Challenge for Ford and GM: To Stay in Business

CNN Money is reporting Ford sales plunge.

Ford Motor (F) reported that its U.S. sales tumbled 28% in June from a year ago, in what could turn out to be the weakest month for auto sales in 16 years. The No. 3 automaker in terms of U.S. sales, saw demand for its SUVs plunge by more than half and for pickups and other trucks fall more than a third.

Even the so-called crossovers, saw sales off 18% from a year earlier, as buyers went searching for more fuel efficient vehicles in the face of record $4 gas prices. But Ford apparently didn't have the car models buyers were looking for, as its car sales fell 12%.

The overall sales slide was worse than the forecast of a 25% drop from auto sales tracker Edmunds.com. Edmunds is also predicting a 25% drop in sales at General Motors (GM), a 12% decrease in sales at Toyota Motor (TM) and 31% plummet in sales at Chrysler LLC.

Jim Farley, Ford group vice president said buyers' new demand for cars provided Ford an opportunity.

Ford Sees Opportunity

One has to laugh (or is it cry) at the "opportunity" presented to Ford. Opportunity to do what? Scale down truck production to produce more cars that no one wants either?

There is no opportunity here, but there is a challenge. The challenge for both Ford and GM is to stay in business.

Auto Bonds Plunge

Reuters is reporting Automakers' bonds tumble after Ford sales slump.

Ford's bonds with a 4.25 percent coupon due in 2036 fell to 68 cents on the dollar, down from 72 cents on Monday, according to MarketAxess.

General Motors Corp's bonds with an 8.375 coupon due in 2033 fell to 57.5 cents on the dollar, down 2 cents on the day, according to MarketAxess. At their trough on Tuesday, they traded at 57 cents on the dollar, a record low.

Carmakers Complain About Fuel Rules

The big carmakers say fuel rule plan too strict.

Global sales leader Toyota Motor Corp, General Motors Corp (GM) Ford Motor Co (F) Chrysler LLC and other manufacturers complained in a regulatory filing that a planned 4.5 percent yearly increase between 2011-2015 is unworkable.

"This goes beyond what it is technologically feasible and economically practicable," the companies' trade group, the Alliance of Automobile Manufacturers, said. "It would require manufacturers to expend resources at a pace that is excessive given the fact that the auto industry is already under economic stress," the companies said.

The Transportation Department's National Highway Traffic Safety Administration (NHTSA) is drafting a rule that would set annual targets for satisfying a new law mandating a 40 percent jump in fleet-wide average fuel efficiency to 35 miles per gallon by 2020.

Automakers said the "most important problem" is that regulators underestimate the costs and overestimate the benefits of fuel saving technologies.

They complained the plan to "front-load" efficiency gains for the fleet in the first years of the program -- nearly 32 mpg by 2015 -- especially penalizes sport utilities, pickups and vans because they are more expensive to make than cars.

Between 2011-15, new cars would have to get 35.7 mpg, while light trucks, including sport utilities, pickups and vans would need to reach 28.6 mpg.

The government estimated it would cost manufacturers about $16 billion to meet the 2015 standard for cars and $31 billion for light trucks.

Valid Complaint

On this score the automakers have a valid complaint. If customers want to drive gas guzzling vehicles they will. However, recent trends suggest they don't. At any rate, it should be up to consumers to demand higher gas mileages, not big brother.

Even though the complaint is valid, it rings at least a bit hollow. The reason is the plunge in SUVs and trucks is going to be so deep and last so long that aggregate vehicle mileage is going to go up on its own accord, by consumer preference alone.

Comments

[mycargets52mpg]

If GM and Ford seriously sat down and met the fuel rule, they might finally be ahead of the curve instead of way behind. By dragging their feet, and trying to lower the bar, all they are doing is fooling themselves. Consumers will choose better, not worse fuel efficiency, as the market can attest to. GM and Ford are sadly mistaken if they think they have a choice in this. In that case, the sooner they go, the better.

[bluevoter]

I just returned from France, where I rented a Renault Clio (157 inches long) and drove more than 400 miles on France's extremely well maintained highways (for which I paid a lot in tolls). Regular gas (95 octane) was 1.60 euros per liter, which works out to about $9.50/gallon at the current exchange rate. I paid more for the fuel than for the car rental, even at 31 mpg (I did the conversion from liters/km). The price of fuel is comparable in other western European countries -- both Ford and GM have a major presence in the UK and Germany, and sell fuel-efficient (and very small) cars there that they don't offer in the US. Maybe they should think about balancing the Tahoe and the Excursion with some of these vehicles; they might sell better than GM would expect, particularly in major cities like Boston, Seattle and San Francisco. They wouldn't have to offer them in every dealership, since there is probably no market for such vehicles in Houston or Montana. These moves might not save Ford and GM from bankruptcy, but they would give potential car buyers some additional alternatives if and when they check out a showroom.

[IXLR8]

Well Michael Shedlock has all the answers doesn't he. Ford and GM should have seen this coming, right?

Well, Mr. Shedlock, you should also report that in the labor negotiations last fall (that's right, only about eight months ago) Ford proposed to the UAW that it would close the plant that makes the 35MPG Focus because sales were so dismal. The two sides agreed to new terms to keep the plant open. Now, of course, it is running maximum overtime on two shifts and will soon move to three shifts.

Truck plants are the inverse with $4 gas.

Mr. Shedlock similarly does not report that the vaunted Toyota is also losing money in the US as its Tundra pickup, Sequoia SUV and Sienna Minivan sales have fallen apart. Indeed, it's TX plant is running at about 70% of capacity and its IN plant is at 45% of capacity.

Weak article, poorly researched.

[Jobu37]

Agreed that this guy did his research by reading headlines instead of looking for facts.
Had he searched for facts he would have known that the only reason that Ford was down on the car side was because they plain ran out of Focus modesl after a record setting May. The Fusion with 4-cyl engines were also in very short supply.

The plant that builds the Focus will begin benefiting from a third shift in paint and body departments along with the assembly line being sped up to meet demand in coming months.

Fusion/Milan/MKZ will introduce new engines, trannies, and interiors in December. Car is already selling near capacity on a 4-year old design. Ford is looking at expanding capacity at an underutilized plant to cover the increased demand that the newest car in the mid-size will garner. Hybrid versions of these same cars come out in Jan or Feb. Annual production of these could be sold out as soon as the order process opens up.

Fiesta is the car that will make the B segment mainstream in the US. It will offer 40+ mpg and have an interior that is desriable and have a sporty suspension. Yaris, Fit, Versa, and Aveo are and will be not match. It hits the Eurpean market in a month or two and then China after that. Watch it zoom to the top of the sales charts to gauge it's future performance in the US in just over a year. This is one reason may experts view Ford as the domestic company that has the best chance of surviving.

[grandstrand]

Cars nobody wants? Ford has cars and they are sold out. Ford is at fault for not producing more cars that they cant keep in stock. Next year Ford introduces the Fiesta and New Focus. Look out. I only hope they are making a profit on those vehicles.

[Zerosum]

Why does government mandate on car companies CAFE and safety requirements. Let the consumer determine what kind of mileage they want. There are no mandates on oil companies to install natural gas pumps or E85 pumps. Big 3 had cars that ran on NG in mid 90's but there was no infrastructure to support it and then people wanted SUV's and big trucks. Now the game has changed and with no energy policy and gas prices being projected by wallstreeter who are them selves being bailed out by treasury finding fault with Auto companies for not having product that customer wants. Please do not forget Toyota also fell for the big Trucks and built a plant in Texas and now their sales are dowm by 30+ %. Nissan went Chrysler for big Trucks and Hyundai/KIIA was built truck in US and changed the plans the last minute. Thanks.

[paulk8756]

What we know about the history of equities is the greatest gains are made in stocks that NOBODY wants anymore. GM and Ford certainly qualify here. But that's a TOUGH CALL when you're investing real money, which is precisely why the returns are so great if they make it. GM at 10 and F at 4 are beginning to look awfully tempting, aren't they...?

[george ofthe jungle]

comments are better informed then shedlock.
who is out of touch with reality !

[StephenMetzger]

Many commercial fleets could be operated on pure electric vehicles, powered by conventional lead acid batteries. Fleets of forklifts do this and the trend to electric forklifts is proceeding apace. Sure, these vehicles would be slower and would have to be recharged on a routine basis that would involve a learning curve and adaptation--but certainly doable. The Big Three should look into this possibility. The fact is that many ICE commercial fleets are used in daily operations well within the range of current battery technology, and when lithium ion batteries become commercially available, there will be very little difference in work capabilities.

[Donald E.L. Johnson]

I can think of a dozen reasons GM and Ford won't go bankrupt.

First, Obama and the Dems will bail them out directly and indirectly. Are the stocks oversold? Hard to tell. The options markets are very bearish, and I'll be contrarians are buying these stocks and will be.

[BioInvestor]

The problem is that for each company that turns around and bounces back, approximately nine others cease to exist. Turnarounds are tough. Personally, I can't imagine the big three disappearing. Of course, five years ago, I wouldn't have imagined GM hitting a half century low.


On July 4 paulk8756 wrote:

What we know about the history of equities is the greatest gains are made in stocks that NOBODY wants anymore. GM and Ford certainly qualify here. But that's a TOUGH CALL when you're investing real money, which is precisely why the returns are so great if they make it. GM at 10 and F at 4 are beginning to look awfully tempting, aren't they...?

[BioInvestor]

If there are any subscribers to the Wall Street Journal, here's a link to a new story on GM: online.wsj.com/article...

The full story requires a subscription, but the synopsis is that GM is laying off even more white collar workers in an effort to reduce costs.

[JoeTreaf]

Why is Big Brother always trying to regulate what the car makers do. I can't remember the last time that our government mandated that Dominos sell at least 50% pepperoni pizzas or that Nordstroms sell all dress shirts for 1/2 off. Give it a rest. Let the consumers drive the market. Last time I checked this was the US and we're supposed to be a FREE market, not a government over-regulated market [can you say "China"].