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Ford's Worst Quarter Ever


Problems at its credit arm and a writedown of assets, plus a poor economy and high gas prices, led to a second-quarter loss of $8.7 billion

Ford Motor (F) reported a second-quarter loss of $8.7 billion, its worst single quarter in history.

Much of the loss was due to a writedown in the value of assets, and losses on falling values of SUVs coming off leases back to the automaker's Ford Motor Credit arm. But, like a kid who wrecks the family car and tries to distract his parents from the bad news by offering to paint the house, Ford unveiled a plan to make over its lineup with more small, fuel-efficient vehicles in the next two-and-a-half years—faster than Wall Street had expected.

Ford's plan to achieve a net profit in 2009 after losing $15.3 billion the past two years had already been thrown off track by the worse-than-expected housing meltdown and high gas prices. But the huge second-quarter loss was a setback Chief Executive Alan Mulally did not anticipate until a few months ago when SUVs like the Ford Explorer (BusinessWeek.com, 9/1/06), Ford Expedition (BusinessWeek.com, 2/19/07), and Lincoln Navigator (BusinessWeek.com, 4/2/07) started losing thousands of dollars in value in a matter of weeks at auctions where off-lease vehicles are sold. Skyrocketing gas prices have cratered demand for such vehicles.

Whipsawed Stock

Ford shares were trading down 9.5%, at 5.46, in midday trading on the New York Stock Exchange. Ford has been a volatile stock over the past two months, trading between 4.30 and 8 a share. The company has been whipsawed between a surprise first-quarter profit, subsequent changed forecasts in profitability and cash burn, and an investment in the automaker by financier Kirk Kerkorian, who paid 8 per share for a stake in Ford.

The second-quarter loss was $3.88 per share, compared with net profit of $750 million, or 31¢ a share, in the same quarter last year. The loss includes $8.03 billion worth of write-offs because of a decline in value of North American assets and Ford Motor Credit's lease portfolio. Even excluding those special items, Ford lost 62¢ a share, worse than Wall Street expected. Twelve analysts surveyed by Thomson Financial, on average, expected only a 27¢ loss. Ford's second-quarter revenue was $38.6 billion, down $5.6 billion from the year-ago period. Analysts expected $34.6 billion.

Mulally is moving faster to restructure Ford's global product portfolio around more fuel-efficient cars, less reliance on trucks and SUVs, and less manufacturing complexity. Since his arrival at Ford from Boeing (BA) in late 2006, Mulally has been driving his team to make business cases for bringing more of Ford's smaller European vehicles to the U.S., a move on which Ford product strategists have pushed back. Mulally especially has questioned from the beginning of his tenure why Ford was making different similar-size vehicles for North America and Europe. "We can't survive with this level of complexity" is a mantra Mulally has repeatedly drilled into Ford managers, according to staffers.

Smaller, Leaner Models

To make good on his plans, Mulally announced that by the end of 2010 Ford will be bringing to the U.S. several new small cars: the Fiesta sedan, which Ford designed for Europe, Asia, and North America; a new five-door hatch version of the car; a four- and five-door version of the European Focus; and an unidentified small multipurpose vehicle Ford says will be "totally unique" in the marketplace. The company's Mercury division will also get a small car believed to be built on the new Focus platform in order to give Lincoln-Mercury dealers a small car to meet demand for more fuel-efficient vehicles. Also by 2010, Ford will launch a new Explorer SUV that will be based on a car platform and will get 25% better fuel economy than today's SUV. And by 2012, Ford will bring two additional small cars to the U.S. from Europe.

Until recently, many Ford managers were still carping to Mulally that Ford needed vehicles of different styling and packaging to meet the different tastes of European and American consumers. Ford has a checkered history of trying to sell a car of the same design on multiple continents. The company bombed with the global Ford Contour in the early 1990s, and with importing the Merkur Scorpio in the 1980s. But Mulally believes the stars are aligned now. "With fuel prices up in the U.S. [as they have long been in Europe] and consumers valuing smaller, more fuel-efficient vehicles, [we think we can replicate] the success we have had in Europe under similar circumstances," says Mulally.

Indeed, the CEO said Ford's revised product plan has reduced the number of engineering platforms Ford uses in four vehicle segments—subcompacts, compacts, midsize cars, and vans—from an astonishing 14 separate platforms worldwide to just four.

It's a vital transformation at Ford that Mulally has rammed through in the face of a company culture that protected regional silos around the world.

Legacy of Duplication

Group 1 Automotive (GPI) CEO Earl Hesterberg, who worked for Ford Europe in the late 1990s, said Ford was structured around waste and duplication that made its costs much higher than those of rival Toyota (TM). "The whole company was set up with different regions of the world running independently as separate companies and centered on making their own unique products for each part of the world," he says. Meanwhile, according to Hesterberg, whose company is one of the largest auto dealer holding companies in the U.S., Toyota was doing just fine making Corollas and Yarises for the world. "Mulally has clearly brought sense to the whole company by beating those forces back," says the former Ford executive.

There will be some differences in sheet-metal design in the North American Fiesta compared with those sold abroad. The Focus, as well as later designs of the Ford Fusion, will be close to their European counterparts. "Design is much more global than it was 20 years ago, when Ford was trying global design, and from what I have seen at auto shows the company seems to be in the right zone with its ideas," says independent marketing and design consultant Dennis Keene.

The biggest worry facing Ford is whether it will have enough cash to see it through an economic downturn and a drop in auto sales with an uncertain floor. Ford is burning more cash than it planned for last year. Ford burned $2.1 billion in cash in the second quarter and $8 billion in the first half of 2008. Besides a major recapitalization plan Ford undertook in 2006, it has also sold its Hertz, Aston Martin, Jaguar, and Land Rover units to raise capital to see it through. Ford had about $27 billion in cash at the end of March.

Chief Financial Officer Don LeClair says Ford believes it has enough cash, but the company is not committing to a return of profitability by 2010. "There is still too much uncertainly and volatility in the economy [to target a return to profitability]." Mulally said, though, that Ford does anticipate that an economic recovery of housing and growth will rev up in early 2010.

SUV Shift

J.D. Power & Associates—owned by BusinessWeek parent The McGraw-Hill Companies (MHP)—revised its forecast for 2008 U.S. auto sales to 14.2 million vehicles from 14.7 million.

Ford's long-term shift to more fuel-efficient vehicles can be seen in the investments it is making. Ford said it will retool the Michigan Truck Plant in suburban Detroit, shifting its products from large SUVs to make global vehicles off the European Focus. The SUVs made at Michigan Truck—the Lincoln Navigator and Ford Expedition—will be shifted to the Kentucky Truck Plant in Louisville. The moves reflect that Ford views big SUVs as niche products in the future, rather than the big volume sellers they have been in the past.

Ford is also expanding its manufacturing capacity of a new generation of engines it is calling EcoBoost, technology that allows four- and six-cylinder engines to perform like larger engines while achieving 20% better fuel economy.

For 10 years, Ford has been slow to plan for consumer demand for smaller vehicles, and the worsening U.S. economic picture has come about faster than the company anticipated, acknowledged Mulally. "But we continue to make progress on every element of our transformation plan, and we are taking decisive steps in the near term to ensure our long-term success."


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