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Is Ford Rolling Backward With 'Way Forward'?
posted by admin on 22/06/06

Restructuring plan has proved to be more painful than anticipated.

The first four months of Ford Motor Co. Chairman and Chief Executive Officer Bill Ford Jr.'s big "Way Forward" restructuring plan have proved to be more painful than anticipated. Now, things could get even harder.

Mr. Ford, who still has to fend off questions about his commitment to being CEO of his family-controlled company, has acknowledged he faces a tricky challenge. He must overhaul the auto maker from one that makes most of its automotive profits on a few vehicles -- primarily big pickup trucks and sport-utility vehicles -- into a nimble company that can make money on a lot of different vehicles, including cars that compete head-on with Japanese stalwarts like the Honda Civic or Toyota Camry.

"We recognize we've been too dependent upon a very few vehicles, and that we couldn't count on hitting home runs in the future, even though we'd love to do it," said Mr. Ford on an earnings conference call last week. "Therefore, our business structure had to be such that all of our vehicles had profit potential and that we were going to try and hit a lot of singles and doubles."

Now, after another month of disappointing U.S. sales, there are increasing worries on Wall Street that Ford isn't making the transition fast enough, and could lose money for the year for the first time since 2001.

Ford's first-quarter earnings from continuing operations, in part excluding a $2.5 billion charge related to an overhaul of Ford's unprofitable North American operations, were $458 million, or 24 cents a share, down from $1.26 billion, or 62 cents a share, a year earlier. North America lost $457 million.

U.S. sales are down 3.9% for the year through April 30, reflecting a 9% drop in sales of Ford's pickups and SUVs, once mainstays for profit. With consumers shifting back to more fuel-efficient passenger cars, and away from big and medium-sized SUVs, Ford faces a struggle to stabilize its market share, a key element of Mr. Ford's "Way Forward" plan.

Ford quit giving quarterly guidance for investors in 2005, and ended full-year guidance earlier this year. The company, however, does expect losses in North America and auto operations and lower profits in its financial services operation. Ford spokeswoman Becky Sanch declined to discuss the company's profitability this year.

But with rising gas prices and strong competition threatening Ford's SUVs and its best selling F-series pickup, some analysts are saying it is increasingly likely that Ford will lose money in 2006, after making money in 2005. Both GM and Toyota will unveil redesigned big pick-up trucks later this year.

The consensus among analysts now is that Ford will make about 50 cents per share this year. But "there is more downside to that figure than upside. It's certainly possible they lose money when you see the steep decline they've had this year in their SUVs and even some of their cars," says Goldman Sachs auto analyst Robert Barry.

Mr. Barry says "the auto maker is going through a very painful transformation because they've underinvested in cars for years and it's hard to make up that ground."

"Their numbers in 2006, but especially in 2007, have significant risk. We predict a loss of $2.5 billion in North America in 2006 but that could worsen because the Expedition and Navigator are in a free fall," said Himanshu Patel, auto analyst with J.P. Morgan, who recently lowered his estimate of Ford 2006 earnings from 50 cents per share to 40 cents, or about $1.1 billion. Mr. Patel says that in 1998 and 2003 when General Motors Corp. and then Ford redesigned their big pickup trucks, each time the rival lost two to seven points of share.

And for all the bankruptcy talk regarding GM, a chart compiled by J.P. Morgan on April 24 shows that the credit market rates a default at Ford as more likely in two, three or five years than one at GM. The market implied probability of a default at GM in three years is 34%; at Ford it's 43%.

Inside Ford, another big worry is that SUV sales -- both at Ford and industrywide -- are collapsing faster than the company anticipated. Sales of the Ford Explorer, once the best selling SUV in the U.S., are down 30% this year. The big Ford Expedition is down 24%. The luxury Lincoln Navigator has fallen an additional 20% from last year's weak levels. Even the Ford Mustang, which has been a bright spot, has posted an 8.5% sales decline this year.

Ford needs strong performances from those SUVs and the F-series pickup trucks to compensate for the bulk of other Ford products that lag behind the competition. Not only does Ford sell fewer cars than Toyota Motor Corp. in the U.S., but those it does sell often sell for less than key rivals.

For example, the Ford Focus small car sells on average for $13,990, or about $3,060 less than the average compact car, according to data compiled by J.D. Power & Associates. Ford's minivan, the Freestar, sells on average for about $22,090, or also about $3,000 less than the average minivan. The popular Honda Odyssey, by comparison, sells for an average price of $30,050.

Even Ford's new midsize entry, the Ford Fusion, sells for about $3,100 less than the average vehicle in that segment. The Fusion's average transaction price is $20,150, compared with $22,935 for the Honda Accord or $22,200 for the Chevrolet Impala.

In April, 35% of Ford's U.S. sales were to fleet customers -- generally lower-profit deals than retail sales to car and truck consumers. So far this year, Ford fleet sales each month have been between 30% and 40% of its total.

Putting further pressure on Ford this year is the fact that Ford Credit earnings are also falling fast, due to a smaller asset base, more-expensive borrowing costs and other troubles with the automotive operations. Many analysts project Ford Credit earnings to decline about 30%, or about $1 billion. "The auto business is hurting the credit business because they are so linked. The interest is obviously larger on a $45,000 big SUV that a $25,000 car," said Shelly Lombard, senior bond analyst for Gimme Credit.

Mr. Ford, who ascended to the top of Ford as a nonexecutive chairman in 1999, took the CEO reins in late 2001 after Jacques Nasser was at the helm during a financial collapse at the auto maker. Mr. Ford has acknowledged meeting with rival automotive executives such as Renault-Nissan CEO Carlos Ghosn and DaimlerChrysler CEO Dieter Zetsche. Ford insiders say he tried and failed to recruit them to Ford. Various Ford employees say Mr. Ford is also less visible around the auto maker. He used to dine quite often at the employee cafeteria -- he's no longer there as often.

In the first-quarter conference call, Mr. Ford emphasized it is still early in the turnaround process. It is the second turnaround he has launched in four years at the company started by his great-grandfather Henry Ford.

"Three months in, we're in the very early stage of this strategy to transform the way we do business down to its very core," said Mr. Ford. "As we said in January, the transformation isn't going to be quick and it isn't going to be painless."

Write to Jeffrey McCracken at

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