Ford Refocuses
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Ford Refocuses
Ford Motor’s $8.7 billion net loss--the largest quarterly loss in its history--certainly wasn’t part of Chief Executive Alan Mulally's plan.
Two years ago, Mulally mapped out a course for the company to return to profitability by 2009. The landscape changed dramatically when gas prices hit $4 a gallon, sending its most profitable truck and SUV sales off a cliff.
But Ford (nyse: F - news - people ) will be OK. The next couple of years will be scary, but by 2010, Ford won’t even resemble the company it is today. It’ll have a completely different lineup of small cars and crossover vehicles with an array of new fuel-efficient engines. It will still sell big pickups and SUVs, just fewer of them. And while Mulally won’t make any promises, if the economy cooperates, Ford could finally be profitable again by 2010.
Other automakers, including General Motors (nyse: GM - news - people ) and Toyota (nyse: TM - news - people ), were also caught flat-footed by the sudden shift away from pickups and SUVs. But Ford is better positioned to make the transition to small cars because Mulally has been working to simplify Ford’s global vehicle lineup since he joined the company from Boeing in 2006.
Mulally’s insistence on “one Ford” around the world dovetails nicely with the rather urgent need for more fuel-efficient cars in North America. On Thursday, he announced that Ford would bring six small cars from its well-regarded European lineup to North America by the end of 2012. Some of the models arriving here starting next year: the small Transit Connect delivery van, a redesigned Focus compact, the subcompact Fiesta and another small car, possibly the tiny Ka. Analysts also expect Ford to bring a version of its new five-passenger Kuga crossover from Europe to the United States.
In North America, Ford will also accelerate the introduction of a fuel-efficient EcoBoost and new four-cylinder engines, increase hybrid production and convert three truck factories for small car production, beginning this December. By the end of 2010, nearly all of Ford’s North American engines will be upgraded or replaced, and most of its vehicles will also offer fuel-saving, six-speed automatic transmissions.
Ford, like other automakers, has tried to bring European models to the U.S. in the past with little success. “What’s really different today,” Mulally says, “is that fuel prices are up, so consumers are really going to value fuel-efficient vehicles.” They'll be willing to pay more for small, capable cars loaded with premium features, he says. “We’ve seen the success of this in Europe and around the world. It’s going to be led by consumers.”
Small cars have not been profitable for U.S. carmakers in the past (which is one reason they clung to SUV production longer than they should have). But Mulally says that’s not true any more. As Ford consolidates the number of global platforms on which its cars are built, development costs go down and volume increases.
The resulting economies of scale, combined with premium prices and labor cost reductions from recent union contracts, will make for a much different business model. “We can make a very reasonable return on all our vehicles,” Mulally says.
Many industry analysts say Ford is now pointed in the right direction. “I’m pretty confident they’re going to pull it off,” said Global Insight’s John Wolkonowicz. “But this is not going to be a cakewalk. They have a huge, nasty puddle to jump over called 2008 and 2009. The economy is not going to start improving measurably until 2010.”
Indeed, Ford warned investors Thursday that the company’s operating results for 2008 would be worse than 2007, when it had a pre-tax loss of $3.7 billion (a net loss of $2.7 billion), and that it would burn more cash than expected.
In the second quarter, Ford recorded a pre-tax loss of $1 billion, as strong results in Europe and South America failed to offset a $1.3 billion loss in Ford’s home market. The loss included a $294 million operating loss at Ford Credit, once a generator of billions in profit for its parent, which was hit by huge losses on leased vehicles.
The automaker recorded $8 billion in special charges during the quarter, partly to pay for job cuts and other restructuring actions. But $7.4 billion of the charges were to write down the value of certain truck factories that will need to be retooled and to write down the value of used trucks and SUVs coming off lease that are no longer wanted.
The good news was that Ford achieved $1 billion in cost savings during the period, and the company remains on track to hit its $5 billion cost-reduction goal by the end of 2008.
Chief Financial Officer Don LeClair said the company had “stress-tested” its financing plan in 2006 when it obtained $23 billion in loans, so despite today’s tougher market conditions, Ford’s liquidity is sufficient. The company had $26.6 billion in cash at mid-year, with another $11.6 billion in available credit lines to weather the storm.
It’ll be a white-knuckle ride.
Two years ago, Mulally mapped out a course for the company to return to profitability by 2009. The landscape changed dramatically when gas prices hit $4 a gallon, sending its most profitable truck and SUV sales off a cliff.
But Ford (nyse: F - news - people ) will be OK. The next couple of years will be scary, but by 2010, Ford won’t even resemble the company it is today. It’ll have a completely different lineup of small cars and crossover vehicles with an array of new fuel-efficient engines. It will still sell big pickups and SUVs, just fewer of them. And while Mulally won’t make any promises, if the economy cooperates, Ford could finally be profitable again by 2010.
Other automakers, including General Motors (nyse: GM - news - people ) and Toyota (nyse: TM - news - people ), were also caught flat-footed by the sudden shift away from pickups and SUVs. But Ford is better positioned to make the transition to small cars because Mulally has been working to simplify Ford’s global vehicle lineup since he joined the company from Boeing in 2006.
Mulally’s insistence on “one Ford” around the world dovetails nicely with the rather urgent need for more fuel-efficient cars in North America. On Thursday, he announced that Ford would bring six small cars from its well-regarded European lineup to North America by the end of 2012. Some of the models arriving here starting next year: the small Transit Connect delivery van, a redesigned Focus compact, the subcompact Fiesta and another small car, possibly the tiny Ka. Analysts also expect Ford to bring a version of its new five-passenger Kuga crossover from Europe to the United States.
In North America, Ford will also accelerate the introduction of a fuel-efficient EcoBoost and new four-cylinder engines, increase hybrid production and convert three truck factories for small car production, beginning this December. By the end of 2010, nearly all of Ford’s North American engines will be upgraded or replaced, and most of its vehicles will also offer fuel-saving, six-speed automatic transmissions.
Ford, like other automakers, has tried to bring European models to the U.S. in the past with little success. “What’s really different today,” Mulally says, “is that fuel prices are up, so consumers are really going to value fuel-efficient vehicles.” They'll be willing to pay more for small, capable cars loaded with premium features, he says. “We’ve seen the success of this in Europe and around the world. It’s going to be led by consumers.”
Small cars have not been profitable for U.S. carmakers in the past (which is one reason they clung to SUV production longer than they should have). But Mulally says that’s not true any more. As Ford consolidates the number of global platforms on which its cars are built, development costs go down and volume increases.
The resulting economies of scale, combined with premium prices and labor cost reductions from recent union contracts, will make for a much different business model. “We can make a very reasonable return on all our vehicles,” Mulally says.
Many industry analysts say Ford is now pointed in the right direction. “I’m pretty confident they’re going to pull it off,” said Global Insight’s John Wolkonowicz. “But this is not going to be a cakewalk. They have a huge, nasty puddle to jump over called 2008 and 2009. The economy is not going to start improving measurably until 2010.”
Indeed, Ford warned investors Thursday that the company’s operating results for 2008 would be worse than 2007, when it had a pre-tax loss of $3.7 billion (a net loss of $2.7 billion), and that it would burn more cash than expected.
In the second quarter, Ford recorded a pre-tax loss of $1 billion, as strong results in Europe and South America failed to offset a $1.3 billion loss in Ford’s home market. The loss included a $294 million operating loss at Ford Credit, once a generator of billions in profit for its parent, which was hit by huge losses on leased vehicles.
The automaker recorded $8 billion in special charges during the quarter, partly to pay for job cuts and other restructuring actions. But $7.4 billion of the charges were to write down the value of certain truck factories that will need to be retooled and to write down the value of used trucks and SUVs coming off lease that are no longer wanted.
The good news was that Ford achieved $1 billion in cost savings during the period, and the company remains on track to hit its $5 billion cost-reduction goal by the end of 2008.
Chief Financial Officer Don LeClair said the company had “stress-tested” its financing plan in 2006 when it obtained $23 billion in loans, so despite today’s tougher market conditions, Ford’s liquidity is sufficient. The company had $26.6 billion in cash at mid-year, with another $11.6 billion in available credit lines to weather the storm.
It’ll be a white-knuckle ride.
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