Ford Still Must Negotiate Rough Road Ahead
Saturday, December 20, 2008
Ford Motor may have passed on the $17.4 billion auto bailout plan, but analysts say the automaker is still fighting for its survival along with every other company in the American auto industry.
At the end of September, Ford reported to Congress that it had about $30 billion on hand, including $19 billion in cash and $11 billion of available credit lines. But the cash-intensive operations of a car company means that money could be quickly eaten up, analysts say.
"They don't have an endless supply of cash," said Pete Hastings, an analyst at the investment banking firm Morgan Keegan. "If GM and Chrysler are in the emergency room, Ford is in the waiting area next to go in."
Analysts said all companies building cars in the United States could face severe financial pressure if the market stays weak. In the past few months, U.S. vehicle sales have slipped to their lowest rates in 25 years. Economists blame depressed home values and slumping consumer confidence.
Due to the steep decline in the market, Toyota this week suspended preparations for a new Mississippi plant to build the gas-electric hybrid Prius. Toyota plans to finish the building, but is holding off the installation of equipment on the factory floor. In recent months, Toyota, Nissan Motor and other foreign-based automakers have idled factories or slowed production lines in response to weak demand.
As the one U.S. automaker not taking loan money, Ford will not be subjected to the loan plan's strict provisions, like limiting executive pay and the use of corporate jets. But analysts say Ford will likely seek to adopt other provisions of the government agreement that binds General Motors and Chrysler.
Chief among those provisions will be any that deliver savings from cutting costs associated with organized labor. In labor agreements, GM, Ford and Chrysler generally try to adhere to the principle of "pattern bargaining" -- an aim to keep pay and benefits at similar levels across the three companies.
But the plan announced yesterday could yield GM and Chrysler new savings from labor costs. The plan calls for the companies to pay cash for only half of the billions of dollars owed to the underfunded health-care plan for retired United Auto Workers, with the remainder coming in the form of stock. The two automakers might also reap savings from provisions in the plan that ask GM and Chrysler to make work rules and wages competitive with foreign automakers, which are not unionized.
"One of the questions here is do you think they will get the same benefits of the labor contract that GM and Chrysler have," said David Cole, chairman of the Center for Automotive Research. "My guess is they probably will."
Ford so far isn't talking about its next move. But executives across the industry are calling for "shared sacrifice" among bondholders, dealers, labor groups and suppliers. In a statement, Ford chief executive Alan Mulally said the automaker would benefit from the government's cash injection.
"The U.S. auto industry is highly interdependent, and a failure of one of our competitors would have a ripple effect that could jeopardize millions of jobs and further damage the already weakened U.S. economy," Mulally said.
Foreign-based companies have also said they were worried that a collapse by one of the Big Three could ricochet across the industrial sector, threatening the financial stability of thousands of dealers and supplier companies.
In a statement, Toyota Motor said the well-being of the U.S. auto industry is essential to the recovery of the economy. "Because the auto industry is highly interconnected, it is in the best interests of all our stakeholders, including consumers, to achieve industry stability soon," the statement said.
Ford's stockpile of billions in cash over the past couple of years gave the automaker the financial strength to pass on the government loan funds. In 2006, Ford amassed $18 billion in bank loans backed by company assets such as U.S. assembly plants, its Swedish luxury brand Volvo and even the intellectual property associated with its famed blue oval logo. At the time, Ford was viewed as the Detroit automaker most likely to go under.
Historian Douglas Brinkley said Ford's decision to buck the government bailout was a "dice-gamble." But he said it fit the contrarian streak of Ford history.
"A hundred years ago at a major world's fair there were 100 automobile companies showing wares in St. Louis," Brinkley said. "Ninety-nine of those companies have been abolished and only Ford has survived. They've done it by always being a contrarian to what the other automakers at the moment are trying to do."