Editorial: Ford Death Watch 44: A Time to Die

Ford sits on the “Edge” of disaster. Despite the assurances from its CEO and chief cheerleader to the contrary, Alan Mulally knows that the day of reckoning could soon appear at his doorstep. Without an increase in sales volume, and soon, there will be no way to stop the cash burn. We’re not going to malign anything Mr. Mulally has done so far. In fact, he’s done more right than any other head honcho from Detroit in decades. But it’s time to pull out all the stops and break with tradition of never wishing ill on a competitor. It’s time for Chrysler to die.

Mulally needs to publicly state the obvious: Ford’s survival depends on Chrysler elimination. There’s no other way. Chrysler needs to go away immediately, not sustained in some semblance of suspended animation with token grants of government assistance. Now is not the time to be shy about this startling reality. Alan Mulally has to speak up now. He might also want to mention that Chrysler’s death will give GM a chance at salvation. Perhaps he can get to Rick Wagoner to show some of spine in support of this action, as well.

Let’s review.

Ford has managed to stabilize its market share around 15 percent of the U.S. market. The slide towards ignominy has stopped in its tracks. The only problem: the entire market has shrunk to about 10.5m units. This gives Ford maybe a 1.6m unit per year throughput– if the annual sales rate continues. If sales go lower, well, good things won’t happen.

Last year, Ford sold 1.9m units, and 2.4m units in 2007. So in just two years (2007 to 2009), Ford will lose about 800k units in sales, roughly three assembly plants’ worth of production.

In the last quarter of 2008, Ford burned cash at the rate of $2.3b per month from automotive operations globally. Europe, Asia-Pacific and Volvo had negative operating income during the quarter, with future losses likely. We’ll assume that there won’t be positive cash generation in the near term there. But the bulk of the burn comes from North America and again, we know which way that’s going.

Ford claims that the cash burn will slow. That’s probably true. But it will still be a burn. To bolster its cash, Ford will soon borrow $10.1b from its credit line. Its cash on hand at the start of February will be on the order of $23b. Assuming it slows the burn to $1.5b per month, Ford has only seven more months before it goes cash critical at its minimum operating cash of $10b. That’s sometime in August this year.

There’s one cure. Kill Chrysler now, don’t wait.

Chrysler sold almost 1.5m units last year, of which one million were trucks (includes SUVs and Jeeps). Its recent sales pace puts it on target for only one million units for 2009, while living on the taxpayer dole. Of this, roughly 175k will be Ram pick up trucks, 160k minivans and roughly 200k Jeeps of all flavors. The rest are the hodgepodge of cars, small trucks and SUVs no one really wants anyways.

With Chrysler out of production, at least 800k of non-unique but easily substituted Chrysler vehicles (everything but minivans and Jeep Wranglers) could be sold by Ford and GM. That’s pick up trucks, fleet cars and SUVs. Plus, each of the remaining Detroit 2 could pick up some or all of the minivan and Jeep business.

Keeping with this line of logic, let’s assume Ford splits the future Chrysler business with GM. That’s an additional 500k unit of sales, of which approximately 60 percent or so are trucks (including minivans). That’s some decent profit business. And with Chrysler gone, the merry-go-round of rampant discounting for fleet and retail business led by this weak sister also grinds to near halt.

Worst case: the transplants pick-up the lion’s share of the “new” business. There’s no evidence to suggest that Oldsmobile’s death transferred sales to the remaining domestically-owned brands. And there’s another problem…

Kissing Chrysler off today would mean that shuttering Chrysler dealers would offer their entire existing inventory at clearance pricing. That’s something like 400k+ units selling at prices levels never seen before seen (save decades ago). And the ChryCo cast-offs will sell. Imagine new Chrysler 300’s at $10k. Heck, whip out a credit card and drive away.

The fire sale will sop-up “excess” demand, most likely from the D2. So there will be short term pain at Ford and GM stores. But it’s a pill worth swallowing.

Under this scenario, in a few months, Chrysler’s inventory will be gone. Ford will then add sales, especially in trucks and fleet sales. Maybe 500k or so. Pricing will improve. The cash burn will be eliminated, as its existing plants product more without adding capacity. That’s the win.

Alan Mulally needs to abandon his pro-Chrysler bailout stance and tell the world that it’s time to kill the once-proud American brand.