Ford Hurt by Home Turf Woes

Declines in North American sales and revenues drive the carmaker's surprising report of a $123 million overall loss in the second quarter

Just as General Motors (GM) shows some signs of recovery, crosstown rival Ford Motor (F) is heading fast in the opposite direction.

Ford surprised analysts with a loss of $123 million in the second quarter. The company made $946 million during the second quarter of last year. But falling vehicle sales and revenue in North America are hammering the company's bottom line. Chairman and CEO William C. Ford Jr. says he will need to accelerate his planned restructuring moves (see, 6/22/06, "For Ford, 2008 is Suddenly a Lot Closer").

Indeed, Ford's home market is its biggest problem. Even though Ford has been aggressively cutting costs, the company lost $797 million in North America, compared with a $907 million loss during the same quarter last year. So far this year, Ford has lost $1.6 billion in North America. Says Chairman Ford, "We face serious challenges, and we don't underestimate them."


  Ford has big legacy costs and too many workers. But an equally crippling problem is that the company isn't ringing the cash register. Revenue in the quarter fell $700 million to $19.2 billion in large part because sales of its large SUVs are tanking. Sales of the Ford Explorer and Expedition are down about 30% in the first half of the year.

As consumers look toward more thrifty options, Ford doesn't have a strong-enough car lineup to keep buyers who might want to downsize their ride. The Five Hundred sedan has not sold well, and the new Fusion—while it has won plaudits from car critics—sold just 13,691 copies last month, about one-third of what Toyota's (TM) Camry sedan sold.

What's worse is that analysts don't see Ford turning things around anytime soon. Oil and gasoline prices remain high and will continue to pressure SUV sales, says Goldman Sachs analyst Robert Barry. Ford still has a very strong franchise with its F-series pickups, but even that is coming under pressure. "We see particular risk to Ford's high-profit F-150 franchise as GM and Toyota launch new pickups later this year and into 2007," Barry wrote in a research note.


  Ford's only money makers were its finance business and overseas operations. But even cash cow Ford Motor Credit saw a profit drop, falling $300 million to $441 million. Ford earned $105 million in Europe and $95 million in South America. Mazda, of which Ford owns 33.4%, brought the Dearborn (Mich.) auto maker a tidy $148 million.

But all of that is for naught if the company can't crack the code to finding some winning cars in the U.S. But don't expect that to happen anytime soon. Even Ford's Premier Automotive Group (PAG), which sells tony brands, lost $162 million. Executives were mum when repeatedly asked if they were considering selling off ailing Jaguar, sales of which are down 32% during the first six months of the year. They pointed instead to upcoming product launches from Land Rover and Volvo. "PAG will get its act together going forward," said Ford. "In this case it's a product issue."

Bill Ford was clear that more work needed to be done and fast. But in the near term, the company will cut production again in the third quarter, which will hurt the bottom line.


  Could Ford use a partner? High-profile talks between GM and Renault-Nissan about a possible alliance have made headlines around the globe. But Ford executives on July 20 insisted they weren't actively seeking such a partnership, though the company's chief executive admitted they'd engaged in "game-planning" the effects of a GM-Renault-Nissan tie-up. "It's not our top priority; our top priority is to fix our business," said Ford.

Ford can take solace in one thing. His company has net cash liquidity of $23.6 billion, says Morgan Stanley analyst Jonathan Steinmetz. That could give Ford the liquidity to buy out or retire union workers and get its production in line with sales.

Ford hopes that a few new products due out this fall could help buoy results. In hopes of capturing consumers bailing on large SUVs, Ford will offer the Ford Edge and Lincoln MKX crossovers. Land Rover, meanwhile, will launch an all-new LR2 SUV, and Volvo will unveil three products. Mark Fields, executive vice-president, admitted, "Maybe we don't talk about them as much as we should."


  But, the road ahead for Ford is a long one. This is the third restructuring in five years for Mr. Ford, who was non-executive chairman when now-fired CEO Jacques A. Nasser launched the first one. Mr. Ford concedes: "We have a difficult transition period ahead of us. We've just got to go faster." Fields added, "We've got to go further and faster and deeper than we originally planned."

Ford's latest turnaround job, which includes cutting 25,000 to 30,000 jobs and idling 14 plants, will only work if he can get sales turned around. Given that Ford's U.S. market share has been falling for the better part of a decade, that would be some trick.

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