Ford's the Strongest of the U.S. Automakers: So What?

Here is a quick run down of Ford's (F) results for 2008:

(From the NY Times): "DETROIT — After closing the books on a $14.6 billion loss in 2008 — the worst annual result in its 105-year history — Ford Motor Company said Thursday that it would draw the last $10.1 billion from its lines of credit to add to its cash hoard so that it could survive the increasingly bleak vehicle market.

Ford ’s chief executive, Alan R. Mulally , said the company, which tapped credit markets to build its cash reserves well before the economy soured, remained determined to finance its operations without the federal aid that was extended to its crosstown rivals, General Motors and Chrysler .

“I think there’s more awareness than ever that Ford is on a very different path,” Mr. Mulally said in an interview.

He added that it had become a marketing advantage for Ford with consumers shopping for an American car. “Our dealers have told us that people know that Ford is in a better place,” Mr. Mulally said.

Ford joined G.M. and Chrysler in December in asking Washington for a combined $34 billion in loans, but has since backed away from seeking its portion of the request. G.M. and Chrysler, however, needed $17.4 billion in emergency loans from the Treasury Department to avoid filing for bankruptcy...

...Ford’s miserable sales in 2008 worsened sharply in the fourth quarter, with nearly $6 billion of the total $14.6 billion loss coming in the fourth quarter. It was a year in which Ford’s revenue declined almost 20 percent, and its cash reserves declined by $21 billion.

The automaker ended 2008 with $13.4 billion in available cash, which it will augment by tapping into its credit lines for another $10.1 billion.

Ford’s financial health owes considerably to its decision in late 2006 to mortgage its assets and arrange long-term borrowing before the credit markets dried up.

Now, with more than $23 billion in hand, Ford can keep spending billions of dollars on new products during what promises to be another tough year for vehicle sales around the world.

Ford said Thursday that it expects the United States market to total 11.5 million to 12.5 million vehicles in 2009. Last year, industry sales fell 18 percent, to 13.2 million vehicles.

The company is also forecasting lower sales in the already depressed regions of Europe and South America, and little if any growth in Asia."

While Ford has established itself as the "healthiest" of the Detroit automakers in terms of available cash, let's not forget that the company's relative health comes with a heavy price. Namely: Ford effectively mortgaged the entire company to raise cash in 2006, and as a result has nearly 3 1/2 times the debt load of GM (as of 9/30/2008), $156.8 billion vs. $45.2 billion.

In other words Ford's relative health comes more from having greater access to credit than GM, as opposed to having had stronger sales, more efficient operations, etc, etc.

All that being said: while I have more faith in Ford's ability to survive than say Chrysler, I'm still rather skeptical overall because of the size of their debt load and the fact that they weren't making money when car sales were at record highs (for the market overall at least). Furthermore the "recovery" the automakers are waiting on isn't going to be like the old market in terms of SUV/Truck sales, and the ability of consumers to finance vehicles that are well above their means.

The days of Ford selling $35k Explorers to people who earn $40k/yr are over.

At this stage it just remains to be seen whether or not Ford can introduce the necessary operational efficiencies, on top of having a better product strategy around bringing stateside some of the cars designed by their European subsidiaries, cutting back on product overlap, etc. Having greater access to credit than GM is meaningless if the money is spent funding the old way of doing things, and they aren't able to become efficient enough to be profitable.

Let's also not forget that despite Ford's stronger cash position relative to GM and Chrysler, Ford dealers are still offering cars for 50% off. I'm actually considering an SUV at the moment and the Explorers are tempting because I can get a decked out one with low mileage for under $16k, whilst a 4-Runner with similar content would cost me well over $20k. However this isn't necessarily an advantage for Ford because they won't make any money off of me buying an Explorer at their 2 for 1 sale, while Toyota (TM) will make money if I buy a vehicle from them.

Furthermore being the "strongest" of the Detroit Automakers isn't a competitive advantage when it comes to the Japanese manufacturers, as being less "functionally bankrupt" than GM & Chrysler isn't going to help them sell Fusions to potential Camry buyers.

I suppose the question offered is: is this still the Ford that doesn't even sell some of its best products in the U.S., or has the company woken up and realized that many of its prior assumptions, strategies, etc, for the American market were patently fatuous? Finally, are they going to be capable of introducing the cost efficiencies needed for their survival, especially considering the $156 billion (and growing) worth of debt they need to service?

You can read more here (NY Times), and about Ford's plans to draw down their credit lines here (FT).

Sources:

The NY Times: "Ford Reports a Record $14.6 Billion Loss for 2008" -- Bill Vlasic, January 29, 2009.

*All Data related to total debt provided by Yahoo Finance.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[TB3:]

Another author with a wonderful grasp of the obvious. Glad to see he reads the NY Times. I'd hate to think he came up with this info all by himself.

Feb 02 08:53 AM

[antonio311:]

Ford is making great quality American vehicles....but when you compare them to Chryslers vehicles the Fords have a lot of work to do with styling!

Feb 02 09:50 AM

[Jobu37:]

Most of that $165 billion is backed by loans due to Ford Credit. Ford's real debt that is held against assets is in the $45 billion range. A little worse than GM but GM doesn't have a lineup coming out in the next year that will put their vehicles in the status of best in class in almost every segment of the market like Ford does. GM has not demonstrated strong cashflow from operations as Ford has until the fourth quarter of 2008 either.

This author appears to be another idiot that thinks Toyota is invincable. Maybe the author should look at the debt load that Toyota has taken on in order to expand plant capacity around the world. Capacity that they don't need. At the end of the last quarter posted by Toyota they had debt of $55 billion with even less cash than Ford. And their lackluster lineup does not appear to have potential for more sales but much less when compared to Ford's upcoming lineup.

Q: Which economy looks even more dire than the U.S.? A: Japan's does. Fortunately due to the protectionist environment that does not allow Ford to be competitive in Japan, Ford has much less exposure to the dead Japanese economy while Toyota has a heavy reliance on Japan for most of their profits. By keeping competition out, the Japanese manufacturers are able to extort extremely high margins from their people. The Japanese culture is much more inclined to save their earnings instead of spending their way out of a recession which means the recovery won't come soon. So while Japan went into a recession long before the U.S. and they will come out of it long after the U.S. does. It seems very likely that there will be a few major banks fail in Japan due to their attempts to save companies like Toyota in order to keep the land of the rising sun a prominent force in the global economy. The potential failure of the Japanese economic model will be good a thing in the long run. Perhaps the impending implosion of the Japanese economy will demonstrate the benefits of truly free trade to the Japanese and they will open up their borders to cheaper product that will allow their own people to get more bang for their buck which would help fend off future implosions like the one about to take place. Or maybe they will luck out and the global slowdown will recover fast enough to continue to hide the precarious postition their protected industries are truly in. Time will tell. The one thing that is certain is the fact that Toyota is going to feel the pain this time around much moreso than in past recessions.

Feb 02 10:24 AM

[Hmm?!:]

A key point left out is the quality ratings. Ford is in the gap between the other US automakers and the Japanese. It is extremely likely the US dollars falls against the Yen, which could price Japan out of the market.

Yes Ford lacks styling. But if the quality perception holds and it is a domestic choice between quality and stylish junk? Your domestic choice is?

Further if Ford is locked in longer term and interest rates will rise. Chrysler and GM are already essentially bankrupt where are they going to get funding? At what rates? If Ford gets into trouble later, can congress say no to an equal gift to Ford?

Feb 02 10:36 AM

[ESAA:]

Ford's debt level included in this article must include debt for its finance subsidiary. GM and Chrysler no longer report the debt of their finance subsidiary I don't think. Ford could not survive with automotive debt. This should be clarified.

Feb 02 12:51 PM

[briacal:]

The author makes it looks like it is better to be the weakest than the strongest of the automakers.Ford stock has been trashed as if the company had already filed for bankruptsy protection.Don't you thnk that Ford should receive a better treatment than that?

Feb 02 11:38 PM

[Poor me:]

Everyone is out to make an example of Ford. How dare they shrug off the Bail out funds, and thumb their nose at Nancy, and Harry, and Biden, and the great one himself. As a result, today we see all the articles of doom, and gloom for Fords future, and see their rating cut by Barclays. This is only the begining. They will be CRUSHED, and forced into submission, and into taking the Dem's bail out money. Why the impudence. We the people are rooting for you Ford.

Feb 03 01:32 AM

[lligruts:]

Hey when the the American people finally decide that manufacturing and farming are the only two careers that actually produce a product....all else are simply service jobs....especially banking and politics....then maybe they'll support the home products...rather than send the profits back to Korea, Japan and China....lets see....save a buck on a Toyota....lose thousands on the value of your house....as your neighbors become unemployed....and foreclosed.

Feb 03 01:54 PM

[JBond:]

This article is useless.....
what's he talking about 50% SUVs? with low mileage? he's talking used vehicles..not NEW...so who cares then (dealers profit from used..not FORD)?
unless they're off-lease....I'd buy a NEW FORD right now if they were 50% off...

Feb 03 02:33 PM