21 July 2006

Ford’s 2Q06 automotive sector results. Although North American results improved compared to 2Q2005, it remains a very large problem.

Ford Motor Company reported a net loss of $123 million for the second quarter of 2006—results worse than expected. This compares with net income $946 million in the second quarter of 2005. Ford’s second-quarter loss from continuing operations, excluding special items, was $48 million, compared with a profit of 936 million in the same period a year ago.

Ford’s second-quarter total sales and revenue was $42 billion, down $2.5 billion from a year ago.

The truck and SUV markets that sustained our profitability for so long are getting smaller and more competitive..the market shift continues to impact our revenue. The speed and magnitude of the market shift is putting added pressures on our costs...and the competitive landscape is continually shifting, as evidenced by the GM-Renault-Nissan discussion.

The external factors [market shift, commodity and fuel costs] I’ve outlined aren’t going to get any easier, so we need to go father and faster [in the restructuring].

—Bill Ford, CEO

On a pre-tax basis, worldwide Automotive sector losses in the second quarter were $808 million. This compares with a pre-tax loss of $245 million during the same period a year ago.

Worldwide automotive sales for the second quarter declined 2.6% to $37.7 billion from $38.7 billion in the same period last year. Worldwide vehicle unit sales in the quarter rose 0.8% to 1,732,000, up from 1,718,000 a year ago.

In the second quarter, Ford’s North America automotive operations reported a pre-tax loss of $797 million, compared with a pre-tax loss of $907 million a year ago. The improvement is more than explained by cost reductions in most areas of the business, partially offset by a mix shift from trucks to passenger cars, higher incentives and adverse foreign currency exchange. Sales were $19.2 billion, down 3.5% from $19.9 billion for the same period a year ago.

Ford is cutting its projected third-quarter production in North America to 670,000 units, down 58,000 units on a year-over-year basis, and 40,000 units less than what was previously announced. This drop mainly reflects reductions in truck production.

During the earnings conference call, Ford said the company will accelerate and revamp the “Way Forward” restructuring plan announced early this year.

If they had a better crystal ball, I’d go out and buy one. We don’t want to get into were we right or were we wrong. The issue is, how do we react? We baked in flexibility, and now we are going to use it.

Comments

Some of their North American "loss" is made up for in the financing side of the business -- give away the razor in order to sell the blades, or give away the cars in order to collect interest on the loans. The sale price of the car may book a loss, but the interest on the auto loan makes up for that. But seemingly not enough anymore. Ford and GM are sick, but I wouldn't count them out just yet. At minimum, they have enough ready cash on hand to keep chugging along for a few more years before the party grinds to a halt. Beyond that, they may be able to bail themselves out through their current restructuring efforts. We'll see.

My guess is that this is what you get with roomfulls of MBAs running the business. Nothing inspriational comes out any more - they are just crunching numbers in order to try to figure out how to squeeze more money out of consumers.

My thinking is that both GM and Ford are really top-heavy. To many highly-paid managers are leading us to the place where they can only make profits on big SUVs.

I see a lot of Monday morning quarterbacking here. Big car companies need to set up their plans years in advance. Ford is being crucified for not anticipating back in 2002 or 2003 that oil would be $75 today. They should have known that Hurricane Katrina would deal a blow to gulf oil production that would last for a full year. They should have anticipated that Israel and Lebanon would get into an undeclared war, that Saudi production would level off, that Nigerian rebels would attack oil infrastructure. Their crystal ball should have been perfect.

Ford managers weren't the only people who failed to anticipate these events. If you look at the commodities market from back then, you could buy 2006 oil for under $30. That was the market consensus for what the price would be in 2006. That was what the smart money was betting about the course of future events.

Ford is not to blame here. Like a lot of other companies, it is a victim of the inherent unpredictability of the future. The future is guaranteed to surprise us - sometimes favorably, sometimes unfavorably. And when surprises happen, there are always winners and losers. In this case, Toyota and Honda were winners and Ford and GM were losers. But because surprises are unpredictable (by definition!), we could just as easily have seen surprises in the other direction, which could have reversed the fortunes of these competitors. In that case we'd be praising Ford management for their farsightedness!

The truth is that people seldom deserve either as much praise or as much blame as their receive when unexpected events strike with good or bad results. The world is unpredictable, and people have to live with it. Sometimes you're lucky and sometimes you're not. Ford has been unlucky, that's all there is to it.

I will stipulate that part of the problem for Ford and GM is that they have pretty much assumed that what has worked in the past will work in the future. GM, certainly, still wants the past to work by trying to prolong American's love affair with big vehicles. Their latest strategy to keep this affair is to pretend that their big vehicles get good gas mileage by making them fuel flexible. They want to hang on to their big vehicle strategy because that's where the profits have been and they can't figure out any other way to make money.

So what are they going to do going forward? Hope that the future causes gas prices to plummet? While that is a strategy and might even work, it's probably not a good idea to bet the whole company on it.

Ford recognized over a year ago that one of the things they needed is predictability. They decided they wanted to start investing heavily in hybrids but they wanted an environment that would help that investment pay off. What this means is that the future needs to become more predictable by instituting gas taxes will keep gas prices at a high and increasingly high but predictable level.

Well, there nothing on the horizon that indicates that Government is going to play ball. If anything, we may end up with lower taxes at least for a time. Ford needs long term stability. The politicians are busily trying to find palliatives for those who are complaining about $3/gallon gas.

I think it is clear to Ford that the future remains a crap shoot, with prices maybe trending up but still enough volatility along the way to sink them if they make the wrong bets. Phase 1 was to cut jobs and save billions of dollars. This isn't good enough and now they realize they don't have the resources to beat Toyota, for example, by investing in a hybrid future.

Ford is running out of the ability to take risks that might pull their fat out of the fire. Now all they are left with is even more restructuring,i.e., more cost cutting.

Yeh, maybe Ford has just been unlucky. And I don't see their luck changing.

They staked everything on SUVs and trucks and did not have compelling small car solutions, at least for the US (they do in Europe, which is either bizarre or shows lack of vision in management.) In a time when anyone in the business could see the writing on the wall wrt oil (namely the consumption/discovery gap getting bigger and bigger every year) this looked like a high risk game of chicken which they lost. Doubly high risk given the time it takes to get a new product out. Honda and especially Toyota also have SUVs and trucks but they have a more balanced lineup. Ford US never believed in the Focus (how many ads did you see for the Focus and how many for the F150?), and they didn't take advantage of hybrid technology they'd been developing since 1994. Even now they're still fixated on the SUV, still fighting the last war.

You are right. “Professional managers”, who are trained to manage virtually anything without knowing particular industry they are working in, is the root of the problem. Look, for example, at air lines industry. But the most damaging is management aggressively trying to achieve better financial results every quarter at any price. Enron and current Yahoo mess are following.

As it is always happened, any success is presented as example of exceptional wisdom of management. Any defeat is because of “market volatility”, “rising oil prices”, “shifted demand”, etc.

Just stop making crappy vehicles and start to make good ones, cars or trucks – no matter, and you will post two-digit sales increase, like Toyota does.

Lucas: It's not the engineers. Not fifteen years ago when I was there, and not today. It's not engineers whose bonuses depend on making quarterly targets. It wasn't the engineers who cancelled the PNGV efforts because Bush pulled the money and the EPA changed standards to effectively prohibit their engines.

It wasn't the engineers who made heavy trucks into the most profitable market segment. It was the US public, voting for cheap gas at the pump, a vehicular arms race on the road, and pols who never talked about a tomorrow which might require us to consume smarter instead of more. The public kept voting out anyone who pushed policies that would have steered us away from this mess.

The nation as a whole is anti-intellectual and trusts feelings over facts. It's hard to argue that we are not getting exactly what we collectively deserve.

Engineer-poet:
You are probably right at all your points.
However, what we are talking about is that such companies as GM and Ford, being able to hire brightest from brightest, should lead the public, not blindly follow it (I am talking about management, not engineers). They miserably failed, and that was quite visible for long time even for outsiders.

Unfortunately, one company can't "lead" if that means another company is going to eat its market share. The UAW would have killed them for that. And two or more companies getting together is an anti-trust violation.

The whole point is moot; even Toyota went for the profitable guzzler segment with trucks like the Tundra and Tacoma. They built them because Americans would buy them; we failed as individuals. We could have voted to cut "light trucks" back to their historical share of perhaps 15% and raise gasoline taxes (the most effective thing we could do!), but we failed as a body politic also.

Well, you are right on this too. The whole ordeal is sad.
My impression is that Big Three way longer then other companies were selling cars with inferior technology: 3 and later 4 speed automatic transmission, 2 valves per cylinder engines, cast iron engine blocks, pushrod valvetrain. They failed timely and broadly introduce variable valve timing, independent rear suspension, 4-way ABS, side impact air bags, etc. Bright spot was Ford SVT initiative, but it was not expanded broadly. And when truck marked began to tank, they discovered that they lost the edge in car’s technology. One of the reasons of their demise.

I think Andrey hit the nail on the head. Most of this discussion had to do with Ford being unable to predict the rise in fuel prices. However, I think the biggest issue was Ford's (and GM's) unwillingness to keep up with the technologies being developed by other car companies. This is not as a result of a lack of engineering capability. It's as a result of a business model that favors cost cutting.

As Andrey pointed out, what was the last significant advancement that Ford (or GM) debuted before either a Japanese or German company had? They have to be dragged kicking and screaming at times, which resulted in them being years behind in terms of implementation.

I remember seeing all of these articles a couple months ago about Ford's "new" family of V6 engines that would make their debut in 2007 models. VVT on the intake valves. Capable of adding direct injection and turbocharging in the future. Wow. My 1999 Lexus RX has continuously variable valve timing. Direct injection and is already being used by their competitors.

Examples are everywhere, whether it's the engine, the transmission, or even convenience features. Maybe there was a time not too long ago that US companies could rely on consumers to just keep replacing their old vehicles with a newer version of the same thing. That time has gone. Maybe Ford/GM should start blaming the internet for making it too easy for consumers to compare vehicles and notice that they got much more for their money from other competitors? Oh, wait, maybe they had no way to predict that!

There are two things I believe Toyota saw 10 years ago but GM and Ford didn't. Toyota saw that world oil field discovery peaked in the 60s and that China and India were increasing oil demand. The facts were there to be seen and Toyota planned and designed vehicles in anticipation of what has happened.

Tom:
You may be right, but Toyota didn't have to recognize that peak oil was comming. They just had to recognize that some markets existed for small, fuel efficient cars -- like Japan and other Asian countries. US auto companies continue to see only the world around Detroit. They didn't learn anything from what has happened in the auto markets since 1973. They are still afraid of losing money on a little Nash Rambler -- Beep Beep.

Good point on Internet, Angelo. It changed market place dramatically. The time when whole sectors of the industry moved up and down together long gone. Ability of consumer to get instantly all information to choose the best product results in dramatic and fast rises of some companies with superior products, and corresponding demise of the companies at the moment does not offering product of comparable quality. And the situation could reverce at same lighting speed. And it is not only cars, it is electronics, software, services – virtually everything (probably aircraft only not). Too bad stock market could not comprehend this new reality.

I think corporate agility may be another useful factor to discuss here. Toyota, and to a lesser extent, Honda, have been able to latch on to the big ass SUV demand in the US and provide arguably a competitive if not superior gas guzzler product (e.g., Tundra, V8 Landcruiser, Ridgeline) in a period of a few years. At the same time Toyota and Honda have continued to improve their economy car offerings. GM and Ford have barely tweaked their bread and butter products over the past 30 years, namely the Suburban/Tahoe and the F150. Status Quo rules the day. Folks need to understand that it is in the mutual interests of high ranking corporate executives to perpetuate the status quo. It make the rich, richer. US automakers, oil/gas concerns, pavement/concrete firms, all have a joint interest in selling gas guzzling vehicles that will traverse any remaining piece of open space that can be paved over. I would concur most with engineer-poet, it is a temporal, myopic, short-sighted mentally of Americans that have landed us in our current situation. If ordinary people stop buying gas guzzlers, and start pressuring their electorate to focus tax spending away from Defense and sprawl projects toward sustainable programs, I'm sure that positive changes in our quality of life will result. Moreover, if consumers stop purchasing wasteful incipid products (e.g., Hummer, Expedition, etc.) and purchase more economical offerings (e.g., Prius, Insight) then automakers will produce the vehicles that the majority of consumers demand.

After 911 there is no such thing as luck in the automotive industries... They should have known to participate in the unknown of mid-east event where the oil prices are set but instead they choose to ignore all warning signs and go with consumer demand and concentrate on gas guzzling vehicles... SUV, PONY/MUSCLE cars resurrection!. Yeah those Excursions are BIG and ROOMY and those Mustangs can blow off your cheesy crap anytime, anywhere so better get out of my way! Now, have you see what’s on the used car lots lately; there full of them waiting for the next suckers. The sad thing is the term “one born every minute” applies. My question is if they’re going to build those vehicles then why not over-priced them for a small market segment and concentrate their effort on the fuel efficient not to mention better reliable cars?

There are technologies, which can reduce the cost of fuel, production of GHG to near zero( compared with fossil fuels).
There are technologies that can reduce the cost of bio fuels to about 50% at distillation and about another 50% in producing the feed stock.
But who is interested, they will make the existing Board Rooms redundant ( may be)