For Ford, Another Revival Roadmap


By Kathleen Kerwin After a summer of plant-closing rumors and heavy white-collar job cuts, Ford Motor (F) will lay out the details of a major restructuring sometime this fall, says Chief Executive William C. Ford Jr. The auto maker is scrambling to restore profitability to its North American car operations, plagued by sinking market share and steep materials and health-care costs. The unit lost $907 million pretax in the second quarter.

The pressure for Ford to get back on track is intensifying. On Aug. 24, Moody's Investors Service cut Ford's debt rating to junk status. Says Moody's: "The downgrades reflect further erosion in the operating results and cash flow generation" and "continued challenges in addressing its uncompetitive cost structure in North America." Moody's adds that it expects Ford's auto operations to post a pretax loss for 2005. Because cost reductions take time to pay off, Moody's says it expects financial performance to remain weak.

In remarks to reporters after a speech in Detroit on the evening of Aug. 23, the CEO says Ford will address its factory overcapacity. He didn't rule out closing more assembly plants. Analysts speculate that the carmaker may close as many as four plants after negotiations with the United Auto Workers in 2007.

SURPRISING CHANGES. Ford has already begun eliminating 2,750 white-collar jobs, or nearly 8% of its North American total, this spring and summer. And it has warned of possible further cuts. The belt-tightening extends to Europe. Ford's Volvo Car unit said on Aug. 23 it will lay off 1,000 to 1,500 workers in Sweden, as much as 5% of its global work force, to save $130 million this year. Volvo sales in the U.S. are down 5% this year, and a weak dollar is hurting profits.

However, Bill Ford emphasizes that the restructuring wouldn't be all about slashing costs. He promises new initiatives "that would surprise people positively." The CEO didn't elaborate, and the company declined to provide details. However, in answer to other questions, Ford did say the company is looking at ways to expand its lineup of gas-electric hybrid vehicles.

Bill Ford is also counting on new models to aid the No. 2 U.S. carmaker. It has a lot riding on the new Ford Fusion and Mercury Milan sedans that go on sale this fall. This will be Ford's second shot at the family-sedan market, where its Taurus once ruled. Last year, the larger Ford Five Hundred sedan and Freestyle wagon -- worthy, but bland entries -- got off to a slow start.

Ford's Mustang, however, has been red hot since last year's launch. The company needs more hits to shore up U.S. market share, which has slipped 5.7 points since the decade began to 18.8% now.

DEEPER CUTS? Analysts are encouraged that Ford will take additional measures to repair its flagging domestic auto operations. "They have too much overhead and too much capacity for the amount of business they're doing now or are likely to be doing in the future," says David Healy, an auto analyst with Burnham Securities. Ford shares closed Aug. 24 at $9.92, up 12 cents.

The carmaker has already taken some measures to build up its cash hoard. In June, Ford announced it would spin off part of Hertz in an initial public offering. The nation's largest car-rental company is considered an attractive buy for private-equity firms and could fetch as much as $6 billion, analysts and investment bankers say.

Healy and other analysts expect Ford to announce deeper cuts to its salaried workforce, perhaps a much as 30% of its 35,000 North American auto staff. They speculate that Ford may someday merge its U.S. car divisions, Ford and Lincoln-Mercury, or drop some brands. In early August, the company consolidated the marketing and sales staffs for the two divisions.

OFF TO MEXICO. Further plant closings are widely expected. Analysts have said Ford probably doesn't need truck plants in both Louisville, Ky., and St. Louis, Mo. Sales of traditional SUVs have slowed this year, as gas prices rise and consumers flock to smaller, more car-like sport-utility crossovers.

And as of Aug. 24, Ford's car plant in Wixom, Mich., looks especially vulnerable. Ford said then it will end production next summer of the Lincoln LS small sedan built there. The LS will be replaced by the new Lincoln Zephyr, which Ford will begin building in Mexico later this year. Ford already stopped making the Thunderbird at Wixom in June. The Ford GT supercar built there is expected to go out of production in 2007, and the Lincoln Town Car could be shifted to a Canadian factory that builds similar large sedans, analysts say.

The plan unveiled this fall would be Ford's second major restructuring in four years. In April it retreated from the biggest goal of its 2002 turnaround plan: reaching $7 billion in pretax profits by 2006. In May, Standard & Poor's lowered Ford's credit rating to "BB+," sending the company's debt into junk-bond territory.

A ZETSCHE PLAY. Moody's also downgraded Ford Motor Credit, but the credit arm is still clinging to the last rung above junk-bond status. Moody's says the finance arm is rated higher than the parent because, in the event of a default, unsecured creditors would have a better chance of recovering assets there than at Ford itself.

In other remarks on Aug. 23, Bill Ford confirmed earlier news reports that he tried several years ago to hire Dieter Zetsche, then Chrysler Group's CEO and now DaimlerChrysler's (DCX) CEO-elect, to come to Ford.

Kerwin is senior correspondent in BusinessWeek's Detroit bureau


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