Lifestyle

How Do You Save a Car Company?


If you want to know how hard it is to turn around a troubled car company, just look at Ford. The company said Sept. 15 that it will accelerate its plans to cut 14,000 white-collar workforce, slash 30,000 hourly jobs, and close 16 factories. And still, it also stated that it doesn't expect to see a profit in its all-important but money-losing North American business until 2009.

For Ford Motor (F), the announcement signals a redoubled effort to get the company back to profitability and even become competitive again. Mark Fields, president and chief operating officer of Ford—The Americas, said on a conference call with analysts and the press that Ford's problems have been compounded by rising gasoline prices, which have undercut sales of profitable pickups and SUVs, as well as rising prices for commodities needed for catalytic converters and other parts. Says Fields, "We needed to go further and faster."

The company's announcement today marks the second major restructuring that the U.S. car industry has seen since the start of 2005. Add the cuts by crosstown rival General Motors (GM), and the cuts amount to about 90,000 white-collar and union jobs—most of them union.

OBVIOUS NEED. Ford originally introduced its Way Forward restructuring plan in January. But the new plan revealed today hastens the job cuts and previously announced factory closings while adding two more to the list: the Maumee Stamping Plant in Ohio and the Essex Engine Plant in Ontario, Canada. Originally, Ford wanted to finish all of its plant closings by 2012, but these will now be finished by 2008, Fields said.

It's easy to see why Ford needed to goose its turnaround plan. The company lost $1.4 billion in the first half of the year. Market share is down to 17% from almost 18% last year. Fields says he feels Ford's share will keep falling to about 15% over the next several years.

Ford's latest cuts should reduce costs by $5 billion, Fields said. But even getting those cuts on an accelerated basis won't bring the North American business back in the black until 2009, Fields added.

BIG PRODUCTION. Wall Street was disappointed by the outlook. In a research note, J.P. Morgan analyst Himanshu Patel said, "We are disappointed by comments that suggest that [Ford's] North America-Auto may lose money through 2008." In fact, Patel said Ford's stock may be overpriced at $9 a share. Goldman Sachs (GS) analyst Robert Barry said Ford's profit outlook is now "worse than our bearish estimates."

One of the problems is that Ford has so much extra factory production that deep cuts won't be enough to get it to break-even quickly. Even taking into account the planned factory closings, Ford will still be able to build 3.6 million vehicles in North America —more than it needs, according to Fields.

If Ford's market share falls to 15% as management predicts, it will only sell 3.1 million-3.2 million vehicles. That means getting Ford's plants to hit 100% capacity—the sweet spot for maximizing profits—won't come until after 2008 and it would require more cuts or a sales boost. Says Fields, "We will get to 100% capacity by 2010."

Ford plans to cut the 14,000 white-collar jobs mostly through attrition and early retirement deals. The factory jobs will also be handled conscientiously. Ford is offering workers the following:

All employees can opt to take $100,000 in cash to walk away with no retirement or benefits.

Workers with 30 years of service and hence retirement eligibility can take $35,000 in cash and retire.

Others who have at least 28 years at Ford but aren't eligible to retire can go on leave for two-thirds of their pay until they are eligible to retire.

Others can take an education package that reimburses them up to $15,000 a year for tuition for up to four years along with a stipend of 50% of their pay for the same period.

CASH TO BURN. The buyouts come at a big cost. Original restructuring moves were expected to hit profits by $3.8 billion, about half of which comes out of Ford's cash this year. But company CFO Don Leclair said the hit to both profits and cash will be greater. Ford didn't have specifics.

Still, Leclair said he expects Ford's cash hoard to be $20 billion at the end of the year, from $23.6 billion now. But that also includes $3 billion cash diverted from a long-term fund earmarked for health-care costs. So Ford will burn about $6 billion or $7 billion in cash this year. Ford has the cash to pay for its restructuring and absorb the losses. In addition to its forecast $20 billion in year-end cash, Ford is selling Aston Martin and has a $6 billion credit line.

Here's the worrisome part. Detroit's three carmakers have been downsizing their way back into profitability for years. But to get off the boom-and-bust cycle of profit and loss, they need to finally, at long last, figure out how to boost sales and revenue. That's the only way to preserve long-term cash flow.

NEW MODELS. To that end, Fields said Ford has a product offensive coming to help boost sales. He said by 2008, Ford will redesign or freshen enough of its product line so that 70% of the sales volume of Ford-, Lincoln-, and Mercury-branded cars will be new.

Ford plans to launch a new special-edition variant of the Mustang every year until 2008. The company has gone back and given the forthcoming F-150 pickup a new redesign and better engines for 2008 (see BusinessWeek.com, 4/19/06, "America's Favorite Pickup"). Next year, Fields said, Ford will freshen the Ford 500, Mercury Montego sedans, and Ford Freestyle crossover SUV (see BusinessWeek.com, 9/14/06, "2007 Ford Freestyle Limited AWD").

After 2008, Fields said there are five all-new models coming that Ford has not talked about. He wouldn't provide details. John Wolkonowicz, an analyst with Boston-based Global Insight, thinks Ford may launch rear-wheel drive sedans for Lincoln and Ford brands using the Mustang platform. He also thinks Ford may launch a Lincoln off the Escape small SUV platform, a premium subcompact car, and a Hummer fighter off the Explorer platform (see BusinessWeek.com, 4/19/06, "Ford's Explorer Loses Its Way").

But even with the new cars coming, Ford doesn't expect to hold market share. Says Chairman William C. Ford Jr., "What Mark and his team have come up with is an appropriately conservative plan." Basing its strategy on conservative sales forecasts is a refreshing move coming from Detroit companies that have long fallen short on their own market share projections. Now Ford has to find a way to meet even its scaled-back expectations.


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