eastern Europe and Latin America/Mexico are popular locations to produce automotive parts. This pattern differs from the OEMs, almost all of which operate heavily in expensive unionized countries (although this trend has been changing over time). In addition to this focus on pension-friendly site selection, many suppliers also do not have the OEM's level of unionization, Fitch said.

Unlike the OEMs, the supplier's hourly employees are not completely unionized. In fact, many suppliers have minimal union representation. Although this trend is slowly changing, it currently provides a competitive advantage to many suppliers. This is especially true when comparing one of these suppliers with a former Big Three operation such as Delphi or Visteon. Both of these companies have nearly 100 percent unionized workforce. As a result of these differences, both Delphi and Visteon are at a relative disadvantage to almost all other suppliers, the Fitch report stated.

Print Get the Mag Weekly Updates