Ford Cuts Trucks
Thursday, May 29th, 2008The unthinkable has happened—and probably not a moment too soon. Ford Motor is cutting its production of its one-time cash cows, pickups and SUVs, to instead increase production of smaller and more fuel-efficient cars. In doing so, the automaker is forced to abandon its goal of turning a profit next year after several years of annual losses, but it might be able to better position itself long-term for a world of high oil and commodity prices.
The announcement sent Ford’s share price down 57¢ to 7.23, or 7.3%, in midday trading May 22.
“What we are seeing [consumers leaving trucks and SUVs] is a structural change in the marketplace, not a cyclical one,” said Ford Chief Executive Officer Alan Mulally in a morning conference call. “Unless there is a fairly rapid turnaround in U.S. business conditions, which we are not anticipating, it now looks like it will take longer than expected to achieve our North American automotive profitability goal,” said Mulally, who predicted Ford would report a full-year loss this year and do no better than break even in 2009.
Ford is re-evaluating some aspects of the restructuring plan Mulally has been leading since he took over the struggling automaker in September, 2006. Specifically, Mulally told Wall Street analysts and media May 22 that the company is in the midst of negotiating commodity contracts for materials such as steel. In July, said the CEO, he will announce whether Ford will forecast full-year profitability by 2010, or delay guidance. “We will know much more by July,” he said.
Standard & Poor’s on Thursday changed its outlook on Ford to negative, from stable, citing heightened concerns over the North American auto industry, while Moody’s Investors Service affirmed its rating on the automaker.
Limiting the Damage
To cope with falling consumer sales, Ford is increasing production of its passenger cars to meet demand, targeting specific assembly plants (especially those making SUVs, for employee buyouts to further cut payroll) and reducing its white-collar workforce for cuts through buyout and attrition. Mulally said the company may announce additional plant closures in July.
Ford is also burning more cash than it expected. It expects cash burn between 2007 and 2009 to cope with losses and the costs of buying out employees to run from $12 million to $14 million. Ford recently sold its Jaguar and Land Rover brands to Indian carmaker Tata Motors to rid loss-making businesses and raise cash to see it through the crisis. Ford has $29 billion in cash on hand and $41 billion in total liquidity including credit lines.
“If lower-than-expected U.S. light-vehicle sales persist through 2009 or higher fuel prices cause an even more dramatic shift away from light trucks, Ford’s liquidity could reach undesirable levels by late 2009,” S&P said, in lowering the automaker’s outlook. This could occur even if Ford continues to make progress on its turnaround program in North America, S&P added.
Ford Motor Credit, said Ford’s Leclair, is seeing higher loan defaults, but will earn a profit in 2008. One of the issues creating losses for Ford is the number of trucks and big SUVs coming off lease back to Ford. The value of such vehicles at auction has been falling, forcing Ford to absorb the difference between what it projected resale value to be when it wrote the lease and what the market is actually delivering.
Ford has a few bright spots. Sales of the Edge crossover are up 38% as former Explorer and Expedition owners gravitate toward the less thirsty utility vehicle. Also, the redesigned Ford Focus is a surprise hit. The new design was derided by car reviewers before it went on sale last year. But with fuel economy above 30 mpg, sales were up 29% through April, compared with the same four-month period last year. Ford has a smaller, even more fuel-efficient vehicle, the Fiesta, arriving in the U.S. by 2010. Mulally said the company can’t get it to dealerships any faster. But the company is looking at other designs to build off the same vehicle engineering platform. It is also developing a smaller, lighter, more fuel-efficient version of the F-Series pickup that could go on sale by 2011.
Tags: Ford Trucks