June 25, 2008 – 9:10 am | by admin
Henry Ford II was famous for saying “Big cars, big profits. Small cars, small profits.”
Now a better mantra for the country’s second-largest carmaker might be “Big cars, no profits.”
Faced with crashing sales of big sport utility vehicles and pickups and an increasingly dim financial outlook as a result, Ford Motor Co. said Friday that it hoped to eke out small profit margins by ramping up production of small cars, cutting production of large trucks and SUVs and delaying release of its redesigned F-Series pickups by two months. But many of the fuel-efficient sedans and hatchbacks aren’t expected to hit dealer lots for at least 18 months.
“We view the move to smaller, more fuel-efficient vehicles as permanent, and we are responding to customer demand,” said Ford Chief Executive Alan Mulally, blaming gasoline prices, which have climbed above $4 a gallon, in part for the shift.
Because of sagging sales, Ford said it did not expect to reach profitability in 2009 and that even its long-profitable lending division would lose money this year, largely because of declining resale values for SUVs and pickups.
Ford has not shown a profit since 2005, when it earned $2 billion. Over the last two years, it lost a combined $15.3 billion.
The Dearborn, Mich., automaker said it would cut overall production significantly for the remainder of the year, as much as 25% in the third quarter. At the same time, Ford plans to increase production of its sole compact car, the Focus, as well as of the Ford Escape and Mercury Mariner small SUVs.
Ford also confirmed plans to begin U.S. sales of its well-regarded European Ford Focus — a more refined, higher-end car than its North American counterpart. Ford previously had announced plans to produce the new Fiesta, a European-styled economy car, in North America as well. Neither will be released until 2010.
“The revamp of Ford’s product line can’t come fast enough,” said Aaron Bragman, industry analyst at forecasting firm Global Insight. “Ford needs these cars right now.”
It’s difficult to overstate how large a change such a downshift is for Ford.
For nearly two decades, the SUV and full-size pickup have been emblematic of the fortunes of American carmaking. And arguably no company benefited more from them than Ford, which pioneered with the medium-size SUV Explorer, the full-size Expedition and super-size Excursion (no longer in production).
Those kinds of vehicles are extremely profitable, analysts say, because their production costs are only marginally higher than those of even the smallest car, but their retail prices can be many times more.
“You’ve got to pay a little bit more for materials in an Expedition than a Focus, but labor costs and plant costs don’t change,” said Erich Merkle, an analyst at IRN Inc. in Grand Rapids, Mich. The price difference, however, is huge: A loaded Focus costs $22,515, but an Expedition with all the bells and whistles comes in at $55,020.
Moreover, while the SUV and truck market is relatively uncrowded, the sedan market is fiercely competitive, with dozens of models and very tight pricing.
That segment, long dominated by Toyota Motor Corp. and Honda Motor Co., is characterized by per-vehicle profit of as little as $100, compared with as much as $10,000 on an F-150 Supercab, Merkle said. For that reason, he and other analysts say, Detroit has preferred trucks.
Now, however, with gas prices in the ionosphere and credit increasingly tight, the big vehicles appear to be in their death throes.
Resale values for pickups and SUVs fell at least 21% in May compared with a year earlier, according to Manheim Consulting, and new sales in that category are down 16% year to date.
Focus has been a winner for Ford so far this year. Its sales were up 36% through May, and it was the company’s second-best selling vehicle, after the F-Series pickup trucks.
Overall, Ford has seen U.S. sales decline 11% on the year, better than General Motors Corp. (down 15.8%) or Chrysler (down 19.3%). Honda, which has no full-size anything to speak of, has increased sales by nearly 5% in what is shaping up to be the worst year for vehicle sales in decades.
Ford did post a surprise $100-million profit in the first quarter, but just weeks later said it would miss long-promised goals of a profitable 2009.
Friday’s news drove Ford stock down 8%, or 51 cents, to $5.81. A Lehman Bros. analyst said Ford Motor Credit may need to write down $1.1 billion in outstanding loans, and debt rating agency Moody’s downgraded its outlook for Ford to “negative” from “stable,” citing “the increasingly challenging environment faced by it and the other domestic auto manufacturers.”
Meanwhile, activist investor Kirk Kerkorian has been buying up Ford stock, increasing his stake to 6.5% this week and meeting in Los Angeles with Mulally and Executive Chairman Bill Ford Jr.
Known for his attempts to wrest control of GM and Chrysler in the past, Kerkorian’s interest has sparked speculation about a shake-up.
That worries some Ford-watchers, who fear that too much meddling could derail the turnaround plan that Mulally has been executing since he came on in late 2006.
Since then, Mulally has significantly cut costs, signed a new labor agreement with the United Auto Workers union and hired several promising young executives.
“What’s going on isn’t Ford’s fault and it isn’t Mulally’s fault,” analyst Bragman said. “Everybody expected trucks and SUVs to turn around by now. Nobody expected $4 gas.”
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