The Way Forward

Ford Motor Company is clearly in trouble. Enquiring minds may be wondering what Ford is doing about it. Following is a 12-point summary of “The Way Forward.”

Production Cuts

The New York Times is reporting, “Ford to Cut Fourth-Quarter Production by 21%”:
“The automaker said it would cut North American production in the fourth quarter by 168,000 units and reduce third-quarter production by 20,000 vehicles.

“‘We know this decision will have a dramatic impact on our employees, as well as our suppliers,’ chief executive Bill Ford told employees, but said it was the ‘right call.’

“He said full details of the accelerated plan would be announced in September.”

0% Financing

Ford is offering 0% APR financing for 72 months on all Mercury vehicles.

Price Reductions

Ford is dropping the price of the 2007 Lincoln Navigator:

“The manufacturer’s suggested retail price for the 2007 Navigator ranges from $46,575-51,475, including destination and delivery — $4,100 less, on average, than the 2006 Navigator base models. Lincoln is estimating that the 36-month lease-end residual values of the 2007 Navigator will be as high as 48%, which is a seven-point improvement compared with the 2006 model.” 

Focus on Mexico

Back in June, reported, “Ford to Invest Billions in Mexico”:
“Ford Motor Co. which is slashing jobs and closing plants in the United States as it seeks to return its North American operations to profitability, is preparing to invest up to $9.2 billion in Mexico to leverage its low operating costs there, a Michigan newspaper reported on Wednesday.

The Oakland Press, a Detroit-area newspaper, said the investment was detailed in a confidential, 28-page document turned over to it by a Ford employee.

“The document, part of which had been prepared for a presentation in early April to officials from the Mexican government, said Ford, the No. 2 U.S. automaker, could invest a total of $9.2 billion in Mexico over a six-year period from 2006-2012, according to the newspaper.

“Ford spokesman Oscar Suris declined to comment on the report, calling it ‘speculative.’

“The newspaper said a second source familiar with Ford operations vouched for the authenticity of the document, ‘which suggested the automaker’s investment could potentially create up to 150,000 jobs in Mexico within the next decade.’

“‘The Way Forward — Mexico (offers an) opportunity to further leverage Ford of Mexico cost advantage and location to reduce corporate fixed costs,’ the confidential document said.

“‘We will leverage our global scale like never before and Mexico is a key partner as we’re targeting lower fixed costs, better quality, and speed to deliver our Way Forward plans,’ the document said.

“Ford, which is struggling with rising costs and declining U.S. market share, currently has two assembly plants and an engine plant in Mexico.

“Under Ford’s restructuring plan, which is dubbed Way Forward and was first announced in January, the automaker plans to close 14 plants and cut up to 30,000 hourly workers in North America.

“Mark Fields, the executive vice president in charge of the North American restructuring effort, said in January the company was looking to build a new low-cost assembly plant in North America.

“The document also indicated that Ford expects to increase its purchases of Mexican-made components by 300%, while suppliers could increase their investment by $3.6 billion.

“Ford, which is hoping to attract incentives from the Mexican government, also said it was prepared to shift some professional engineering and purchasing jobs to Ford of Mexico as part of the expansion plan, according to the document.” 

Sell Jaguar and Land Rover

Bloomberg is reporting, “Ford May Sell Luxury Brands to Former Chief Nasser, People Say”:
“Ford Motor Co., restructuring after a $1.44 billion first-half loss, is in talks to sell some luxury auto brands to an investment group led by former chief executive officer Jacques Nasser, four people familiar with the discussions said.

“The discussions focus on Jaguar and Land Rover, said one of the people, who didn’t want to be identified because the negotiations are private. The talks are with J.P. Morgan Chase & Co.’s One Equity Partners LLC, where Nasser is senior partner for mergers and acquisition, the people said…

“The Fords’ preferred move would be a partnership bringing Carlos Ghosn, chief executive of Nissan Motor Co. and Renault SA, into a leadership position in the company, said the person, who didn’t want to be identified, because the deliberations are confidential…

“Last month, Bill Ford told Ghosn he would like to explore an alliance if Ghosn fails to team up with General Motors Corp., according to people familiar with the conversation. Ghosn said he wouldn’t talk to Ford before his discussions with GM conclude in mid-October, the people said.” 

Court Nissan

In The Toronto Star, “Reports Say Ford Courting Nissan”:

“Shares of Ford Motor Co. rose more than 4% yesterday after reports that chairman and CEO Bill Ford had approached Nissan-Renault CEO Carlos Ghosn to discuss a partnership if Ghosn fails to form an alliance with GM Corp.

“A report in The Wall Street Journal said Bill Ford recently called Ghosn ‘with a simple message: If you don’t do the deal with GM for any reason, come talk to me.’

“Ghosn, the CEO of Japan’s Nissan Motor Co. and France’s Renault SA, said he wouldn’t talk to Ford until his talks with GM conclude, Bloomberg News said.”

Worker Buyouts

The Detroit Free Press is reporting, “Top UAW Officials to Meet Next Week Over Possible Ford Buyouts”:
“Ford has been offering buyouts on a plant-by-plant basis. A Ford spokeswoman called recent reports that it is considering across-the-board buyouts ‘speculative.’

“The UAW has summoned local presidents and chairmen to Detroit on Tuesday for ‘a special meeting for buyout strategy discussions,’ said Chris Kimmons, president of UAW Local 919 in Norfolk, Va.

“Kimmons said he believes the discussions will center on possible buyouts throughout Ford, similar to the ones offered by rival General Motors Corp. earlier this year. However, he said he had no information as to whether Ford was actually making such an offer.

“A spokesman for the UAW’s national leadership had no immediate comment. Ford spokeswoman Marcey Evans said across-the-board buyouts are ‘not an approach that we’re currently taking.’ But, she added, ‘Everything is on the table.’ Ford has offered a variety of buyouts and early retirement programs at 11 plants.

“Through Aug. 1, 3,800 workers had left in exchange for those deals, Evans said.” 

Buyouts or Sellouts?

The Detroit Free Press is reporting, “Ford Buyout Plan Chills UAW Locals”:
“It’s a deathblow if workers aren’t replaced, official says.

“A local UAW president said he and his southeast Michigan peers oppose efforts by Ford Motor Co. to eliminate thousands of jobs with buyouts, unless the automaker pledges to replace many of those workers — even at lower wages…

“But some union leaders say the deal effectively could be a deathblow to the UAW, which has been losing membership for decades, or at least to some locals.

“‘I don’t call them buyouts — I call them sellouts,’ said Mario Guerreso, president of UAW Local 245, which represents more than 2,500 Ford workers at various facilities in Dearborn, such as the research and engineering center.

“‘We are fast approaching extinction…When you accept those buyouts, those jobs are gone’…

“Workers who are eager to retire early or move on to careers less turbulent than those in the domestic auto industry say they are upset with their union leaders for taking this stance.

“After news broke Monday that Ford was considering company-wide buyouts, several workers called the Free Press to complain that that some union leaders were blocking the process…

“The UAW already has lost 35,000 members at General Motors Corp., under its attrition program this year. If Ford had a similar 30% acceptance rate for its 82,000 hourly workers in the United States, about 25,000 workers could leave the company — and the union’s membership rolls.” 

Take Ford Private

USA TODAY is reporting, “Ford Motor Considers Going Private”:
“Ford Motor is considering taking the company private, a move that could give the ailing automaker time to restructure operations outside the glare of critics, a source with direct knowledge of the discussions said Wednesday.

“‘The family is willing to look at anything,’ said the source, who didn’t want to be identified because the discussions are ongoing. ‘A lot of different scenarios are being gamed out.’

“With Ford’s shares trading around an anemic $7.76, going private could cost interested parties as little as $13.34 billion…

“Plummeting pickup sales have derailed Ford’s current restructuring plan, laid out last January, and the automaker plans to unveil an accelerated version in September. Through the first half of the year, Ford has lost $1.4 billion…

“‘The biggest benefit to taking it private is just not having to answer to all the external stakeholders they have to answer to today,’ said Kevin Reale, an analyst with AMR Research.

“Nearly 600 banks or investment firms own shares in Ford, according to Thomson Financial, and 790 mutual funds also have a stake in the automaker. Sixteen analysts cover Ford, issuing reports to investors when news breaks.

“CEO Bill Ford has been criticized for several incidents since taking the job in October 2001. In 2002, he said the automaker would make $7 billion in pretax income in 2006. In April 2005, three weeks after saying it would still meet its goals, it revoked its earnings guidance and said it would no longer meet the $7 billion target, shaking investor confidence.

“Ford’s shares have traded between $6.06-10.20 in the past 52 weeks, giving it a market capitalization of $14.5 billion, a quarter of smaller rival DaimlerChrysler’s market cap.

“‘The assets are tremendously undervalued,’ said David Cole of the Center for Automotive Research. A private equity firm could be eyeing a future share price of $20-40, he said.”

The Way Forward?

1. Cut 4th-quarter production 21%.
2. Offer 0% financing for 6 years.
3. Court Nissan.
4. Sell Jaguar and Land Rover.
5. Reduce list prices compared to 2006.
6. Close 14 North American plants.
7. Eliminate 30,000 jobs in the U.S.
8. Create 150,000 assembly jobs in Mexico.
9. Increase Mexican-made components by 300%.
10. Shift some professional engineering and purchasing jobs to Mexico.
11. Offer worker buyouts.
12. (If all else fails) Take the company private. 

Two Questions:

1. Is this plan the way forward, or are these acts of desperation?

2. After all the jobs and parts are moved to Mexico and China, will Ford still be running ads to “Buy American”?

“‘The assets are tremendously undervalued,’ said David Cole of the Center for Automotive Research. A private equity firm could be eyeing a future share price of $20-40, he said.”

Tomorrow, I will look at Ford’s balance sheet to see if there is a different answer to just how valuable Ford’s assets are.

September 4, 2006

The Daily Reckoning