The Record Year Ford Hopes to Shake Off

The automaker finished 2006 with a $12.7 billion loss, its biggest plunge ever. But CEO Alan Mulally insists Ford is on its long recovery road

by David Kiley

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Ford Motor Co. is setting records, but not the good kind. On Jan. 25, as expected, the struggling automaker posted a full-year 2006 net loss of $12.7 billion, the largest single-year loss in the company's history. Ford (F) lost $5.8 billion in the fourth quarter alone. Operating results for Ford in 2007 are expected to be worse, though the net profit will be substantially better because of far fewer one-time charges.

The massive losses come as Ford tries to cope with a major restructuring and downsizing to shrink the company's workforce and number of plants to match its declining market share. Ford's big problem is its North American automotive operations. The company's European and South American operations were profitable. And its financial-services unit earned more than $1.9 billion.

For 2006, Ford's North American automotive operations reported a pretax loss of $6.1 billion, compared to a loss of $1.5 billion in 2005. The increased losses stemmed primarily from unfavorable net pricing, largely reflecting higher incentive spending, a decline in truck and SUV sales, and lower market share. For the year, North America's sales totaled $69.4 billion, compared to $80.6 billion a year ago.

Plant Closures

Results for North America in the fourth quarter were a bit worse than analysts expected. "North America remains the biggest challenge, reporting a $2.8 billion pretax loss, even worse than our estimated $2.3 billion loss," noted Merrill Lynch (MER) analyst John Murphy.

Ford shares gained 1.1% to $8.29 in midday trading on the New York Stock Exchange. The Dearborn (Mich.) company's losses last year included heavy provisions for its hard-hitting restructuring plan, which foresees 16 plant closures in North America and the elimination of 45,000 jobs by 2008.

Ford Chief Executive Officer Alan Mulally, who took over the top post in September from Bill Ford, who remains chairman, said that while the current financial picture for Ford will remain bleak for two more years, the restructuring is going as planned. "We have an operating rhythm now, and a new attitude at the company," says Mulally (see BusinessWeek.com, 1/9/07, "Mulally: Ford's Most Important New Model").

Rankings Slide

In particular, Mulally has been busying himself breaking down a global structure in which Ford Europe, Ford Asia, Ford North America, Ford Australia, and Ford South America had long created redundancies of efforts, products, engineering platforms, engines, and the like as a way of perpetuating each division's independence.

Ford sold a total of 6,597,000 vehicles worldwide last year, a decrease from 6,767,000 in 2005. Ford now ranks as the second-biggest U.S. automaker, behind General Motors (GM). Ford lost its No. 2 ranking worldwide in 2004 to Japan's Toyota (TM), which is now threatening to overtake Ford in the U.S.

While much of the focus on Ford's problems has centered on its core Ford-Lincoln-Mercury business, it also continues to struggle with its luxury portfolio—Jaguar, Land Rover, Volvo, and Aston Martin. For 2006, the Premium Auto Group (PAG) posted a full-year pretax loss of $327 million, compared to a pretax loss of $89 million a year ago.

Conjoined Brands

The decline, Ford says, is more than explained by warranty costs and unfavorable currency exchange rates. Jaguars and Land Rovers are built in Britain, and Volvos are manufactured in Sweden. Losses at Jaguar alone are estimated by some analysts to be between $700 million and $800 million, in large part because of extremely high manufacturing costs in Britain. Ford has announced its plans to sell Aston Martin.