Why Ford Is a Goner

The WSJ has one of those “Duh” articles this evening that suggests that Ford (F) may face tough going against two federally funded auto manufacturers. Ya think?

I’ve written about this many times over the past month. Ford is probably a goner as well, either by dint of circumstance or because there truly is a plan for control of the auto manufacturers. I prefer to believe that the former is probably the reason but wouldn’t be at all surprised to learn that the latter is in fact the driver.

While there is a lot in the Journal about various cost advantages that GM and Chrysler will enjoy as well as the rationalization of the dealer network, the key component of the advantage that both are going to enjoy will be in the area of auto finance.

GMAC (GMA) in January became a bank holding company, making it eligible for bailout funds from the Treasury and low-cost lending programs from the Fed. GMAC has since received $12.5 billion in financial aid from the government.

GM (GMGMQ.PK) on Wednesday began issuing $3.5 billion in three-year debt backed by the federal government. This should cost GMAC about 2.2% a year.

Ford Motor Credit Co., meanwhile, recently priced a five-year bond and is paying 8%.

After getting help from the Treasury, GMAC in the beginning of the year started offering 0% loans on some GM vehicles. Ford Motor Credit finally followed suit last week.

Ford Motor Credit has applied to become an industrial bank, which would help lower borrowing costs as a federally insured lender.

The ability to offer preferential financing through GMAC is going to give GM and Chrysler an insurmountable advantage. The game is essentially over before it even begins. Ford may offer better products, it may be private and thus not impart the concern about future warranty performance but in the end, the ability of the GMAC manufacturers to offer lower monthly payments will spell the end of Ford as a privately owned company.

All of this was baked in the cake from the minute the government started down this road. Give Ford high marks for fighting a good fight but it was fixed from the get go. The only remaining question is how do the transplants compete? Will their governments pitch in to help them maintain market share and if they do, what kind of government to government response would that elicit from the U.S. You know free trade, subsidies and all of that stuff.

Comments

[SAF:]

I aggree with your assessment.

Ford is a goner for sure. Compared to Government Motors it has a poor capital structure. The only was that GM will succeed is with import restrictions. Obama cannot let GM fail and whatever it takes for that to succeed, killing Ford and killing imports will happen.

Fiat had such a poor reputation in the US that it abandoned this market long ago. I don't see how they can succeed with the Chrysler take over.

Brace for lousy US made cars and high prices on imports.

Jun 08 07:53 AM

[basehitz:]

Rewarding failure. With the banks, we subsidized the miscreants with undeserved bailouts and cheap money giving them an operational advantage over those who managed better. With the automakers, we'll repeat the nonsense.

Let's say you are a parent with 3 children, 2 misbehave and 1 acts responsibly under difficult circumstances. All want to go to Disneyland this year. So naturally, as a responsible parent, you'll take the 2 mischevious children, and leave the other home to do extra chores.

Nice lesson taught.

Jun 08 08:23 AM

[casey00001:]

So to much free credit (subprime loans) that caused the economic chaos, that led to lack of credit (not be able to finance a car) which helped to dump sales, will now be politically selective cheap credit that will lead to the further downfall of another industry. Great, seems like real progress.

Jun 08 08:45 AM

[JackF:]

On Jun 08 07:53 AM SAF wrote:

> I aggree with your assessment.
>
> Ford is a goner for sure. Compared to Government Motors it has a
> poor capital structure. The only was that GM will succeed is with
> import restrictions. Obama cannot let GM fail and whatever it takes
> for that to succeed, killing Ford and killing imports will happen.
>
>
> Fiat had such a poor reputation in the US that it abandoned this
> market long ago. I don't see how they can succeed with the Chrysler
> take over.
>
> Brace for lousy US made cars and high prices on imports.

I find this writeup absolutely ridiculous n assuming that Americans will buy junk just because they can get it financed.

What is left out in this opinion is the important point of whether
Ford can build better cars and cheaper than GM or Chrysler.
While they are floundering around ford is going ahead with better
vehicles and taking over market share.

Jun 08 08:59 AM

[JackF:]

I find this writeup absolutely ridiculous n assuming that Americans will buy junk just because they can get it financed.

What is left out in this opinion is the important point of whether
Ford can build better cars and cheaper than GM or Chrysler.
While they are floundering around Ford is going ahead with better
vehicles and taking over market share.

Jun 08 09:00 AM

[Tdot:]

I think the "jury is still out" so to speak, from a constitutional standpoint, on the seizure of GM and forced sale of Chrysler to Fiat. These two corporations came to the government asking for some relatively short-term loans to make payroll and avoid bankruptcy, much as Chrysler did some 30 years ago, and Ford asked for an "option" line of credit just in case things got worse.

What the first two got, after receiving some cash along with a loud and public berating by Congress, was a governmental hostile takeover by the Executive Branch. I don't think they saw that coming. The whole affair smells like New Deal politics of the last Depression era, and may not pass Constitutional muster.

Meanwhile Ford is thanking and praising God, Allah, Buddha, Vishnu, and any other deity they can think of with their diverse work force, for not falling into the Fed's cash trap.

If the Governmental Motors Corporation does end up with a significant and unfair advantage (due to the Fed's unlimited cash position) over an independant Ford Motor Company, I don't think the Free Enterprise and Laissez-faire Capitalistas will stand for it for long. Expect a Supreme Court battle if Ford is unable to compete due to continued "free financing" from TARP or other rewards, to re-level the playing field.

But right now there is just too much dust and hyper-emotion in the air for people to see and comprehend clearly what is going on, just as in the early days of the New Deal. At least some of the remaining "conservatives" in Congress are starting to ask the right questions. These same conservatives took a lot of grief six months ago for refusing to "bail out" GM and Chrysler during the House and Senate hearings late last year, even to the extent of a handing over relatively small loan. They never anticipated that the Administration would take it this far. But on the other hand, it was not then expected that GM and Chrysler would have to keep coming back for seconds and thirds and fourths, during the six months after the initial loans were handed out around Christmastime.

Jun 08 09:11 AM

[DJOmega6:]

Umm, or we ignoring the fact that Ford has continued to gain market share from GM AND Toyota over the last few months? Or we also ignoring the fact that Ford has continued to trim it's loses in consectuative quarters? Finally, or we going to ignore that sales of the Ford Fusion are actually UP over last year? I understand that Ford is at a disadvantage against a now nearly debtless GM and Chrysler, but we should not and cannot ignore what the market is telling us now. Right now, the marketing is telling us that they are jumping on the Ford bandwagon, with staying out of bankruptcy as one of the reasons why.

Jun 08 09:34 AM

[Fred W:]

Your analysis is way off. Quite simply, Ford has been changing its offerings to match the "Obama" before Obama's name was of any relevance--2001. They have been paying RMI millions to help them with a plan to reinvent the car--at least environmentally.
I also think you underestimate the level of incompetence at GM and Chrysler...Cerberus purchase of Chrysler was as embarrassing as its efforts to run the company.

Jun 08 10:18 AM

[Graham and ...:]

Lindmark's right:The government's "propping up" of GM and Chrysler undercuts the survival chances of Ford, the "legitimate" operator of the bunch. But the Administration doesn't seem to care about "legitimacy."

It was a point I had missed in my own instablog on Ford, "And There Was One."

I've become a follower of Tom Lindmark's.

Jun 08 10:26 AM

[261133:]

Of course Ford is a goner. They don't build better cars, just not as bad as GM or Chrysler. They have bil. of losses and debt, again just not as bad as the other two. They don't stand a chance against a renewed GM ( Chrysler and Fiat is a different story ) and if you look at Ford Europe for example, they loosing over there too. Now Gm-Europe gets a shot in the arm too, same story and Ford will loose everywhere.

Jun 08 11:24 AM

[TCK:]

Look for an increase in federal gas tax and limits on imported cars. In the government's grand plan, this should help you make the "correct" decision on your next vehicle purchase.

Jun 08 11:56 AM

[OhSure:]

Baloney.

I don't know anyone planning to buy anything from Government Motors, and plenty of people planning to buy Ford.

How many times did you vote for Obama?

Jun 08 12:06 PM

[elcopone:]

The one other point that will do Ford in is the fact that they have the most debt of any automaker at the moment. If it wasn't for them getting "lucky" by refinancing that debt right before the credit markets exploded, they would have been in the exact same situation as GM and Chrysler.

Jun 08 01:17 PM

[RMG:]

Ford will be at a huge disadvantage vs new GM and Chrysler because of Ford’s huge debt loads (while the other two have none). I guess Ford will go under and in order to protect UAW jobs, government will come to the rescue of Ford resulting in Ford’s fate mimicking that of GM and Chrysler, in other words, Ford’s stock will be near zero and Ford’s investors will disappear from the face of the earth.

Jun 08 01:21 PM

[Dubious Bro...:]

I refused to by Chrysler products after the first government bailout (can't speak to quality as it was never even considered) and Fiat was never even considered as a viable choice due to reputation for poor quality. Now that it is a Chrysler/Fiat combo there is no chance even if they are the only choice.

I stopped buying GM cars in the mid 80's due to poor quality. Now that the UAW is an owner there is no chance that I would consider any car from them regardless of the financing.

The 0% financing that came after 9/11 may have seemed good for those that qualified, but it seems that we are all paying now for their joy.

I have purchased only Ford vehicles since the early 90's because of their value and quality. I do believe that the author does not give the American consumer enough credit as they are the final judge. He also is not placing enough weight on the anti-UAW sentiment in this country. From a marketing standpoint - Obama's ties to the UAW, the taking over of GM and the forced sale of Chrysler, not to mention the attorneys that are pocketing $$$millions form the legal games - has eliminated abour 1/2 of the potential buyers. As the newspapers are finding out, that is a tough market to survive in.

Jun 08 04:30 PM

[awake09:]

Because Hussein has politicized car buying, expect to see Ford's flag raised all over the country as the Real American alternative. I certainly hope it makes it... I have been buying Fords all of my life and will continue to do so. Screw Hussein and his meddlers... all funded by OUR money, Ds and Rs alike.

Jun 08 05:33 PM

[a. palmer jr.:]

I think Ford may be the only non-socialist car made in the future. I'm taking a new look at Ford because of this. I can't say I was ever much of a Ford fan before, but I don't want a car designed by Nancy Pelosi and Harry Reid either.

Jun 08 06:36 PM

[qw:]

Ford has an impressive portfolio of present and future products that Americans want, not what the government wants them to build and that will continue to propel Ford in becoming the largest US automaker in the near future.
Yes, the financing issue with GMAC is real but Ford will most likely get similar treatment either through its present efforts to get TARP funds or through a future court battle.

Jun 08 09:33 PM

[Philman:]

You people are crowing about Ford's alleged "quality" compared to GM and Chrysler. I don't agree. I've owned two Fix Or Repair Daily (FORD) vehicles, and both have been utter crap! Both spent more time in the repair shop than on the road. On top of it all, the customer service people were snarly. I bought the first one in the 1980s and the second in the 1990s, so a lot of time has passed, but I can assure that they lost me, PERMANENTLY, as a customer. I would NEVER buy a Ford product again.

When I switched to Toyota (mine were made in America, by the way!) I had nothing but good service, and few problems. I will always buy Toyota vehicles, as long as they continue their excellent quality and service. So, as far as I am concerned, you can take all the Detroit based manufacturers of vehicles, and, also, the UAW, and flush them all down the toilet. I am angry that my tax dollars are being used to support such second rate products. That is frankly wrong. Let these companies disappear from the face of the earth. They STINK!

Jun 09 01:36 AM

[bbowen7:]

The GMAC subsidy is a big deal, but I am betting that John Galt can slay the socialists.

Jun 09 01:37 AM

[JJ Hornblass:]

Sorry, but Ford is not a "goner." It just needs its industrial loan charter to be approved by the FDIC, and I think its application will get approved soon, particularly since many other auto finance enterprises already have an ILC. With an ILC, Ford Credit's cost of funds drop, making it more competitive on the financing front with GMAC -- exactly what Ford Motor Co. needs to stay in the game.

Jun 09 09:06 AM

[33Nick:]

Mayb part of the answer could come from France that is subsidizing Renault and has the Peugeot/Citroen group on its own. Somehow they both manage to operate.

Ford could become the U.S. Peugeot and continue its lead, IF it reworks intelligently its business model and finds the right investors.

The Electricnick.com team.

Jun 09 03:02 PM