Banks Take a Cue from Ford's Capitalism

The most fascinating thing to me about the coverage of the fate of Chrysler and General Motors (GM) is the extent to which the language has changed since earlier this year and late last year. In 2008, the automakers were all hanging together, and aid was cast as critical for the continued functioning of the economy -- without it, bankruptcy would result, leading to the collapse of suppliers and the loss of millions of jobs. The government played along, extending loans to Chrysler and GM and a line of credit to Ford (F).

But the tune now being played is a little different. Chrysler will almost certainly file for bankruptcy, whether or not it reaches an agreement with creditors or Fiat (FIATY.PK), and in fact, liquidation is not out of the question. GM's position on bankruptcy has also changed significantly; the company acknowledges that it may be unavoidable, though it seems certain that the government would take the necessary steps to ensure that restructuring, rather than liquidation, would be the order of the day for GM.

What explains the shift? To begin with, Detroit's woes are now placed in a new context. The loss of all of Chrysler's 66,000 American jobs would be painful, but it no longer seems apocalyptic given the employment picture everywhere in the economy. The weak economy has also meant that employment losses are assured in any case; downsizing will continue for GM and Chrysler whether they manage to avoid bankruptcy or not.

But one can't ignore Ford as a significant factor influencing the policy environment. The firm has proven itself to be stronger than the competition at every turn in the process; turning down government loans, citing its stronger cash position, and now indicating that it sees a profitable way forward. In the first quarter of 2009, Ford reported a smaller loss than expected and reduced the rate of cash burn (which it said would continue to decline through the year). It also announced production increases to come, even as GM said it would be idling many of its plants this year.

This is hugely important. It means that no matter what happens to GM and Chrysler, there will still be an American car industry. It means that supply chains are less threatened by the complete collapse of the domestic producers. And it means that GM and Chrysler can rely less on broader conditions as the scapegoat for their troubles, as opposed to internal problems.

It also means that Ford is actively undermining its rivals. It has clearly decided that now is the time to eat up market share and prepare for a post-recession world. Given widespread agreement that the global car market is oversupplied and in need of serious consolidation and contraction, a production increase can't be interpreted as anything but Ford sucking up the oxygen in the room.

This, of course, is exactly how an economy is supposed to function -- the weak go down, and the strong take their place in the market. Ford has provided everyone with the chance to feel like a good capitalist again. It has also give the administration an argument against the inevitable complaint that will arise when Chrysler, and potentially GM, enter bankruptcy -- that failure is for blue collar workers, but not white collar workers. At this point, a strong defense of GM and Chrysler would clearly undermine the progress made by the one actually successful (ish) American car company.

But just because the administration has a counterargument, doesn't mean the complaint won't be made. More interesting yet, some American banks seem to be leaning toward a Ford approach -- leaving the solidarity of bank-brothers-in-failure behind. The move is trickier in the financial sphere; unlike Ford, every financial institution is heavily reliant on government guarantees, explicit and implicit, to survive in the current climate. As the relative health and needs of the banks continues to become clearer, however, expect more noise to be made about the government impairing the success of the strong by propping up the weak. The question is -- will that provide the government with an avenue to seriously address the questionable status of the Citigroups (C) out there?

Comments

[Dewangski1:]

Disclosure? Are you short C, or just don't like them? I see good reason not to like them, but also IF they survive (and they seem to be being back by the government, almost guaranteeing this), on a longer time line than this week, one could stand to make a significant profit

Apr 24 01:03 PM

[User 387439:]

@ Ryan Avent:

You are ignoring a few critical factors. Ford wasn't all that smart about staying afloat. It just so happened that Ford needed money last year and started getting credit loans before the current financial fiasco. It didn't foresee all this, it had less cash reserves than GM and Chrylser and had just gone through troubles with Visteon it's past/ current parts provider.

Also, if even Chrysler goes under, suppliers will be an issue to Ford. GM defaults and goes through some sort of restructuring to reduce it's debt load, suppliers will also suffer. Next, GM is shutting down most of it's plants starting in May for 9 - 11 weeks. This will put further cash losses on the suppliers of Ford also.
The author, as well as many people, don't understand the total infrastructure and cash flow needed for running an auto business the size of GM, Ford, or Chrysler.

So, wait till August or September and see how things go for Ford. This summer ought to be really eventful with so many people out of work. It will be interesting to see how many parts makers, steel makers, transportation companies and the like will fallout over this before it's all over.

Apr 24 01:11 PM

[old guy:]

I started buying Ford early last November ....added several times as late as early this week...let me say upfront I have leased 5 Honda's with no problems ever and I have never owned a Ford but I travel a lot and rented all makes and settled on Ford as the best of breed...the CEO is fantastic...the product is fantastic...NO TAXPAYER MONEY...their pipeline is right on target...many quality awards (I believe one even above Honda)...I have been converted I will buy a Ford next time...Keep an open mind and Good Luck to you on your investments "Have you driven a Ford lately?"

Apr 24 02:12 PM

[Zane:]

Ryan, please provide your evidence that Ford had less cash reserves than GM and Chrysler last year or the year before. Besides, it is clear you have done little research on this. Ford did not negotiate these loans last year either. I even wondering if you know when it was done and what the justification Mullaly gave for doing it at the time. Before you make a dumb rant, do some research so you can get your arms around the facts first.


On Apr 24 01:11 PM User 387439 wrote:

> @ Ryan Avent:
>
> You are ignoring a few critical factors. Ford wasn't all that smart
> about staying afloat. It just so happened that Ford needed money
> last year and started getting credit loans before the current financial
> fiasco. It didn't foresee all this, it had less cash reserves than
> GM and Chrylser and had just gone through troubles with Visteon it's
> past/ current parts provider.
>
> Also, if even Chrysler goes under, suppliers will be an issue to
> Ford. GM defaults and goes through some sort of restructuring to
> reduce it's debt load, suppliers will also suffer. Next, GM is shutting
> down most of it's plants starting in May for 9 - 11 weeks. This will
> put further cash losses on the suppliers of Ford also.
> The author, as well as many people, don't understand the total infrastructure
> and cash flow needed for running an auto business the size of GM,
> Ford, or Chrysler.
>
> So, wait till August or September and see how things go for Ford.
> This summer ought to be really eventful with so many people out of
> work. It will be interesting to see how many parts makers, steel
> makers, transportation companies and the like will fallout over this
> before it's all over.

Apr 24 02:28 PM

[Dallas Al:]

I am with Zane. Ryan, you do not have your facts at all and are just repeating historical facts but with no factual timeline.

Alan Mullaly did know there was going to be a problem. He also knew that he couldn't do so without the capital (CASH) in the bank available. He did the only thing he could, which was to mortgage Ford including the blue oval. He did this not last year, not the year before, but almost 4 years ago. Early in 2006 he began the rebuilding Ford and if it wasn't for his foresight and vision Ford would be in that same line that GM and Chrysler are in.

Al.

Apr 24 03:45 PM

[TB3:]

It's nice to see Ford and Mulally are finaly getting the positive ink that they have deserved for some time. GM has unfortunately soaked all the oxygen out of the press' air because of their problems, leaving the real progress at Ford out of sight. It's a real American success story that deserves its recent recognition.

Apr 24 03:52 PM

[Old Trader:]

Although my personal experience with Ford products has been mixed (neither nightmarish, nor exceedingly wonderful), I'm glad to see at least one Detroit firm had the foresight and good fortune to have a chance at surviving at current debacle. I can't help but wonder how much the fact that the family/founder's name is still over the door has to do with the choices/decisions made that made this possible. (Yes, I know that the percentage of stock still owned by the family is relatively miniscule, but....).

Regarding Chrysler, I wonder what benefit there is to Fiat pursuing a merger, rather than just buying any assets they perceive as "valuable" out of bankuptcy. Perhaps access to US government money (in the form of loans, or loan guarantees) to help offset some of the risk? There's no question the Jeep franchise is still a valuable one....and possibly the truck line, although to a much lesser degree. Fiat, Renault, and Peugot have all come and gone in the US market without making much of an impact, regardless of their global stature.

Apr 25 10:28 AM

[EGGBEATER:]

I THINK IT DOES NOT SEEM TO BE PROBABLE THAT FORD WILL GO BANKRUPT IN THE NEXT 18 MONTHS. THERE IS AN ATTRACTIVE INVESTMENT OPPORTUNITY IN CHEAP "FORD CAPITAL" BONDS (ALBEIT NOT "INVESTMENT GRADE") WITH A 9.5% COUPON, WITH THE UPSIDE RISK THAT AT MATURITY -JUNE 2010- ONE WILL GET BACK THE FULL FACE VALUE OF THE BOND, WHILE HAVING ENJOYED NICE INTEREST PAYMENTS.

Apr 25 11:30 AM

[kk-bloomfie...:]

People tend to forget that Ford quality has improved tremendously and is as good as Toyota and Honda, in fact, better than Honda and at the par with Toyota. Ford Fusion Hybrid in it's class is beating the competitors by 8MPG. Watch for the new Taurus, will do the same magic which did the 1986. All these initiatives should help Ford. I must add Ford had already started becoming lean upon the arrival of Mr. Mullaly, so Ryan, please check your facts.

Apr 25 10:11 PM

[slowdown:]

Zane, Dallas Al, kk - Ryan is the author of the article and I believe that you are all addressing the post made by User 387439. Yesterday's New York Times Business topics.nytimes.com/top...
discusses the refinancing Ford did in 2006 right down to the big blue oval. According to Mullally's statements since the Congressional hearings (what a joke they were)...Ford has enough money to get them through 2009. Unfortunately - when the supply base starts going belly up in August....Ford will likely be in the same boat as GM and Chrysler....unless the government decides to prop up suppliers too.

Apr 25 11:36 PM

[Me XMan:]

Ford maybe looking good now but I'll load on GM after they go through BK.

Apr 26 01:40 PM

[kk-bloomfie...:]

All you guys questioning the integrity of US auto companies - what are you driving? Ford will survive with flying colors with the supporting cast.


On Apr 25 11:36 PM slowdown wrote:

> Zane, Dallas Al, kk - Ryan is the author of the article and I believe
> that you are all addressing the post made by User 387439. Yesterday's
> New York Times Business topics.nytimes.com/top...
>
> discusses the refinancing Ford did in 2006 right down to the big
> blue oval. According to Mullally's statements since the Congressional
> hearings (what a joke they were)...Ford has enough money to get them
> through 2009. Unfortunately - when the supply base starts going belly
> up in August....Ford will likely be in the same boat as GM and Chrysler....unless
> the government decides to prop up suppliers too.

Apr 26 06:29 PM