The Fitness program is a necessity, but it will take several years for material financial and operating benefits of the program to be realized. Success could be challenged by having to address the serious performance problems in multiple business units simultaneously. At the same time, Ford will have to continue investing in the areas critical for the future of the auto industry. These areas include alternative propulsion, autonomous driving, ride sharing and connectivity. Investments will also have to be made in meeting the carbon emissions regulations in a number of regional markets. Of particular near-term concern is China, where Ford must rapidly renew its product lineup and rebuild relationships with dealers in order to regain lost market share. As it pursues the revitalization in China, Ford will have to contend with an environment in which domestic Chinese producers are being more competitive, pricing pressure is growing, and non-Chinese manufacturers are attempting to expand their presence.
Ford's negative outlook recognizes the significant challenges of effectively executing the full scope of the Fitness program, and the extended time period over which material benefits might be achieved. In addition, the considerable financial and managerial resources devoted to the Fitness program will reduce Ford's ability to contend with any unexpected cyclical downturn.
The ratings could be downgraded absent clear progress in pursuing the Fitness initiatives by early to mid-2019, with evidence that the company is on a strong trajectory for recovery. The rating could also be lowered if Ford is unable to address operational inefficiencies in each of its major regions, while at the same time showing progress under the Fitness program's objective to generate adequate returns across all aspects of its automotive business. Evidence of such improvement could be reflected in the following areas: 1) North America: achieving an EBIT margin above 8%, maintaining market share of at least 14.5%, and lowering the breakeven level; 2) China: successfully launching new products that help grow market share, improve dealer relationships and restore historic levels of profitability; and 3) consolidated automotive operations: making steady progress toward restoring positive free cash flow.
