Ford Death Watch 4: Death by a Thousand Cuts

by Neunelf

Last Friday, Ford announced its largest production cuts in over two decades. The bold (not to say unavoidable) move comes in the face of evaporating truck sales; even large discounts on the formerly formidable F150 and Explorer can't move the metal faster than it's being built. With a debt rating that’s sleeping with the fishes, with the company’s “Way Forward” recovery plan in triage, with another disastrous quarter only days away, Ford is looking increasingly, irredeemably desperate.

The cutbacks are large in both scope and scale. Ford’s rolling production blackouts will hit ten assembly plants in total. The Blue Oval Boys will reduce output by some 21% for this year’s final financial quarter, shrinking total vehicle production to just over three million vehicles for the year (roughly nine percent behind ‘05 totals). Ford truck plants will fare the worst, losing 404k units from previous annual output targets.

That's not good. Last year, Ford’s F-Series pickup trucks accounted for nearly a third of the company’s 3.2m US sales total (or more than seven times Volvo's American sales). For the first time in three years, the F-Series will not reach its sales target— not even the revised 900k mark recently put forth by embattled CEO Mark Fields. With over 270k units depreciating on dealer lots, America’s best selling truck will bear the brunt of at least half of the cuts.

No matter how you look at it, coming-up short is gonna hurt. Ford’s Michigan Truck factory was once one of the world’s most profitable production facilities; through the late 90’s, it generated some $10b in annual revenue. While Ford doesn’t divulge production costs or profit margins for its individual vehicles, analysts indicate that each F-series pickup delivered $13k in profit. The evaporating truck market has put Ford’s cash cow on the barbie, and there aren’t any newborns ready to lactate greenbacks on their behalf.

Falling revenues are only half the problem. J.P. Morgan analyst Himanshu Patel figures Ford’s decision to downsize production will cost the company $1.4b this year, and around $2.7b in 2007. The main reason: Ford’s current contract with the United Auto Workers (UAW). Idled union workers will receive a Supplemental Unemployment Benefits (SUB) package. After an initial period of partial government support, Ford will have to pay them 95% of their normal take home pay for a 40-hour work week, for not working. Union members with at least ten years’ service will still receive full employer-paid health insurance.

Looking ahead, the UAW contract also stipulates that no union worker can be laid off for more than 48 weeks due to a decline in sales or production. While it’s doubtful that production would halt for that long, the 48 weeks is cumulative for the entire four year agreement. Short term, expanding their blue collar buyout program is the only way for Ford to staunch their “death by a thousand cuts” labor cost wounds.

Unconfirmed reports indicate that Ford will put buyout offers on the table to all their hourly workers in the next week. UAW V.P. Bob King has already stated that he could convince his brothers to stay home– for the right price. But none of this will solve Ford’s cash crunch. Only an immediate series of blockbuster new products and a new, more favorable union contract can do that— neither of which is likely.

Again, there's no immediate relief on the product front. Sales of fuel-sipping B-segment cars are up 43 percent and growing. In most urban markets, Honda, Nissan and Toyota dealers can’t keep up with demand for their Fit, Versa and Yaris, which are selling at full retail or, wait for it, better. Despite finally admitting the seriousness of this market, Ford has yet to announce a B-segment buster.

Meanwhile, Ford’s desperation is there for all to see. Yesterday’s announcement that FoMoCo would follow GM’s lead and offer up to 72 months of zero percent financing to anyone with a pulse is a clear-cut indication that Ford is willing to do anything to stay in business— including cheapening the brand and mortgaging their future. Ford isn’t even trying hard to hide the fact that they’ve thrown open their doors to sub-prime borrowers. "If you were on the margin for being approved for a loan,” Ford flackmeister Jim Cain said. “You are more likely to get a loan today than you were a week ago."

The question is, is Ford more likely to avoid Chapter 11 than it was a week ago? Ford's market share is still declining rapidly– from last year's 25.7% to this year's 18.1%. The company would like you to believe that the production cuts reflect a new, new realism and demonstrate management’s courage to make difficult decisions. Which may be true. But the old maxim “You can’t cut your way to prosperity” is just as true for Ford as it is for GM and DCX. Ford is still poised for breakup, merger or bankruptcy.


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  • Voiceprint1 Voiceprint1 on Aug 28, 2006

    Ford just fell way behind, and doesn't seem to be able to bridge the gap in the 00's. The fit and finish of ford cars is kinda rough around the edges. Yeah I have driven them and owned them, but compaired to german cars they just don't do it. I am not a fan of GM either but I have to say the cars just run and run, without major incidents, but there are no frills cars. If ford was smart they would just come out with that concept car they had in the auto shows a while back the Model U , give you a free ipod, make it a nice hybrid and underprice honda.

  • John John on Sep 05, 2006

    Just wanted to resurrect this thread as a venue to discuss Bill Ford's resignation as CEO this afternoon. Should I be buying Ford stock? It might be a plus that Mr. Ford is stepping aside. What are the odds that an heir to Henry Ford is also the most qualified person to run such a company? Although he's been "working" at Ford since he was 22 years old, is that good or bad? What about broader exposure? Then there's his replacement, Mr. Mulally. He's also worked at the same place, Boeing, since he was a young man in 1969. Is Boeing, who splits the aircraft business with only one major rival, or does work for the government, a good training ground for an intensely competitive industry? Maybe this "One life, one job." concept is the key to success. After all, GM's Rick Wagoner started at GM right out of grad school.

  • Varezhka I have still yet to see a Malibu on the road that didn't have a rental sticker. So yeah, GM probably lost money on every one they sold but kept it to boost their CAFE numbers.I'm personally happy that I no longer have to dread being "upgraded" to a Maxima or a Malibu anymore. And thankfully Altima is also on its way out.
  • Tassos Under incompetent, affirmative action hire Mary Barra, GM has been shooting itself in the foot on a daily basis.Whether the Malibu cancellation has been one of these shootings is NOT obvious at all.GM should be run as a PROFITABLE BUSINESS and NOT as an outfit that satisfies everybody and his mother in law's pet preferences.IF the Malibu was UNPROFITABLE, it SHOULD be canceled.More generally, if its SEGMENT is Unprofitable, and HALF the makers cancel their midsize sedans, not only will it lead to the SURVIVAL OF THE FITTEST ones, but the survivors will obviously be more profitable if the LOSERS were kept being produced and the SMALL PIE of midsize sedans would yield slim pickings for every participant.SO NO, I APPROVE of the demise of the unprofitable Malibu, and hope Nissan does the same to the Altima, Hyundai with the SOnata, Mazda with the Mazda 6, and as many others as it takes to make the REMAINING players, like the Excellent, sporty Accord and the Bulletproof Reliable, cheap to maintain CAMRY, more profitable and affordable.
  • GregLocock Car companies can only really sell cars that people who are new car buyers will pay a profitable price for. As it turns out fewer and fewer new car buyers want sedans. Large sedans can be nice to drive, certainly, but the number of new car buyers (the only ones that matter in this discussion) are prepared to sacrifice steering and handling for more obvious things like passenger and cargo space, or even some attempt at off roading. We know US new car buyers don't really care about handling because they fell for FWD in large cars.
  • Slavuta Why is everybody sweating? Like sedans? - go buy one. Better - 2. Let CRV/RAV rust on the dealer lot. I have 3 sedans on the driveway. My neighbor - 2. Neighbors on each of our other side - 8 SUVs.
  • Theflyersfan With sedans, especially, I wonder how many of those sales are to rental fleets. With the exception of the Civic and Accord, there are still rows of sedans mixed in with the RAV4s at every airport rental lot. I doubt the breakdown in sales is publicly published, so who knows... GM isn't out of the sedan business - Cadillac exists and I can't believe I'm typing this but they are actually decent - and I think they are making a huge mistake, especially if there's an extended oil price hike (cough...Iran...cough) and people want smaller and hybrids. But if one is only tied to the quarterly shareholder reports and not trends and the big picture, bad decisions like this get made.