Ford Cuts to Move Forward

Drivers Shun SUVs and Pickup Trucks

SARAH A. WEBSTER / Detroit Free Press 19aug2006

In a bold bow to changing consumer tastes, Ford Motor Co. announced a dramatic 21% production cut — mostly of its lagging F-Series pickup and SUV lineup — for the last three months of the year that will result in downtime at three local factories and seven others nationwide.

Ford said it would build 168,000 fewer vehicles from October to December than a year ago.

While the cut could result in substantial layoffs at Ford and its suppliers, it will help the financially struggling automaker. Ford would have a chance to provide the fuel-efficient cars and crossovers that consumers want these days, and make fewer of the gas-guzzling trucks they don't.

But it's a risky gambit: The vehicles customers want are far less profitable than the big trucks they have been shunning.

And while the move may help Ford better stock its showrooms for future customers, the cutback is yet another blow for Michigan and its battered automotive industry. Ford, General Motors Corp. and local suppliers have already cut back tens of thousands of jobs in the past year.

Dearborn-based Ford's latest cut is expected to have a ripple effect on the local auto parts industry, especially Lear Corp. and Visteon Corp., where more production cuts and financial losses could follow as Ford needs fewer seats and electronics.

"No one can be pleased by the severity of this cut, which is the most aggressive reduction of a North American production plan in more than 20 years," Bill Ford, the chairman and chief executive, said in an e-mail to employees.

"I am satisfied, however, that we are laying a sturdier foundation upon which to build our business structure going forward. ... This is ... the right call for our customers, our dealers and our long-term future."

Ultimately, the aggressive production cut could be a lifesaver for the ailing 103-year-old automaker, which lost $1.4 billion during the first half of the year.

By building more of the vehicles customers want, and less of those they don't, Ford won't be saddled with parking lots full of hulking vehicles that will have to be discounted later.

Six months from now, Ford's shrewd business move could leave showroom floors full of desirable new 2007 cars and crossovers and far fewer trucks that have been less popular.

Cleaning out the showroom inventory in this manner might be a critical opening play for Ford's updated Way Forward turnaround plan, which is slated to be unveiled after a Sept. 14 board meeting, a person familiar with the company's plans said.

The updated plan might move up plant closures, such as the one previously announced for Wixom; close more plants, especially more of those that build the F-Series, and call for the elimination of even more jobs. Bloomberg reported Friday that Ford is preparing to shed 6,000 salaried jobs in North America, citing a person with knowledge of the plan.

Gov. Jennifer Granholm, who last week boasted about a new agreement with Ford that aims to save 13,000 jobs, called Ford's announcement "terrible news" in a Friday afternoon interview on CNBC.

"We want to keep every single automotive job we have," she said.

Schedules face cuts, too

Locally, Ford said it would cut schedules at plants in Dearborn, where the F-Series is built; in Wayne, where the new Expedition and Navigator SUV are assembled, and in Wixom. That factory, which builds the Lincoln Town Car and Ford GT, is already slated to be idled in 2007.

Ford officials refused to say how many workers might be furloughed at specific facilities.

Overall, however, Ford said it would cut production of cars by 5%, to 235,000 vehicles.

Pickups and SUVs, meanwhile, will take the biggest hit — 28% — and only 390,000 of those vehicles will be built in the October-December period.

While 10 assembly plants will cut back, the other seven in North America will run as usual or with overtime, including the Flat Rock and Wayne plants.

"People aren't buying trucks and SUVs because of the cost of gas," said Henry Fischer, 44, a skilled trades worker at the Wixom plant.

For the full year, Ford now plans to produce 3 million vehicles at its North American assembly plants — 1.1 million cars and 1.9 million trucks — a 9% reduction from 2005.

Ford officials said the aggressive reduction is part of the company's broader effort to accelerate its Way Forward turnaround plan, which was announced in January. That plan called for cutting 34,000 jobs and idling 14 plants.

The company acknowledged last month that it would have to cut even deeper to get back on track. Through July, sales of Ford's light trucks, a category that includes SUVs, pickups and vans, were down 16.4%. Car sales, meanwhile, were up 3.5%.

As a result of Friday's news, the credit rating agencies Standard & Poor's and Moody's Investors Service both said that they were considering downgrading Ford's credit further into junk, or speculative, territory. Ford shares closed at $8.00 Friday, down 2%, or 17 cents.

Falling pickup sales hurt franchise

While SUV sales have been falling out of favor for some time, the fall of the full-sized pickup is a relatively new and potentially catastrophic phenomenon for Ford.

At Ford, the F-Series is the franchise: Ford Motor has six brands that sold 3.2 million vehicles last year, but F-Series sales made up nearly one-third of that.

Sales in the segment are off 15.3% through July, compared to the same period a year ago. Ford is performing better than that, with F-Series sales down a lesser 12.3% this year.

August sales results won't be released until Sept. 1. But Ford's top sales analyst, George Pipas, said in an interview Friday that sales of the F-Series have continued sliding through the first half of August.

Katie Merx contributed to this report.

source: http://www.freep.com/apps/pbcs.dll/article?AID=/20060819/BUSINESS01/608190334/1002/BUSINESS&template=printart 19aug2006

Ford Unveils Plan For
Sweeping Cuts In '06 Production

JEFFREY McCRACKEN & JOHN D STOLL / Wall Street Journal 19aug2006

Plummeting Truck, SUV Sales Signal Broad Retrenchment At No. 2 U.S. Auto Maker Ford Motor Co., accelerating its restructuring amid slumping demand for trucks and sport-utility vehicles, unveiled sweeping production cuts in the U.S. and Canada that will partially shut down at least 10 plants that employ more than 20,000 people for the rest of the year.

The move to cut 21% of its North American production — about 168,000 vehicles — signals a growing recognition by Chairman and Chief Executive Bill Ford Jr. that the No. 2 U.S. auto maker, a storied enterprise founded by his great-grandfather, faces a painful retrenchment that will leave it substantially smaller and less U.S.-focused. As Ford sheds jobs in the U.S., it is expanding operations and purchasing in new markets such as China. Ford also is contemplating thousands of salaried job cuts, benefit cuts and more, permanent, plant shutdowns.

In an email to employees, Mr. Ford hinted at a new era for the auto industry and Ford, which has long relied on its profitable trucks and SUVs, writing that the company now assumes it no longer can "count on the relatively low gasoline prices that our customers enjoyed for decades. ... No one can be pleased by the severity of this cut, which is the most aggressive reduction of a North American production plan in more than 20 years. I am satisfied, however, that we are laying a sturdier foundation upon which to build our business structure going forward."

High gasoline prices, Mr. Ford said, have sapped demand for the vehicles that long were among Ford's most profitable and expensive, including the Ford F-Series pick-up truck, Lincoln Navigator and Ford Explorer. Indeed, while Ford had anticipated SUV sales would slip this year, they have fallen to levels the company didn't expect to reach until 2010.

Though Ford said it plans to increase production of some cars, its revised plans put it on track to build fewer vehicles than in any year since the recession year of 1991. It also will be the fewest cars and trucks Ford has built in a fourth quarter since 1982. That was a recession year, while the U.S. economy is growing today, though there are signs that the pace of expansion is cooling. Ford says it sees a slowing U.S. economy for the rest of this year and into 2007.

Overall, Ford expects to produce 3.05 million vehicles in North America in 2006, including 1.13 million cars and 1.91 million trucks — 9% below its 2005 level. It was unclear whether the cuts might be permanent. Ford already plans to close permanently 14 North American plants by 2012, and is weighing more permanent plant shutdowns beyond that. Any permanent plant closures would have to be negotiated with the UAW.

Ford's plans drew a tepid response from Wall Street. Its stock slid 2.2%, to $7.99 a share, in 4 p.m. trading on the New York Stock Exchange. The cut will trim Ford's North American profits by an estimated $1.4 billion and put the auto maker on pace to lose $4 billion in North America in 2006, estimated J.P. Morgan & Co. J.P. Morgan expects Ford to lose $1 billion, its first full-year loss since 2001.

"It's pretty ugly in the short term for Ford profits," said J.P. Morgan auto analyst Himanshu Patel. "They might get some credit from people longer term doing a capacity reduction."

Some analysts speculated Ford may now consider a company-wide early-retirement and buyout plan of hourly workers similar to one launched by General Motors Corp. earlier this year. That plan allowed GM to reduce its hourly work force of 113,000 by nearly 35,000, and slash billions in operating costs. Ford recently has limited buyouts to a few plants and estimates it will get only about 12,000 — from a base of 82,000 — workers to take early retirement or buyouts in 2006.

Credit-ratings agencies also reacted negatively, with Fitch Ratings downgrading Ford one notch, on par with GM at five notches below investment grade. Fitch analyst Mark Oline estimated Ford will burn through $7 billion in cash this year. Standard & Poor's Corp. and Moody's Investor Service both warned they will now review whether they need to downgrade Ford again.

Beyond Ford, the cuts are likely to ripple across the industrial Midwest, where auto-parts companies are a big part of the manufacturing sector. Globally, Ford spends $90 billion a year on parts and services. Many beleaguered U.S. auto-parts suppliers already have fallen into Chapter 11 bankruptcy or are teetering as they scramble to restructure and cut jobs. Stock prices for suppliers most reliant on Ford, such as Lear Corp. and Visteon Corp., tumbled on Friday.

The production cuts also will likely make it more difficult for Ford to sell off its former Visteon parts plants, which get most of their sales from Ford. Many suppliers that do business with Ford are trying to sell assets, either in or out of bankruptcy court.

"There is no upside for Ford's suppliers," said Mr. Patel. "If you are a supplier, you need to get more business with the Japanese auto makers."

Ford's cuts will set off a wave of repositioning inside the company. Besides the 10 assembly plants, the cuts will also affect an unknown number of Ford engine, transmission and stamping plants. The revised plan also reduces the company's previously announced third-quarter plan by 20,000 units.

In one example of Ford's dilemma, the auto maker recently spent $300 million to re-tool a plant so it could redesign its large SUVs, the Ford Expedition and Lincoln Navigator. Those redesigned vehicles are to be launched later this year, but Ford is now looking to partially idle the Wayne, Mich., assembly plant that builds them. A Ford sales manager calls that "fairly unprecedented" at Ford.

The cuts weren't a surprise for workers at Ford's Kansas City plant, which employs about 5,000 hourly employees, said Jim Stouffer, president of United Auto Workers Local 249. But, he said, downtime there is a new phenomenon, given the dominance in the last decade of the SUV and trucks assembled at the plant — the Ford Escape and Ford F-series. "It's contributing a sense of reality, a smack in the face that things are getting tougher," he said.

Mr. Ford has come under increasing pressure from Ford's directors to speed up cost-cutting efforts since the auto maker — No. 2 after GM in terms of North American production — reported a $254 million loss in the second quarter and worse-than-expected July U.S. sales. Ford also is looking to permanently close more factories and cut salaried jobs and benefits by 10% to 30%, said several people familiar with the auto maker's plans.

Ford's board is scheduled to meet Sept. 14 to review new plans, and final decisions are expected to be made public a week later, people familiar with the process said. The auto maker is expected to detail some new products at that time to allay concerns among investors that its design pipeline is weak.

In an interview, Ford sales analysis manager George Pipas said Ford will use the production cuts to clear inventory and reduce spending on sales incentives, such as discounts and rebates. As of July 31, there were 674,000 vehicles sitting unsold on Ford dealer lots. Production cuts should help lift dealer margins, which are at an all-time low due to depressed retail sales and Ford's shifting mix of sales toward lower-margin vehicles, such as passenger cars, he said.

The cuts could amplify the efforts by Detroit's auto makers to break their recent cycle of overproduction followed by binge discounting that has undermined their efforts to rebuild strong brand images in the U.S. Ford is betting that by reducing supply, it can put itself in position to firm up both new vehicle prices and the resale values of its used vehicles. GM has had some success pursuing a pricing-over-volume strategy this year, although GM's North American operations are still in the red.

In an interview yesterday, GM CEO Rick Wagoner said Ford's production cuts are indicative of an industry getting serious about introducing "stability" in inventory levels, adding, "I'm not sure that's bad news." He said GM's own production cuts also are an effort to limit sales incentives. Mr. Wagoner declined to comment specifically on Ford's moves.

Ford's plans also are the latest sign of how Detroit is starting to turn away from SUVs, which helped produce outsize profits for most of the 1990s. In many ways, SUVs were a throwback to the profit formula that worked for Detroit in the 1950s and 1960s — big vehicles with a V-8 engine up front, rear wheel drive, lots of interior space and a commanding presence on the road — all dependent on cheap gasoline.

But with gas prices now averaging more than $3 a gallon, consumers are switching to smaller vehicles with four cylinder engines — segments where Japanese and Korean auto makers have both a real and perceived edge. Consumers who want the space and presence of an SUV also have more alternatives, including crossover wagons constructed from components borrowed from passenger cars. Ford, GM and Chrysler all have growing arrays of these vehicles to sell, but they tend to be less profitable, and the segment is far more competitive, as Asian and European manufacturers have strong positions in crossover segments.

While Ford anticipated continued erosion in the SUV segment, Mr. Pipas said, falling demand in the large pickup truck segment over the past four months has been a surprise. He said gasoline prices have led consumers away from Ford's best-selling pickup trucks, long a key source of profits for the auto maker, representing about 25% of Ford's global volume.

But Ford's problem isn't just that its SUVs and pickups aren't selling as they used to. It's that the cars and crossovers it sells aren't reaping competitive — or in some cases any — profits. To fix that, Ford ultimately will likely have to radically overhaul its product engineering operations and slash overhead to fit its costs to match the post-SUV reality. Ford also will have to invest money to speed up delivery of new models to plug gaps in its car lineup, such as the glaring failure to offer a subcompact "B" class car to compete with rivals such as the Chevy Aveo, Toyota Yaris or Honda Fit.

A key challenge now for Ford will be marketing and advertising the redesigned Expedition and Navigator, which are built at the Michigan Truck plant. Sales of full-size SUVs have tumbled this year faster than Ford expected, with Expedition sales down 38%, and Navigator sales down 17.9%. A further troubling sign: Sales of Ford Explorers are down 33% even though Ford rolled out a redesigned version late last year.

"We are trying to figure out how and how much you advertise new products that are going into segment that may be DOA," said a Ford manager familiar with the Way Forward plan. "We don't want to duplicate what happened with the Explorer."

Reductions to Hurt Suppliers

Lear and Visteon brace for production loss 

JASON ROBERSON / Detroit Free Press 19aug2006

Ford Motor Co.'s chief executive, after announcing on Friday a 21% North American production cut, acknowledged the strain he is putting on his auto suppliers.

"We know this decision will have a dramatic impact on our employees, as well as our suppliers," CEO Bill Ford said.

The supplier industry is being squeezed on all sides, with domestic automakers demanding lower prices even as prices of raw materials steadily increase. Few suppliers with a heavy dependence on General Motors Corp. and Ford were profitable last year, and even fewer expect profits this year.

Shrinking production and smaller market share mean the car companies need fewer parts, translating into lower sales for auto suppliers.

During the last three months of the year, Ford will cut production of cars by 5%, to 235,000 vehicles, and it will cut production of trucks by 28%, to 390,000 vehicles.

For full-year 2006, Ford now plans to produce 3 million vehicles at its North American assembly plants — 1.1 million cars and 1.9 million trucks — a 9% reduction from 2005.

"These decisions are intended to provide a better balance between long-term supply and demand," said Craig Hutson, senior investment grade analyst at Gimme Credit, an independent research service on corporate bonds. "But the short-term ramifications will be ugly."

Two of Ford's largest suppliers — Lear Corp., a Southfield-based seat supplier, and Visteon Corp., a Van Buren Twp.-based supplier of everything from climate control systems to electronics — will be most hurt by the production cutbacks.

But between the two companies, Joseph C. Amaturo, an analyst with Calyon Securities in New York, says Visteon will be affected less.

"While we admit that the news of the Ford production cut is not welcome news for Visteon, we continue to stress that Visteon is much less dependent on Ford North American than it has been in the past," Amaturo said, adding that Visteon still can reach the low to midpoint of its earnings guidance of $170 million to $200 million.

Visteon spokesman Jim Fisher said the company is constantly in communication with Ford "to minimize volume adjustments."

Amaturo said Lear may be hurt more because it was relying on Ford's production to remain steady to offset less production of GM's old line of pickups.

In addition to ongoing cost cutting, Lear is investing $250 million in a global restructuring to help minimize the impact of production cuts, Lear spokesman Mel Stephens said.

"But simply put, when production is lower, it is going to have an adverse impact," Stephens said.

In recent quarterly financial reports, Lear said it expected lower production from its customers.

source: http://www.freep.com/apps/pbcs.dll/article?AID=/20060819/BUSINESS01/608190333/1002/BUSINESS&template=printart 19aug2006