Ford Cuts Trucks

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Mulally has generally been lauded by Wall Street, employees, and dealers, as well as Kerkorian, for moving swiftly to restructure and streamline Ford. Mulally was recruited from Boeing (BA) by Bill Ford, who has complimented the CEO both publicly and privately for shaking up Ford's hide-bound culture, which thwarted the scion's own attempts to reform the company while he was CEO between 2001 and 2006.

Inevitable Retrenching

Though Ford has been making great strides in cost reductions and product quality, a retrenchment of the company's goals was inevitable. The collapse of housing values, rising interest rates, skyrocketing oil prices, and the resulting higher gasoline prices at the pump and higher home heating costs are pinching consumers. Ford has added new cars and crossovers to its lineup to capture car buyers trading out of SUVs and pickups, but it's still dependent for profits on its F-Series pickups, the top-selling truck in the U.S. "From the decline in truck sales (BusinessWeek.com, 5/19/08), we think $3.50 per gallon was the tipping point," says Mulally.

And gas prices are expected to get a lot worse before they get back to $3.50. Already prices have topped $4 per gallon in some states. Goldman Sachs' (GS) influential energy analyst Arjun Murti predicts oil prices will climb to $200 per barrel, sending U.S. prices to $6 a gallon at the pump by next year, though that is still below the prices Europeans have been paying.

Ford says trucks and big SUVs represented almost 7% of auto sales in the first quarter. In the first half of May, the share of those vehicles was down to 4%. Ford is trimming its second-quarter production by 20,000 vehicles, and its third-quarter production by between 120,000 and 150,000. Ford has also revised its industry-wide sales estimate downward to 14.7 million to 15.1 million, compared with 16.1 million last year. While Ford hoped its own market share would be between 14% and 14.5% this year, it now says it is targeting 14% because of worse-than-expected sales for its trucks.

Pickup trucks overall were off 17% through April, according to Autodata. While SUVs were down 10%, sales of several models show the trade-off consumers are making from big SUVs like the Ford Expedition and Chevrolet Tahoe to lighter-weight SUVs that achieve as much as 50% greater fuel economy in some cases. Sales of Ford's Edge crossover were up 38%, and Ford Escape sales were up 12%. The Saturn Vue is up 8%, and the Honda CR-V is running 6% higher.

Limiting the Damage

To cope with falling consumer sales, Ford is increasing production of its passenger cars to meet demand, targeting specific assembly plants (especially those making SUVs, for employee buyouts to further cut payroll) and reducing its white-collar workforce for cuts through buyout and attrition. Mulally said the company may announce additional plant closures in July.

Ford is also burning more cash than it expected. It expects cash burn between 2007 and 2009 to cope with losses and the costs of buying out employees to run from $12 million to $14 million. Ford recently sold its Jaguar and Land Rover brands to Indian carmaker Tata Motors (TTM) to rid loss-making businesses and raise cash to see it through the crisis. Ford has $29 billion in cash on hand and $41 billion in total liquidity including credit lines.

"If lower-than-expected U.S. light-vehicle sales persist through 2009 or higher fuel prices cause an even more dramatic shift away from light trucks, Ford's liquidity could reach undesirable levels by late 2009," S&P said, in lowering the automaker's outlook. This could occur even if Ford continues to make progress on its turnaround program in North America, S&P added.

Ford Motor Credit, said Ford's Leclair, is seeing higher loan defaults, but will earn a profit in 2008. One of the issues creating losses for Ford is the number of trucks and big SUVs coming off lease back to Ford. The value of such vehicles at auction has been falling, forcing Ford to absorb the difference between what it projected resale value to be when it wrote the lease and what the market is actually delivering.

Ford has a few bright spots. Sales of the Edge crossover are up 38% as former Explorer and Expedition owners gravitate toward the less thirsty utility vehicle. Also, the redesigned Ford Focus is a surprise hit. The new design was derided by car reviewers before it went on sale last year. But with fuel economy above 30 mpg, sales were up 29% through April, compared with the same four-month period last year. Ford has a smaller, even more fuel-efficient vehicle, the Fiesta, arriving in the U.S. by 2010. Mulally said the company can't get it to dealerships any faster. But the company is looking at other designs to build off the same vehicle engineering platform. It is also developing a smaller, lighter, more fuel-efficient version of the F-Series pickup that could go on sale by 2011.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.