Ford Plans its ‘Way Forward’

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<h3>Jay Abrams</h3>

Jay Abrams

Ford Motor Company this week announced improved fourth quarter 2005 results and presented its long awaited turnaround plan that it calls “Way Forward.”

Financial results for full-year 2005 showed a profit of $1.98 billion, half of which represents a gain on the sale of its Hertz rental car unit. Ford’s positive earnings mostly resulted from the $2.5 billion in earnings from Ford Motor Credit that offset North American pre-tax automotive losses of $1.6 billion. In the fourth quarter, net income was $124 million, up $20 million for the same period in 2004.

Interest to bondholders

Ford’s results are of interest to municipal bond holders because Ford has outstanding tax-exempt debt, which was issued through the Ohio Environmental Facilities Authority and the Michigan State Strategic Fund.

Ford finished 2005 with $25 billion in cash and is embarking on a major cost-cutting initiative to bring profitability back to their North American automotive business. Over the next few years, 14 plants will be idled and up to 30,000 jobs will be eliminated, half by attrition. Ford currently operates its plants at 75% of capacity and will seek to reduce production by 1.2 million cars and trucks to bring the company’s production more in line with its actual market share. Additionally, holders of Ford Motor Credit debt were assured that over the next several years, FMC has more investments maturing each year than debt payments. Essentially, FMC debt will be self-liquidating over the four-year period that Ford believes it needs to “fix” the company.

Long-term approach

In addition to cost cutting, Ford plans to rely on a longer-term approach to its business and a greater focus on meeting customer needs, with an emphasis on innovation. Ford indicated it would no longer give quarterly earnings guidance, preferring instead to keep Wall Street’s focus on the long-term execution of its recovery plan.

Ford also indicated it would strengthen its three main brands – Ford, Mercury, and Lincoln – giving each a distinctiveness and identity that will be clear to car buyers. Rather than producing vehicles based on available capacity, the company is seeking to better identify and satisfy consumer preferences.

Ford is also seeking to change its culture from bureaucratic to one based on innovation. Technologies and platforms will be shared among brands to better leverage investment, while keeping Ford products on the “cutting edge” of consumer taste. For example, Volvo safety engineers will collaborate with other Ford brands to develop the next generation of safety equipment and airbags that can be deployed by all brands. Ford has also pledged to make hybrid versions of at least half their models by 2010.

Ford’s plans are ambitious but similar to those unveiled earlier this month by GM. Analysts’ reaction to Ford’s new mid-size line (Ford Fusion, Mercury Milan, Lincoln Zephyr) instills optimism that the Blue Oval can still build cars with strong eye appeal at a reasonable price.

Ford, like its American counterparts, is going through a major transformation. Consumers are taking a new look at passenger cars and truck-based SUVs and asking for something in-between. The Crossover Utility (SUV built on a car chassis) is fast becoming a popular vehicle. Small and medium cars are showing signs of making a comeback. Last year, Ford sold more cars than the previous year for the first time since the mid-1980s.

Success of this plan is not assured. Ford’s North American automotive division finished 2005 with a large unsustainable loss. Ford’s previous plan, outlined in 2002, called for profitable automotive results by now – but that didn’t happen. The difference now is that Ford is no longer measuring success by market share. Instead, it is focusing on building quality vehicles that meet consumer preferences.

Jay Abrams

Chief Municipal Credit Analyst

Jay Abrams is the Chief Municipal Credit Analyst of FMSbonds, Inc.
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Jan 27, 2006

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