There's little doubt that 2003 was supposed to be a milestone for Ford Motor Co. (F
) It marks not only the 100th anniversary of the company's founding by Henry Ford but also the year in which his great-grandson, Chief Executive William C. Ford Jr., 45, vowed to bring the auto maker back into the black after it had lost $6.4 billion over the past two years. Based on a host of rosy assumptions, he told investors in January that the company would earn $1.3 billion. "When people look back on 2003," he said then, "I want them to remember it as a turning point."
But so far, nearly all the turns at Ford have been for the worse. The auto maker's prospects are looking bleaker by the day as the industry girds for tougher times amid war and fears of a double-dip recession. Weak sales and rising inventories forced Ford to slash second-quarter production by 17% from last spring's levels. If rivals launch a brutal new round of incentives to revive flagging sales, Ford may be forced to match them as it struggles to hang on to its 21% market share. That would surely push auto operations into the red, triggering a ratings downgrade that would leave Ford's debt one step above junk status at best. In fact, by Mar. 11, jittery investors had driven Ford stock down to an 11-year low of $6.60. Says Deutsche Bank Alex. Brown analyst Rod Lache: "Ford is facing insurmountable headwinds."
Even without the gloomy economic outlook, Bill Ford's turnaround seems to be stuck in neutral. He hasn't yet formed a cohesive and complete management team. The company's top brass has been forced to beat back rumors of infighting. Amid the turmoil, suppliers say Ford is delaying replacement of a raft of vehicles that account for one-quarter of its sales volume. And efforts to improve quality have stalled: The April issue of Consumer Reports ranks Ford dead last in reliability.
The most pressing concern is Ford's balance sheet, which is weighed down by enormous retiree obligations and $162 billion in debt, mostly belonging to Ford Credit. Unfunded retiree health-care liabilities topped $23 billion, Standard & Poor's estimates. The company expects to shell out $2.3 billion this year for U.S. retiree health benefits, up 21% from 2002. To shore up its U.S. pension funds, Ford will need to kick in $5 billion to $8 billion over the next five years, says UBS Warburg analyst Saul Rubin.
Ford dismisses market rumors of a Chapter 11 filing. It has $25 billion in cash, and little of Ford's $14 billion in auto-operations debt must be repaid soon: The average maturity is 27 years, and just $1 billion comes due in the next five years. When total debt is offset against cash, some $11 billion remains. In a true liquidity crunch, Ford could tap $7.8 billion in credit lines and sell assets, such as its Hertz Corp. car-rental unit. Meanwhile, Ford Credit's larger debt is backed by auto receivables. Says Warburg's Rubin: "Ultimately, we believe Ford has sufficient cash reserves to allow it to limp along."
But that cash cushion could run dangerously low if the industry keeps softening. U.S. auto sales in February fell 5% below the 16.5 million-unit annual pace that Ford is banking on. Deutsche Bank's Lache figures the company will burn through $5.7 billion in 2003. Auto operations alone could drain cash by $2 billion to $3 billion annually over the next several years, analysts say. Consider that during the downturn of the early 1990s, Ford ran through a total of $10 billion in cash.
Ford executives insist that they can weather a slump. "We believe we would be in the black at 15.5 million [vehicles]," Ford Chief Financial Officer Allan Gilmour said in January. But at that level, the car operations would surely sink into the red, with profits coming solely from Ford Credit. Goldman, Sachs & Co. analyst Gary Lapidus thinks that Ford's auto unit will lose $850 million this year, leading by summer to an S&P downgrade of one-notch, to BBB-, just above junk level. When S&P reaffirmed Ford's BBB credit rating on Mar. 7, it warned that it would reconsider that rating if auto results fell short of Ford's target.
The danger is that if cash from operations dries up, the car giant might have to delay new models in the pipeline and slow efforts to modernize factories. After a long dry spell, Ford is desperate for updated vehicles. It's in the process of upgrading three plants and plans to unveil a new generation of its best-selling F-150 trucks this fall. New Ford Freestar and Mercury Monterey minivans also arrive then. As in the past, Ford is counting on new models to provide a boost. Last year's redo of the Ford Expedition and Lincoln Navigator SUVs pumped up sales of those models 9% and 11%, respectively. But suppliers say that Ford already may have postponed the remakes of such mass-market cars as the Focus and the Crown Victoria. Ford denies that.
Just as critical would be any delay of Ford's plan to convert most of its North American plants to a flexible manufacturing system by 2010. Flexible factories allow a carmaker to switch from one model to another as needed and can pull off production changes without major disruptions. Ford trails General Motors Corp. and Japanese carmakers in adapting those systems.
Ford's older factories are one reason it has fallen so far behind on quality. Defects continue to plague new models, such as the Super Duty pickup trucks introduced late last year. A faulty valve sensor caused the engines of some Super Duties to cut out at highway speeds. Some trucks spent weeks in the shop before Ford replaced the sensors.
If those problems sound familiar, they should. Bill Ford put them on top of his priority list 17 months ago, when he ousted former CEO Jacques Nasser. But Ford's management fix still hasn't taken. The company was embarrassed by news leaks in mid-March that it had launched an internal investigation into whether Chief Operating Officer Nick Scheele had violated company policy with his order that all of Ford's ad business go to WPP Group Inc. -- a firm run by a friend of Scheele's that also employs his son. Scheele rescinded the order, but more telling were the rumors within Ford that the probe was instigated by Scheele's rival, David Thursfield, who heads international operations. Scheele sent an e-mail calling those rumors "scurrilous."
Just as important are the posts Bill Ford hasn't filled. He is still searching for someone to replace Gilmour, 68, who is eager to hand off CFO duties and focus on his vice-chairman role. And Ford still needs a top "car guy," an executive with the passion and talent for new cars that Robert Lutz has shown at rival GM.
Those are pretty big holes to fill for a company that was supposed to be rounding the bend on its recovery. But with the auto industry headed for a bumpy ride, Ford isn't looking a whole lot better than when Bill Ford first jumped into the driver's seat.
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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