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Ford Reports Unanticipated 2Q Loss; Drop in SUV and Truck Sales Partly to Blame

Ford2q06
Ford’s 2Q06 automotive sector results. Although North American results improved compared to 2Q2005, it remains a very large problem.

Ford Motor Company reported a net loss of $123 million for the second quarter of 2006—results worse than expected. This compares with net income $946 million in the second quarter of 2005. Ford’s second-quarter loss from continuing operations, excluding special items, was $48 million, compared with a profit of 936 million in the same period a year ago.

Ford’s second-quarter total sales and revenue was $42 billion, down $2.5 billion from a year ago.

The truck and SUV markets that sustained our profitability for so long are getting smaller and more competitive..the market shift continues to impact our revenue. The speed and magnitude of the market shift is putting added pressures on our costs...and the competitive landscape is continually shifting, as evidenced by the GM-Renault-Nissan discussion.

The external factors [market shift, commodity and fuel costs] I’ve outlined aren’t going to get any easier, so we need to go father and faster [in the restructuring].

—Bill Ford, CEO

On a pre-tax basis, worldwide Automotive sector losses in the second quarter were $808 million. This compares with a pre-tax loss of $245 million during the same period a year ago.

Worldwide automotive sales for the second quarter declined 2.6% to $37.7 billion from $38.7 billion in the same period last year. Worldwide vehicle unit sales in the quarter rose 0.8% to 1,732,000, up from 1,718,000 a year ago.

In the second quarter, Ford’s North America automotive operations reported a pre-tax loss of $797 million, compared with a pre-tax loss of $907 million a year ago. The improvement is more than explained by cost reductions in most areas of the business, partially offset by a mix shift from trucks to passenger cars, higher incentives and adverse foreign currency exchange. Sales were $19.2 billion, down 3.5% from $19.9 billion for the same period a year ago.

Ford is cutting its projected third-quarter production in North America to 670,000 units, down 58,000 units on a year-over-year basis, and 40,000 units less than what was previously announced. This drop mainly reflects reductions in truck production.

During the earnings conference call, Ford said the company will accelerate and revamp the “Way Forward” restructuring plan announced early this year.

If they had a better crystal ball, I’d go out and buy one. We don’t want to get into were we right or were we wrong. The issue is, how do we react? We baked in flexibility, and now we are going to use it.

—Mark Fields, President Ford Americas

Comments

NBK-Boston

Some of their North American "loss" is made up for in the financing side of the business -- give away the razor in order to sell the blades, or give away the cars in order to collect interest on the loans. The sale price of the car may book a loss, but the interest on the auto loan makes up for that. But seemingly not enough anymore. Ford and GM are sick, but I wouldn't count them out just yet. At minimum, they have enough ready cash on hand to keep chugging along for a few more years before the party grinds to a halt. Beyond that, they may be able to bail themselves out through their current restructuring efforts. We'll see.

allen Z

For Ford, it is the F-Series pickups or bust.

allen Z

They have got to make more of their other brands/lines profitable to reduce their dependancy on light trucks.

Chris

I hate to say it but the sooner these clowns go out of business, the better we will all be.

Neil

Would the demise of Ford and GM open the door to new U.S. car makers or just put a nail in the coffin of the entire north american industry?

Lucas

I find myself wondering if Ford and GM's problems are due to the lack of imagination by their engineers or administration.

At one time I was certain it was the engineers. Now I'm not so sure.

eric


My guess is that this is what you get with roomfulls of MBAs running the business. Nothing inspriational comes out any more - they are just crunching numbers in order to try to figure out how to squeeze more money out of consumers.

My thinking is that both GM and Ford are really top-heavy. To many highly-paid managers are leading us to the place where they can only make profits on big SUVs.

Hal

I see a lot of Monday morning quarterbacking here. Big car companies need to set up their plans years in advance. Ford is being crucified for not anticipating back in 2002 or 2003 that oil would be $75 today. They should have known that Hurricane Katrina would deal a blow to gulf oil production that would last for a full year. They should have anticipated that Israel and Lebanon would get into an undeclared war, that Saudi production would level off, that Nigerian rebels would attack oil infrastructure. Their crystal ball should have been perfect.

Ford managers weren't the only people who failed to anticipate these events. If you look at the commodities market from back then, you could buy 2006 oil for under $30. That was the market consensus for what the price would be in 2006. That was what the smart money was betting about the course of future events.

Ford is not to blame here. Like a lot of other companies, it is a victim of the inherent unpredictability of the future. The future is guaranteed to surprise us - sometimes favorably, sometimes unfavorably. And when surprises happen, there are always winners and losers. In this case, Toyota and Honda were winners and Ford and GM were losers. But because surprises are unpredictable (by definition!), we could just as easily have seen surprises in the other direction, which could have reversed the fortunes of these competitors. In that case we'd be praising Ford management for their farsightedness!

The truth is that people seldom deserve either as much praise or as much blame as their receive when unexpected events strike with good or bad results. The world is unpredictable, and people have to live with it. Sometimes you're lucky and sometimes you're not. Ford has been unlucky, that's all there is to it.

Harvey D.

Hal:

Managers are paid very high salaries to anticipate and plan accordingly. Those employed by GM and Ford are fully accountable and should be fired for their failures.

This may be difficult at Ford.... but see what is happening to Hollinger's Conrad Black.

t

I will stipulate that part of the problem for Ford and GM is that they have pretty much assumed that what has worked in the past will work in the future. GM, certainly, still wants the past to work by trying to prolong American's love affair with big vehicles. Their latest strategy to keep this affair is to pretend that their big vehicles get good gas mileage by making them fuel flexible. They want to hang on to their big vehicle strategy because that's where the profits have been and they can't figure out any other way to make money.

So what are they going to do going forward? Hope that the future causes gas prices to plummet? While that is a strategy and might even work, it's probably not a good idea to bet the whole company on it.

Ford recognized over a year ago that one of the things they needed is predictability. They decided they wanted to start investing heavily in hybrids but they wanted an environment that would help that investment pay off. What this means is that the future needs to become more predictable by instituting gas taxes will keep gas prices at a high and increasingly high but predictable level.

Well, there nothing on the horizon that indicates that Government is going to play ball. If anything, we may end up with lower taxes at least for a time. Ford needs long term stability. The politicians are busily trying to find palliatives for those who are complaining about $3/gallon gas.

I think it is clear to Ford that the future remains a crap shoot, with prices maybe trending up but still enough volatility along the way to sink them if they make the wrong bets. Phase 1 was to cut jobs and save billions of dollars. This isn't good enough and now they realize they don't have the resources to beat Toyota, for example, by investing in a hybrid future.

Ford is running out of the ability to take risks that might pull their fat out of the fire. Now all they are left with is even more restructuring,i.e., more cost cutting.

Yeh, maybe Ford has just been unlucky. And I don't see their luck changing.

d

I see a lot of Monday morning quarterbacking here....

They staked everything on SUVs and trucks and did not have compelling small car solutions, at least for the US (they do in Europe, which is either bizarre or shows lack of vision in management.) In a time when anyone in the business could see the writing on the wall wrt oil (namely the consumption/discovery gap getting bigger and bigger every year) this looked like a high risk game of chicken which they lost. Doubly high risk given the time it takes to get a new product out. Honda and especially Toyota also have SUVs and trucks but they have a more balanced lineup. Ford US never believed in the Focus (how many ads did you see for the Focus and how many for the F150?), and they didn't take advantage of hybrid technology they'd been developing since 1994. Even now they're still fixated on the SUV, still fighting the last war.

Andrey

Eric, Harvey:

You are right. “Professional managers”, who are trained to manage virtually anything without knowing particular industry they are working in, is the root of the problem. Look, for example, at air lines industry. But the most damaging is management aggressively trying to achieve better financial results every quarter at any price. Enron and current Yahoo mess are following.

As it is always happened, any success is presented as example of exceptional wisdom of management. Any defeat is because of “market volatility”, “rising oil prices”, “shifted demand”, etc.

Just stop making crappy vehicles and start to make good ones, cars or trucks – no matter, and you will post two-digit sales increase, like Toyota does.

Engineer-Poet

Lucas:  It's not the engineers.  Not fifteen years ago when I was there, and not today.  It's not engineers whose bonuses depend on making quarterly targets.  It wasn't the engineers who cancelled the PNGV efforts because Bush pulled the money and the EPA changed standards to effectively prohibit their engines.

It wasn't the engineers who made heavy trucks into the most profitable market segment.  It was the US public, voting for cheap gas at the pump, a vehicular arms race on the road, and pols who never talked about a tomorrow which might require us to consume smarter instead of more.  The public kept voting out anyone who pushed policies that would have steered us away from this mess.

The nation as a whole is anti-intellectual and trusts feelings over facts.  It's hard to argue that we are not getting exactly what we collectively deserve.

Andrey

Engineer-poet:
You are probably right at all your points.
However, what we are talking about is that such companies as GM and Ford, being able to hire brightest from brightest, should lead the public, not blindly follow it (I am talking about management, not engineers). They miserably failed, and that was quite visible for long time even for outsiders.

Engineer-Poet

Unfortunately, one company can't "lead" if that means another company is going to eat its market share.  The UAW would have killed them for that.  And two or more companies getting together is an anti-trust violation.

The whole point is moot; even Toyota went for the profitable guzzler segment with trucks like the Tundra and Tacoma.  They built them because Americans would buy them; we failed as individuals.  We could have voted to cut "light trucks" back to their historical share of perhaps 15% and raise gasoline taxes (the most effective thing we could do!), but we failed as a body politic also.

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