Ford Posts Loss of $5.8 Billion, Worst Since ’92

New York Times
By MICHELINE MAYNARD

DEARBORN, Mich., Oct. 23 — The Ford Motor Company reported its worst financial results in more than 14 years Monday and warned that its business was likely to worsen further in the months ahead, as it and other Detroit auto companies struggle to reinvent themselves.

Indeed, the new chief executive at Ford, Alan R. Mulally, a former Boeing executive, said the automaker would require a full transformation in the way it thought about consumers and approached the American market.

The typical Detroit turnaround, based on plant closings and introducing a few hit vehicles but with little change in attitude, will not be enough to see Ford through, Mr. Mulally said in an interview at Ford’s headquarters here on Monday.

The company, posting a $5.8 billion loss for the third quarter, has to first acknowledge the grim realities of the marketplace and then realign itself to be more productive and nimble.

“The most important thing to watch,” Mr. Mulally said, “is do the leaders have a view that’s different than the way it’s being done today. Because if they don’t, we are surely not going to get there.”

But there will not be much good news anytime soon for Ford or for the Chrysler Group, which is expected to join Ford on Wednesday in reporting dismal results for the last three months.

Only General Motors, which is slowly bouncing back from one of the worst stretches in its history with savings from deep cost cuts, is expected by Wall Street to earn a profit in the third quarter, of about $300 million, though its American operations may well remain in the red.

The dire straits in Detroit represent the continuing fallout from the auto companies’ too-long reliance on gasoline-consuming sport utility vehicles, as well as their failure to develop new cars and trucks to fend off their Asian competitors, particularly Toyota and Honda of Japan and Hyundai of South Korea.

Those foreign companies have built factories in the United States during the last two decades and focused on fuel-efficient vehicles , even as they added S.U.V.’s and pickup trucks to compete in Detroit’s last stronghold. That two-part approach paid off in record sales for the Asian makers this summer, when gasoline prices soared above $3 a gallon on average nationwide.

The rapid shift in the preferences of American consumers has been especially hard on Ford and Chrysler, which have been slow to wean themselves away from big vehicles and the outsize profits that such vehicles typically produce.

Including the loss reported Monday — Ford’s worst showing since early 1992 — the company could be on track to lose more than the $10.6 billion that G.M. did last year, even though G.M. is one-third bigger. Ford’s recent losses were deeper than it, and many on Wall Street, had expected.

Ford executives said the company’s operating performance in the final three months of the year would be even worse than its results in the quarter recently ended. And it indicated that it expected its problems to continue through at least the first half of 2007.

At Chrysler, meanwhile, executives are warning Wall Street that it will lose at least $1.5 billion for the last three months when it reports on Wednesday. That is twice as much as Chrysler previously cautioned analysts to expect.

And in another unexpected disclosure, Chrysler acknowledged Monday that it had nearly 100,000 more unsold vehicles on hand this summer than it previously disclosed, at a time when its backlog soared well above industry norms.

The worsening conditions at Ford and Chrysler have, by contrast, made G.M. appear healthier. It began a plan nearly a year ago to cut 30,000 jobs and close all or parts of a dozen plants by 2008.

G.M. has curbed its North American losses, gaining a valuable head start on Ford, said John Casesa, a longtime auto industry analyst.

“This is where G.M. was a year ago,” Mr. Casesa said of Ford. Like G.M., “Ford can do two things: borrow more money and sell assets” to buy time until their operations problems are fixed.

Ford already has put a British maker of luxury cars, Aston Martin, up for sale and is believed to be seeking buyers for its other British marques, Land Rover and Jaguar. It has begun a restructuring plan, called the Way Forward, which includes more than 40,000 job cuts and a dozen or more plant closings through 2008.

As a sign of its need for fresh thinking, Ford reached outside the auto industry for a new chief executive, Mr. Mulally, who succeeded William Clay Ford Jr. in the post last month. Mr. Ford continues as chairman.

Mr. Mulally said the company’s restructuring plan, devised before he arrived, would continue.
But he is also mounting efforts of his own to make Ford more productive and eventually profitable, following similar steps he took at Boeing. During his time there, Mr. Mulally streamlined production and helped the company remain profitable even when airlines reduced orders after the September 2001 attacks.

At the same time, he must convince Ford employees, shaken by job cuts and the threat to long-cherished benefits like health care, that the company has a vibrant future. Ford, once among the most respected names in corporate America, has been rattled in recent years by a series of high- and midlevel departures, producing a brain drain.

“Even more than turnaround, I would use the word transformation,” Mr. Mulally said. “It will require a transformation of the product line and a transformation of the business. You can’t do one without the other.”

For now, Mr. Mulally is still in a sort of honeymoon period, which, analysts said, may last longer than that of the typical auto company executive, given his newcomer status. After just two weeks on the job, he sent Ford employees an e-mail message telling them that he had three priorities: people, products and productivity.

“I know that the people of Ford have been through some tough times in the past few years,” he wrote. “I wasn’t here to share that with you, but I am here now to help move us forward,” adding that it is “at once the most humbling and exciting prospect of my professional life.”
This year, Toyota, which had lagged behind the three Detroit companies in American sales, has passed DaimlerChrysler, which includes its Mercedes and Chrysler Group divisions, to rank by sales as the No. 3 auto company in the United States.

Given the slide at Ford, Toyota is likely to pass it, too, in the next few years. Ford executives have already acknowledged that their company is likely to hold only 14 percent to 15 percent of the American market once its transformation is complete, or about 10 percentage points less than at the beginning of the decade.

In fact, Ford’s market share declined to 15.5 percent in the third quarter, a drop of two percentage points from the corresponding period in 2005, and a central reason for its significant loss, which included more than $3 billion in special charges related to the Way Forward plan.

That in itself did not shake Wall Street, but investors were surprised when Ford’s chief financial officer, Donat R. Leclair, said in a conference call with analysts that the company expected fourth-quarter performance to be worse than that in the third quarter.

In trading Monday, Ford shares fell 11 cents, to $7.90.

Yet these heavy losses. and the prospect of more, come as the company is seeking to enter the market with a new group of small, more fuel-efficient vehicles.

These include a new crossover vehicle, the Edge, which Ford introduced last week, and it is promising to eventually introduce a subcompact to compete with models sold by G.M., Toyota, Honda and Nissan. Unfortunately for Ford, the smaller vehicles come with an expectation of smaller profits.

In revising its Way Forward plan last month, Ford said it did not expect to earn money in North America until 2009, a year later than it originally predicted. Mr. Leclair said in an interview Monday that Ford anticipated a profit of 3 percent to 5 percent once it emerged from the red.

But getting there will be difficult. Mr. Mulally said Mr. Ford had been “really clear” during its courtship of him that grim days lay ahead. But he said he was not deterred.

“The Ford company is looking at business reality and dealing with it,” Mr. Mulally said.

Ford’s third-quarter loss, equivalent to $3.08 a share, is more than 20 times that a year earlier, when it lost $284 million, or 15 cents a share.

“Let me make it clear — these results are unacceptable,” Mr. Mulally said in the conference call, his first, with analysts and journalists.

Ford also disclosed that it would restate its financial results because of incorrect accounting of derivatives linked to interest rate by its finance arm, Ford Motor Credit.

The company said it was still studying most of the period affected, from 2001 through the third quarter of 2006, but that earnings from 2002 “will improve materially.”

Through the first nine months of the year, Ford has lost $7.24 billion, with more than 80 percent of that coming from June to September. By contrast, it earned $1.8 billion in the comparable nine months of 2005.

In the third quarter, Ford’s automotive operations lost $1.2 billion, or 62 cents a share, roughly what analysts had expected.

To reduce its work force, Ford is offering buyouts and other incentives valued as high as $140,000 each to all 75,000 hourly workers in the United States. Those workers have until Nov. 27 to decide whether to take one of eight severance packages, while white-collar workers who are offered buyouts are expected to leave by spring.

Shelly Lombard, a senior high-yield bond analyst with the research firm Gimme Credit in New York, said, “We don’t expect to see any improvement until the second half of next year, when most of the employees who take the buyout will have exited.”

Mr. Casesa said Monday that Mr. Mulally’s presence was a rare bright spot for Ford.

“You’ve got a new C.E.O. with a fresh pair of eyes on Ford’s problems,” he said. “Increasingly, the market will look to this new C.E.O. for some creative ideas to reinvigorate the revenue line.”

For his part, Mr. Mulally said he took the job “because I think we can do this.”

“This is an important industry” and Ford has so much opportunity for improvement, he added.
Asked whether he felt pressure from the expectations being placed on his performance, Mr. Mulally replied, “There’s no reason why we can’t do this, so it’s no pressure.”

Nick Bunkley contributed reporting from Detroit.

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