How Auto Bailout Is Punishing Ford

Ford Motor Co.’s (F) latest earnings report doesn’t mention General Motors or Chrysler, its crosstown rivals. But those competitors have a lot to do with Ford’s surprising $1 billion profit in the third quarter.

Ford attributes its better-than-expected performance—its first quarterly profit since 2005—to aggressive cost-cutting, popular new products like the Taurus sedan and Fusion hybrid, a cash-for-clunkers bump, and improvements at its financing arm. But Ford also is a clear beneficiary of the woes at GM and Chrysler, both trying to recover after bankruptcy filings earlier this year. Ford cited a market share gain of 2.2 percentage points compared with 2008, which helped offset a shrinking market. For a mature industry like the car business, that’s a huge gain in a short period of time. And there’s little doubt that many of Ford’s new customers bailed on the other two domestic automakers as they shambled toward bankruptcy and wolfed down billions in taxpayers bailouts.

But the GM and Chrysler bailouts also are holding Ford back, which prompts some capitalistic what-if questions. For years, there was too much capacity in the U.S. auto industry, with a reckoning on the horizon: Too many manufacturers built more cars than Americans really wanted, forcing deep price cuts to move the metal. That caused the most pain for the weakest automakers, which turned out to be GM and Chrysler. As the recession hit in 2008, free-market forces intensified, forcing the two domestics to hemorrhage cash. Ford wasn’t far behind, and some analysts expected Ford to line up for a bailout too. But by either luck or foresight, Ford had done some financial maneuvering in prior years that allowed it to survive the bloodletting without government aid.

If the government had let GM and Chrysler fail, about 30 percent of the U.S. auto market would have been up for grabs. Ford's 2.2 percentage-point gain in market share could easily have been 5 or 10 points, with other automakers picking up sizeable share as well. The outcome, however, would have been chaotic, because GM in particular is so big that its demise would have sunk suppliers that the whole industry needs to survive, and the collateral damage would have hit every automaker. That made it indefensible to let two of the nation’s three automakers collapse in the midst of an economic meltdown.

But letting Chrysler fail alone was more plausible. Chrysler was in even worse shape than GM, with few compelling products, little in the pipeline, and a poor reputation for quality. It was also smaller, with about 9 percent of the U.S. car market, less than half GM’s share. Steve Rattner, who ran President Obama’s automotive task force, wrote recently that the Obama administration was split nearly 50-50 on whether to save Chrysler. A last-minute study showing that a Chrysler liquidation could lead to 300,000 lost jobs tipped the balance in favor of a bailout.

But those 300,000 jobs remain attached to a company that’s still extremely weak and has an uncertain future. Chrysler could still fail if its forced marriage with Fiat (FIATY.PK) doesn't produce fresh cars Americans want to buy, and soon. Government-aided bankruptcy, meanwhile, has helped GM and Chrysler shed debt and lower costs—putting Ford at a disadvantage. Ford says it needs additional concessions from its unions, such as a no-strike clause, in order to match the concessions GM and Chrysler were able to get through bankruptcy reorganization. But the unions seem likely to resist now that Ford is making a few bucks.

So the one domestic automaker that has paid its own freight could end up penalized for its success, while the government indefinitely subsidizes competitors that would have died without government aid. Without the GM and Chrysler bailouts, there would be a vast surplus of unemployed autoworkers. But since the government saved thousands of jobs, the unions have more bargaining power, which they seem poised to use against a company that has stayed off the federal dole.

Don't expect to hear Ford complain about this, since company executives know that if the timing had been different, they could be the ones with Chapter 11 on their résumés. And Ford needs to right-size its operations, not execute a hasty surge in capacity that could undo years of cost-cutting.

But the domestic auto industry is still a mess, and the huge subsidies at Chrysler and GM could inhibit an overall return to profitability rather than accelerate it. The same dynamics are at play in the banking industry, where bailed-out giants like Citigroup (C), GMAC, and Bank of America (BAC) are sitting on billions in reserves that healthier banks would be able to lend, stimulating a recovery. In the investment banking business, by contrast, the demise of Bear Stearns and Lehman Brothers (LEHMQ.PK) has left survivors like JPMorgan Chase (JPM) and Goldman Sachs (GS) nicely profitable, which—like it or not—has to happen if the overall economy is going to get healthy again. It's awful to watch companies fail and jobs disappear. But the alternative, we seem to be learning, is to watch them fail in slow motion, while contaminating those with the best chance to succeed.

Disclosure: no positions

Comments

[Mike from NYC:]

I happen to think Chrysler will be kaput long before it ever makes a profit. According to what I read, most of the 'new' cars engineered by Fiat will be made overseas and will result in Americans losing jobs as their factories close down. In addition, Marchionne is jettisoning several vehicle lines manufactured in the USA such as the minivans.

As you said their is a lot of anger by Americans towards Chrysler for all the bailout money that was thrown at it and that Fiat is getting Chrysler free courtesy of the US Taxpayer.

Nov 03 08:30 AM

[long_on_oil:]

The government taking over public corporations has to be unconstitutional but who is going to file the test case. The American public should be outraged over these take overs. We are now looking at companies that will suffer huge losses like the post office. The government will subsidize the publics auto purchases much to the detriment of Ford.
The only way we can stop this is for the public to totally stop buying GM products no matter what the government offers in incentives. We have to insure the success of Ford because once Ford is gone Honda and Toyota will be the next companies in the governments sights.

We are just sitting back and watching this creeping socialism take over. I shutter to think of where this robbing us of our freedom is going to end.

Nov 03 08:31 AM

[User 373847:]

Fiat got Jeep Free, Dodge trucks and minivans Free, a dealer and distribution network Free, assembly plants Free, and 12 Billion Dollars of Taxpayer Money for Free.

We got Shafted.

Nov 03 08:39 AM

[beentheredo...:]

I have long held the opinion that if the government had resisted the previous Chrysler bailout, both Ford and GM would be in a better position today.

Nov 03 08:53 AM

[Dan / The C...:]

"Steve Rattner, who ran President Obama’s automotive task force, wrote recently that the Obama administration was split nearly 50-50 on whether to save Chrysler. A last-minute study showing that a Chrysler liquidation could lead to 300,000 lost jobs tipped the balance in favor of a bailout."

IF Obama had let Chrysler fail, Ford, GM & the other remaining auto producers would have gained market share, produced more cars to meet the demand and would probably hire some of the 300,000 unemployed, and improve their bottom line all at the same time. Instead the failures of socialism are repeated.
Will we never learn?

Nov 03 09:05 AM

[Mike from NYC:]

I doubt the 300,000 would be employed by either Ford or GM as both have laid off enough workers to take up the slack.

When the 300,000 of Chrysler are suddenly out of work because of the failure of Chrysler HD and Lowes will get a lot more applications as will MacDonalds, WalMart, Burger King, etc.

Ever wonder where all those unemployed factory workers went that were laid off by the Big 3 and thousands of other factories?

Ever wonder why the last recovery was a jobless recovery and this recovery will be the same?

Ever wonder why teenage unemployment is at record levels? That's because of displaced factory workers and college graduates competing for minimum wage jobs. Who would you hire? A HS graduate or a middle age worker with a good record of employment? A HS graduate or a college graduate?


On Nov 03 09:05 AM Dan / The Common Man wrote:
>
> IF Obama had let Chrysler fail, Ford, GM & the other remaining
> auto producers would have gained market share, produced more cars
> to meet the demand and would probably hire some of the 300,000 unemployed,
> and improve their bottom line all at the same time. Instead the
> failures of socialism are repeated.
> Will we never learn?

Nov 03 09:21 AM

[TeresaE:]

Why would anyone think the unions would agree to let Ford survive?

The unions know that if they bankrupt Ford, they end up owning the company and the taxpayer ends up paying their great salaries and benefits for life.

Just what incentive would a union worker have to take less when they can assist in the government/union takeover?

Anyway, it is hard for me to feel bad for any automaker. With their contracts in the late 90s, the unions made the decision to off shore their suppliers. Take the savings and spend, spend, spend. Job security, no hit for layoffs and better health plans.

What the automakers and their unions neglected to notice was that those "overpaid" (fraction of their own) supplier's employees were their best customers. And they bankrupted them.

When the recession hit in the early 90s, the Big 3, unions and WalMart had huge PR campaigns touting, "Buy American, the job you save may be your own!"

Funny, haven't seen that with this much worse situation. They wouldn't dare as millions who lost their good jobs might be awakened into coming out and telling the truth about American made cars and business.

Nov 03 09:26 AM

[americaninc...:]

I agree with the earlier comment that the original Chrysler bailout was an error. The price then was paid by the owners and workers of American Motors. It is not clear that American Motors, GM and Chrysler had the owner and management strength to have taken advantage of a disappearance of Chrysler then, any advantage might have been handed to the unions.

Nov 03 10:01 AM

[Gem Hudson:]

Henry Ford in making his cars more reliable than that of the horses revved up an engine full throttle and see what brakes down. Rev up the engine again and see what brakes down and rev up the engine again and making his cars more affordable for every man with a decent job are to assemble one car after another. If Henry Ford supply more of his model T than what is demanded of, he would have more model T on his car lot than what he could sell his car for. The customers buy into their money worth but trading in your clunker for your cash back guarantee didn't sell his union made Obama-mobile. Hara Guru Obama did not know his business.

Nov 03 10:16 AM

[perremon:]

Excellent commentary. Painful to watch a slow motion death of US automakers. With the government owning more of GM than it was worth at it's peak production, it seems unlikely that it will turn a profit in the next two decades.

Nov 03 10:18 AM

[Windsun33:]

Disagree - I think the only way this is going to stop is to un-elect a whole bunch of bought and paid for (and often economically totally clueless) politicians.

On Nov 03 08:31 AM long_on_oil wrote:

> The only way we can stop this is for the public to totally stop buying

> GM products no matter what the government offers in incentives.

Nov 03 10:28 AM

[Swiftcreek1:]

teenage unemployment is at record levels because of 30,000,000 illegals in our country......

<<< Ever wonder why teenage unemployment is at record levels?>>>

Nov 03 10:44 AM

[Mad Hedge F...:]

lmz I can’t imagine a finer example of “creative destruction” than Fisker Automotive’s takeover of a General Motors plant in Boxwood, Delaware that once built unwanted Pontiacs and minivans, but closed in July. The startup car maker will use a $528 million US government loan to build 100,000 plug-in hybrid electric cars a year that will sell for under $40,000. The firm’s Danish entrepreneur founder, Henrik Fisker, describes the new car as a “green BMW.” The firm plans to export at least half its production. The Irvine, California based company is already building a high end electric sports sedan in Finland called the “Karma” for $87,500. Joseph Schumpeter’s spirit must be smiling.

Nov 03 11:27 AM

[Graham and ...:]

"The unions know that if they bankrupt Ford, they end up owning the company"

Actually, they end up owning "the taxpayer [that] ends up paying their great salaries and benefits for life."


On Nov 03 09:26 AM TeresaE wrote:

> Why would anyone think the unions would agree to let Ford survive?
>
>
> The unions know that if they bankrupt Ford, they end up owning the
> company and the taxpayer ends up paying their great salaries and
> benefits for life.
>
> Just what incentive would a union worker have to take less when they
> can assist in the government/union takeover?
>
> Anyway, it is hard for me to feel bad for any automaker. With their
> contracts in the late 90s, the unions made the decision to off shore
> their suppliers. Take the savings and spend, spend, spend. Job
> security, no hit for layoffs and better health plans.
>
> What the automakers and their unions neglected to notice was that
> those "overpaid" (fraction of their own) supplier's employees were
> their best customers. And they bankrupted them.
>
> When the recession hit in the early 90s, the Big 3, unions and WalMart
> had huge PR campaigns touting, "Buy American, the job you save may
> be your own!"
>
> Funny, haven't seen that with this much worse situation. They wouldn't
> dare as millions who lost their good jobs might be awakened into
> coming out and telling the truth about American made cars and business.

Nov 03 11:45 AM

[jazzme:]

For a gut check on the roughly 80-100 BILLION $ that the US taxpayer/gov't virtually gave to GM and Chrysler the question is.
What would we have said if Japan or Korea had funded Toyota and Nissan or Hyundai and Kia who compete with us in the auto markets?
Another question is if Ford earned a little less that 1 billion in this quarter and hypothetically GM finds a way to follow suit (very unlikely) how long will it take for GM to repay the 60 or so billion $ to the US taxpayers? It ain't gonna happen folks!
Another question is if Chrysler is such a good and viable company how much cash has Fiat or the Italian Gov't invested?
I spent 37 years in the auto industry at the retail level and even a trench soldier can see this debacle.

Nov 03 01:45 PM

[@jporter:]

Spot on. The UAW needs to recognize that punishing Ford for being successful is a losing game. They need to level the playing field and let the winners emerge. I'm afraid Chrysler may be a lost cause. As Ford, and amazingly, even GM showed sales gains in October, Chrysler has dropped another 30%.

Nov 03 03:09 PM

[zagrebzagreb:]

Anyone who is familiar with Michael Porter's landmark management theories might have easily predicted much of what has happened in the US auto industry... although with a different outcome.

We studied him in school - particularly the 'five forces' model - and its so interesting to see how the issues with suppliers and their overlapping relationships with GM, Ford, and Chrysler are always referenced as a reason to NOT let a company go bankrupt. There's that 'collateral damage' argument: one failure brings down one or more 'innocent' companies...

The problem I have with this is that a good supplier strategy would have insulated a manufacturer from this outcome. These are not innocent companies. The manner in which the US auto manufacturers made a habit of beating-up their suppliers on price and product was legendary. It has now come back to haunt them... but under our new rules of capitalism it is a virtue, not a vice. They drove suppliers out of business and destroyed opportunities for alternative sources of parts. They did this intentionally, and without regret. And so now, rather than having to face the consequences of their bad management (collateral damage), they're rewarded for it. I find this absurd.

Nov 04 11:16 AM

[Selena:]

I can see your point about oversaturation. I agree that the long term effects of the bailout weren't explored. Maybe if they had been, a different solution would have been proposed. I recently wrote a post grading the bailout at my blog. Check it out if you're interested!

Nov 04 09:06 PM