Ford Motor Co. reported a huge loss for 2006 and the situation is apparently getting worse, at least for the next two years. Number 2 car manufacturer of the world nevertheless is confident that its strategic decisions will eventually out cast the loss and turn in to a success within 2009. It recently reported the biggest loss in the company’s history, estimated at a staggering $12.7 billion in 2006. The two main reasons for this record lack of profitability are the declining sales in Ford’s playground, the US and the costs linked to the shut down of 16 plants. Closing the plants, giving compensations to workers and problems tied to special items sales grabbed more than $9.9 billion from Ford’s revenues.
Chief executive Alan Mulally is very much optimistic that the company will eventually regain profitability, sometime in 2009. “We know where we are. We are dealing with it and we're on plan,” Chief Executive Officer Alan Mulally told reporters and industry analysts in a conference call. Mulally was previously the executive vice president of Boeing and the CEO of Boeing Commercial Airplanes (BCA). Mulally was largely credited with BCA's resurgence against Airbus in the mid-2000s.
Mulally was named the President and CEO of Ford Motor Company on September 2006, succeeding William Clay Ford, Jr., who remains as Executive Chairman of the company's Board of Directors. He is taking over ‘The Way Forward’ restructuring plan at Ford to turn-around its massive losses and declining market share. ‘The Way Forward’ means that Ford is attempting to reduce fixed capital costs while maintaining a special focus on cars and car-based crossover vehicles. Over time, it hopes to make more of its product line profitable instead of relying on a limited portion of the products for profit. Making good profits across the product line requires that the company reduce the costs of development and production, while introducing new products that connect with consumers.
‘The Way Forward’ includes resizing the company to match current market realities, dropping some unprofitable and inefficient models, consolidating production lines, and shutting down seven vehicle assembly plants and seven parts factories. Among these are plants in St. Louis Assembly (near St. Louis), Atlanta Assembly (near Atlanta), Batavia Transmission (Batavia, Ohio), Windsor Casting (Windsor, Ontario, Canada), and Wixom Assembly (Wixom, Michigan). Up to 30,000 hourly and salaried jobs (28% of the total workforce) in North America over the next six years are expected to be eliminated, which is comparable to similar cutbacks previously announced at General Motors. These cutbacks are consistent with Ford's roughly 25% decline in U.S. automotive market share since the mid-late 1990s. Ford’s realignment also included the sale of its wholly owned subsidiary, Hertz Rent-a-Car to a private equity group for $15 billion in cash and debt acquisition. The sale was completed on December 22, 2005. A joint venture with Mahindra and Mahindra Limited of India ended with the sale of Ford's 15 percent stake in 2005.
The whopping 2006 loss surpassed Ford's old record of $7.39 billion set in 1992. It amounted to $6.79 a share vs. a profit of $1.44 billion, or 77 cents a share, in 2005. The company also reported losing $5.8 billion in the fourth quarter and $6 billion on its North American operations.
Ford, which lost $6 billion on North American operations alone, said it expects to burn up $10 billion in cash to run its business through 2009 and spend another $7 billion to invest in new products. Chief Financial Officer Don Leclair said the company finished 2006 with $33.9 billion in cash available for its automotive operations, including $12 billion that it borrowed in December. He said the company could tap into nearly all of that cash to fund its operations.
The auto vehicle business was undergoing wrenching fundamental changes for several years but that the changes are now accelerating. Recent troubles are only the latest examples of how the US firms are losing the battle to Toyota, Honda, Hyundai, Nissan and European companies in what was once a U.S. dominated industry.
Ford Motor Co. has not yet done enough to halt its eroding market share. One major shortcoming maybe is that, the company does not give customers top priority. To regain market share and increase profitability, Ford must cut costs drastically, do all they can to produce products that people like, and improve the customer experience at the dealership level.
