As Market Share Erodes, Ford to Slash Production
Saturday, August 19, 2006
Ford Motor Co. plans to slash fourth-quarter production in North America to the lowest level in 25 years and partially shut down some of its plants for the balance of the year, a move designed to hasten its struggling turnaround effort.
In a statement yesterday, the Dearborn, Mich., automaker said it plans to make 168,000 fewer cars and light trucks in the fourth quarter than it did a year ago -- a 21 percent decline. Third-quarter production will decrease by 20,000 units, to 650,000. By the end of the year, production should be down 9 percent from 2005.
"We know this decision will have a dramatic impact on our employees, as well as our suppliers," Bill Ford, the company's chairman and chief executive, said in a note to employees. "This is, however, the right call for our customers, our dealers and our long-term future."
Ford's outlook has darkened as its market share has eroded and its losses have mounted along with those of its larger rival, General Motors Corp. Both automakers have embarked on turnaround plans aimed at curtailing costs, sharply reducing payrolls and winning back customers lost to foreign competitors.
Ford, which analysts say has made less headway than GM, said the decision to pare production is part of its comeback strategy and a sign of its commitment to restructure. Ford shares closed yesterday at $8, down 17 cents.
The production cuts take aim at light trucks, now that consumer demand for the gas-guzzling vehicles appears to be waning.
Industry-wide sales of pickup trucks were off by 28 percent in the second quarter from the same period a year ago as gasoline prices began to cross the $3 mark nationwide, said Oscar Suris, a Ford spokesman.
"The pickup segment of the business is shrinking," Suris said. "We believe that some of this shift may be permanent because of the sustained levels of gas prices."
Pickup trucks typically make up about 30 percent of Ford's sales. The automaker is targeting the F-series full-size pickups in particular, which would result in downtime at plants in Norfolk, Kansas City, Louisville and Dearborn.
Ford plans to focus on producing more passenger cars and crossover vehicles, Suris said. The goal is to reduce the need for sales incentives and the costs that dealers incur for carrying inventory.
By year's end, Ford plans to produce 1.34 million cars, or 118,000 more than in 2005, and 1.91 million trucks, about 404,000 fewer than last year.
Kevin Tynan, a senior equity analyst at Argus Research Corp. in New York, said reining in costs by lowering production is usually a "last resort" for U.S. automakers because contracts with the United Auto Workers Union require them to pay unionized employees even if a plant is idle. So automakers lean toward keeping the production lines rolling and trying to spur demand for slow-moving products through price incentives.
In this case, Ford has not adopted that strategy because it is so financially weakened that "it does not have the flexibility in its cost structure to run inventory levels even a little bit higher than it would like," Tynan said. Instead, Ford wants to ride out the rest of the year with low inventories, watch for signs of relief at the gas pump and then roll into 2007 with pent-up demand for its vehicles.
Meanwhile, the automaker is pushing ahead with Way Forward, its turnaround initiative launched in January that called for cutting 4,000 salaried positions and up to 30,000 factory jobs as it tries to regain profitability.
Earlier this month, the automaker restated its second-quarter loss, which totaled $254 million, more than double the $123 million previously reported. The company's bond rating is in deep "junk" status.
Like GM, Ford sad it was open to alliances with other automakers to strengthen its position in the market.
Ford declined yesterday to comment on how its workers would be affected by its decision to lower production. The United Auto Workers, which represented 82,000 employees at Ford plants at the end of last year, declined to comment on the decision.
The company said it would reveal more details in September about its production plan and the resulting impact on employees.