updated 12/6/2006 4:17:09 PM ET 2006-12-06T21:17:09

The U.S. auto market is likely to remain volatile in 2007 as automakers grapple with restructuring their businesses amid a weakening economic environment, Fitch Ratings said in a report on Wednesday.

However, General Motors Corp. and Ford Motor Co. have sufficient liquidity to finance negative cash flows, which should allay any liquidity concerns next year, Fitch said.

U.S. automakers are struggling to return to profitability while stemming their falling market share and renegotiating labor contracts with the United Auto Workers union (UAW).

Auto suppliers have also suffered from production cuts by the automakers.

Fitch auto analyst Mark Oline said on a conference call that “2006 was a year of turmoil in the auto industry and there is no reason to expect that 2007 or 2008 will be any different.”

Both GM and Ford have benefited from a liberal lending environment, Oline said. However, “with the secured financings taken on by Ford and GM, further access to external capital in the next several years could be limited.”

Auto suppliers are also likely to remain under pressure.

“The stresses in the supply chain will continue throughout 2007, as lower production from domestic manufacturers, pricing pressures and high commodity costs prevent any significant improvement in operating results or financial position,” Fitch said.

“Unrelieved stresses in the supply base in 2007 and a hesitancy by original equipment manufacturers to grant long-term contracts to suppliers in weak financial condition are expected to lead to more bankruptcies over the intermediate term,” the ratings agency said.

Negative cash flows are projected to continue at both GM and Ford through 2007 due to continued share losses, restructuring costs and working capital outflows, Fitch said.

The September 2007 contract negotiations with the UAW will be a pivotal event in determining GM, Ford and Chrysler’s ability to establish a competitive cost structure sized to the companies’ shrinking share and near-term revenue expectations, Fitch said. 

“The talks with the UAW are expected to be contentious, and a labor action cannot be ruled out,” Fitch said.

Fitch rates Ford’s senior unsecured debt “B,” five levels below investment grade, and has a negative outlook on the company. It rates GM “B,” and has the automaker on review for downgrade.

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