Ford Motor Company Struggles to Survive

Excerpt from the Wall Street Journal (online subscription required):

Ford's Chief Cites Hurdles to Turnaround Push

Chapter 11 'Not an Option,'
But SUV Sales Slide More;
S&P Cuts Rating Further

By JEFFREY MCCRACKEN
June 29, 2006; Page A3

Ford Motor Co. is running into a stronger head wind than the auto maker anticipated a few months ago, a development that is stressing the "Way Forward" turnaround plan it unveiled in January, Chairman and Chief Executive Bill Ford said in an interview.

The latest blow came yesterday when Standard & Poor's cut its rating in Ford debt deeper into "junk" territory. S&P cut Ford debt one notch to single-B-plus from double-B-minus, saying it believes "2006 would be a more difficult year for Ford than previously anticipated." (See related article.¹)

In an interview that took place yesterday before the rate cut was announced, Mr. Ford dismissed any talk that bankruptcy was a threat, saying "it's not an option."

He said his family's company has no interest in taking itself private, despite reports that the company has studied doing so amid a falling share price and a flurry of private-equity-backed deals.

Mr. Ford said his company is planning to build fewer gasoline-electric hybrid vehicles in the future than planned, and instead is "rejiggering" the mix it expects to build of hybrids and flexible-fuel vehicles that can accommodate alternative fuels like ethanol.

Since Ford detailed its plan, auto-industry conditions have gotten tougher than the Dearborn, Mich., company planned for, he acknowledged. The tougher treading contrasts somewhat with rival General Motors Corp., which faces similar declines in U.S. market share and reported a $10.6 billion loss last year but since has made some progress in reducing costs.

Ford's shares fell to a 52-week low yesterday of $6.36, down 18 cents, or 2.8%, at 4 p.m. in New York Stock Exchange composite trading, while GM's shares rose 76 cents, or 2.9%, to $26.66.

Mr. Ford said sales of sport-utility vehicles have fallen off faster than planned because of the recent run-up in gasoline prices. That hurts Ford because trucks and SUVs make up more than half of its sales. Prices of metals, plastic and other materials have also risen faster, he said.

This actually makes a decent companion piece to the previous post. Oil prices per barrel are not going to return to any stable levels below $70, and may continue their steady rise as worldwide extraction costs continue to increase due to diminishing yields from reserves and wells. At the same time, demand is increasing for highly fuel efficient vehicles and options that drastically reduce carbon emissions. Detroit has been caught flatfooted as foreign import to the U. S. are once again running circles around the dmonestic producers, who bet on SUV's to the max. I took a cab ride in Las vegas recently, my first trip in a hybrid. It ran extremely well, with very nice pickup. Was it made in Detroit? Are you kidding?

The U. S. auto industry has long relied of favorable regluatory protection to sustain itself in the face of competition, and it's fat, bloated and inefficient. Many heavy indistrial businesses prefer to hire lawyers and lobbyists to protect market power, but protection from innovation always creates an eventual bubble in the competitive environment. Competition will come, though it can be held off a long time. What's good for quarterly earnings in the short term is often not good for the business.

Ford continues to teeter on the edge. Tick-tock, tick-tock. Then again, my father used to sell Fords in the 70's and 80's, and they didn't seem much stronger back then. Is there such a thing as a good business that "succeeds" forever on the brink of failure, even bankruptcy?