Ford’s Profit Soars 56% in ’97 to a Record $6.9 Billion
Ford Motor Co. on Tuesday reported a 56% increase in 1997 earnings to a record $6.9 billion, capping the most profitable year ever for the U.S. auto industry. But the industry will be hard-pressed to repeat the performance this year.
Ford’s fourth-quarter profit of $1.8 billion also set a record, far surpassing Wall Street’s expectations. Its shares gained $1.63 to close at $49.88 after trading at a record $50.44 on the New York Stock Exchange.
The U.S. auto makers achieved their impressive earnings in a year of good but flat sales. It remains a buyer’s market, with competition forcing auto makers to hold down prices and offer incentives that average $1,000 a car.
The auto makers overcame the market constraints by pulling costs out of their operations. Ford reduced costs by $3 billion last year through such things as redesigning manufacturing processes and buying cheaper materials.
“They have done a good job of cost-cutting,” said Maryann Keller, an analyst with Furman Selz.
The question is whether Ford and its domestic rivals can continue to improve earnings even as pricing pressure grows in North America and Europe, and financial uncertainty envelops Asia and Latin America.
“[1998] will be more competitive than ‘97,” said John Devine, Ford’s chief financial officer.
The Big Three are projecting that U.S. auto sales will remain at about the 15-million-unit level in 1998, though many analysts expect sales to be slightly lower. Rebates and other incentives are expected to remain high.
“We don’t think the roof will fall in, but profit margins will fall off for everybody,” said Jack Kirnan, an analyst with Smith Barney.
There are several areas of concern. One is that used-car prices fell throughout 1997. This in part was caused by a surplus of late-model leased vehicles returning to the market, competing with new cars.
Ford Credit, the auto maker’s financing arm, saw its earnings fall 29%, to $1 billion in 1997. Much of the loss was caused by overestimating the resale value of leased vehicles returned to dealers.
The auto makers are also concerned about the recent weakening of the yen, a result of a slumping Japanese economy, and financial turmoil in Southeast Asia. The weaker currency allows Japanese auto makers to lower prices in export markets, including the United States and Europe.
“We will see pricing pressures as far into the future as we can see,” Devine said.
Ford said it will continue to cut costs to offset higher marketing costs and lower prices. The company’s target is to lower costs by $1 billion this year, the same goal it set and exceeded in 1997.
The economic crisis in Southeast Asia has had little effect on Ford’s profit to date in part because of its small presence there. Devine said the region’s problems would not be a meaningful drag on 1998 earnings.
Ford’s net income for the year of $6.9 billion, or $5.62 a share, compared with $4.4 billion, or $3.64 a share, in 1996. Fourth-quarter earnings were $1.8 billion, or $1.45 a share, compared with $1.2 billion, or 99 cents, in the same quarter a year ago.
Yearly revenue increased 4.5% to $154 billion. Fourth-quarter sales hit $40 billion, up 2.8%.
Ford’s profit topped that of its cross-town rivals. General Motors earlier reported net income of $6.7 billion, and Chrysler $2.8 billion. The combined profits for the Big Three hit $16.4 billion, far surpassing the previous yearly record of $13.9 billion in 1994.
“We’ve improved our global competitiveness, said Ford Chairman Alex Trotman.
Ford reported that U.S. auto earnings for the year nearly tripled, to $4.7 billion. The improvement came on the strength of truck sales such as the Lincoln Navigator sport-utility vehicle, and the discontinuance of unprofitable vehicle lines such as the Ford Thunderbird coupe.
The company also showed progress abroad. In the tough European market, Ford earned $273 million, contrasted with a loss of $291 million in 1996. In South America, it earned $40 million, contrasted with a 1996 loss of $642 million.
* MORE EARNINGS: D3, D8
