Cost cutting narrows loss at Ford
Can Ford keep cutting its way to profit?
The Detroit automaker announced a $380-million third-quarter loss Thursday, a better-than-expected result that had its executives crowing that its corporate turnaround was nearly complete, and that Ford would be posting black ink in short order.
Compared with its $5.2-billion shortfall in the third quarter of 2006, the results were a major improvement. But the gap was largely narrowed by Ford Motor Co.’s aggressive cost-reduction efforts, and many industry observers questioned how long the strategy could work in the face of declining sales.
“They’re clearly not making headway on the bottom line as the result of improved market share. It’s all cuts,” said Brett Hoselton, equity analyst at KeyBanc Securities. “These results are good news, but the company still has to prove it has the ability to sell cars.”
The results, which were ahead of analysts’ expectations, came a day after General Motors Corp. posted its worst quarterly loss, $39-billion. On a per-share basis, Ford lost 19 cents, compared with $2.79 a year earlier.
For the quarter, Ford lost $1 billion in North America, and its market share in the U.S. has been steadily eroding. This year, Ford fell behind Toyota for the first time and is in third place with a 14.9% share through October, down from 19.5% at the end of 2004.
Ford’s response, under Chief Executive Alan Mulally, has been to wield a big ax under its Way Forward restructuring plan. Since late 2005, Ford has cut more than 33,000 jobs in North America and worked to close 10 plants and reduce costs through a tentative labor agreement with the United Auto Workers.
At the same time, Ford has been using its assets to raise cash -- it even put up its iconic blue script logo as collateral on a loan -- and it’s been selling off properties. Ford said Thursday that it was close to unloading its Land Rover and Jaguar units, perhaps in early 2008. It added that it would keep Volvo for the time being but would implement a cost-reduction strategy at the Swedish brand.
The problem, observers say, is that although Ford’s cuts may help the bottom line in the short term, they are doing nothing for the top line. Ford showed a small, 1.4% increase in global sales, largely thanks to Chinese demand, but the company’s U.S. sales in the third quarter dropped 18% compared with a year earlier, according to Autodata Corp.
And it seems to have accepted its reduced status in the U.S. market, cutting production and focusing less on innovation and improved technology than on quality issues -- a message that may be hard to get across to consumers, says Mark Warnsman, an analyst at Calyon Securities Inc. It’s an irony that while Toyota has encountered reliability issues of late, it still has a better reputation for quality than makers such as Ford.
“Ford is trying to do it quietly, with quality,” said Warnsman. “But in the U.S., the quality-seeking buyers are already Toyota and Honda owners.”
The good news for Ford is that cost cutting is showing at least temporary results, with the company posting an unexpected $750-million profit in the second quarter. By most accounts, it has a good chance of positive earnings when savings from the union pact begin showing up in late 2009. Through the first three quarters of the year, Ford has an $88-million profit, and it expects any fourth-quarter losses to keep it close to break-even for the year.
But in a company that this quarter lost $362 million on global automotive operations, Hoselton said, “you can only run away from the [sales] bear for so long. Eventually, you get to the cliff.”
Ford shares rose 24 cents to $8.48.
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