Ford's Earning Report and Intangibles

Posted by: Michael Mandel on November 02

Ford’s 3rd quarter earnings report, released this morning, showed a surprisingly large net income of almost $1 billion. The company reported that it:

…reduced its Automotive structural costs by $1 billion in the quarter, largely driven by lower manufacturing and engineering costs, which included benefits from improved productivity, personnel reduction actions primarily in North America and Europe, and progress on implementing its common global platforms and product development processes.

So this leaves two questions: First, how much of these cost reductions came from cuts in intangible investments such as engineering, research and development?

The answer is: The earnings report doesn’t tell us. R&D and product development are not broken out separately on a quarterly basis, even though Ford has had an enormous budget for these items ($7.3 billion in 2008, according to the 10K).

Second, is engineering, research and development money being shifted to Ford’s overseas operations? Once again, the earnings report is mute on this point. The 10K says

We maintain extensive engineering, research and design centers for these purposes, include large centers in Dearborn, Michigan; Dunton, England; Gothenburg, Sweden; and Aachen and Merkenich, Germany

As Ford makes “progress on implementing its common global platforms and product development processes,” it would be good to know the size of the ER&D spending cuts and where they are hitting.

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Reader Comments

Viking

November 2, 2009 01:46 PM

Mike,you seem "surprised" by Ford's better than expected profit,not "pleasantly surprised",which suggests that you hate the fact that a company can actually make money in this environment.We know that the cuts have been made,hence the increase in unemployment,so I think it is good that those cuts have yielded a profit and who cares where the cuts have been made.Again you seem to emply that if we only we knew where the cuts have been made then our all knowing government should step in and tell the company not to make the cuts in the US??As this and other recent articles emply that we are "losing out" in the global trade arena and therefore must erect trade barriers,one has to be careful,as other nations will surely retaliate and block access to their markets.This would be happening at exactly the time when I believe the US is becoming more competetive,via higher productivity and a lower dollar,so we should have had this discussing 10 years ago,not now!!

Mary Adams

November 2, 2009 02:41 PM

Mike- You are asking an important question. Intangibles get short shrift in financial analysis because they are treated as expenses rather than investments. This means that they are not understood or analyzed as investments in the long-term capacity and competitive advantage of an organization.

Although R&D is often broken out on the income statement (and I know that is what you are calling for here), many other categories of intangibles investment are not detailed such as training, process development, network and customer development--as you pointed out so well in your recent macro view of the problem in The GDP Mirage.http://www.businessweek.com/magazine/content/09_45/b4154034724383.htm

Under the current system, a company can cut investments and it looks like they have cut current operating costs. What they have really done is decrease their future earnings capabilities.

We should ask these questions of every company. Here's my take on an approach http://www.i-capitaladvisors.com/2009/08/14/intangibles-measurement-ii-investment/

CompEng

November 3, 2009 01:59 PM

Viking,
I would interpret Mike's concerns as being in the realm of determining what's actually going on in the economy, not as a means of justifying tariffs or whatever. The government is not the only direct consumer of market information, by the way.

Mike's main thrust appears to be that the high-value add is in innovation, and we should be measuring and encouraging that.

Viking

November 3, 2009 08:42 PM

CompEng,please read the whole article.Mike is clearly concerned about money being shifted to Ford's overseas operations and where cuts are being made in ER&D budgets.This clearly emplies that if these numbers were broken out in their budget,action could be taken to stop it or reversing it.
My concern is that after bleeding millions of jobs over the last decade,we would,by enacting protectionism now,give our trading partners an excuse to retaliate and thereby preventing the US from possibly reclaiming some of those jobs,which I believe we can in the next decade,if trade barriers are not erected.

CompEng

November 4, 2009 08:20 AM

Viking,

"Mike is clearly concerned about money being shifted to Ford's overseas operations and where cuts are being made in ER&D budgets."
True.

"This clearly emplies that if these numbers were broken out in their budget,action could be taken to stop it or reversing it."
Not necessarily. You might have a case if I'd ever heard Mike speak out in favor of those measures, but he's stuck with the traditional measures of tax breaks, public encouragements, etc. that are pretty well accepted globally. He's stayed well away from blunt weapons like tariffs and quotas.

Your concern about the possible reactions of others might be justified if they weren't already already doing those things. Many of our trade partners are not really interested in balanced trade flows, fairness, or the concept of "following the rules" (which they consider a sucker's game). They just want jobs. Listen to anyone from India, China, Vietnam, Korea, Africa, etc. talk about how great free trade for developed countries but how their country is in a special situation. And then they point out the US's hypocritical stance towards agriculture. The US executive branch's objective of getting everyone to open up together in a balanced way (taken separately from Congress's more narrow view) seems hopelessly naive.

Viking

November 4, 2009 01:42 PM

CompEng,you make a good point.The biggest distortion in world trade today is China's peg of their currency the yuan to the dollar.So while we might go along with some form of protectionist measures when a country is really poor,until it improves it's living standard somewhat,it is completely unacceptable that we allow a country like China to continue the peg,when it is running a several hundred billion trade surplus with us.If their currency would be allowed to float,it would probably appreciate by 100% very quickly,thus removing much of their cost advantage.However I understand that we can't excert that pressure at this point in time,when we are relying on them to finance a big chunk of our budget deficit,but as our own savings rate increases,we will be able to finance more of the budget deficit ourselves and at some point we can put more pressure on them to float their currency.

CompEng

November 4, 2009 03:45 PM

Viking,

My concern there is that we are unlikely to be able to pressure China into doing anything it doesn't see as in its interest. And if we pressure them, they still might not do it: they are too concerned with the appearance of strength. It's not as if we don't have any leverage with China or Asia in general: we are a huge export market for them. But that is not a lever we are wiling to use.
So all we can do is decide, of the things we can control, what we are willing to do. Which right now is essentially making loud noises at the WTO and getting our finances in order. I don't think we can change anything at the WTO yet, but we should start to build a coherent story. (Our current story seems to be that free trade is great for everybody everywhere in all cases, but we need agricultural subsidies and incoherent tech restrictions on trade).

Vking

November 4, 2009 03:49 PM

My final point is that this is what Mike should be writing about,not whether a company is or is not detailing it's budget enough.

CompEng

November 4, 2009 04:09 PM

Viking,
hard to argue with that except to say that tackling those subjects directly simply invokes the zealots and relegates you to Lou Dobbs status. Nibbling at the edges of data is considered more respectable and is more tolerated by establishments that take themselves seriously. That's even without going all Noam Chomsky on the subject ;)

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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