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Ford's bumpy road to a record loss

The massive losses at Ford come as the automaker tries to cope with a major restructuring and downsizing to shrink its workforce and number of plants to match its declining market share.
/ Source: Business Week

Ford Motor Co. is setting records, but not the good kind. On Thursday, as expected, the struggling automaker posted a full-year 2006 net loss of $12.7 billion, the largest single-year loss in the company's history. Ford lost $5.8 billion in the fourth quarter alone. Operating results for Ford in 2007 are expected to be worse, though the net profit will be substantially better because of far fewer one-time charges.

The massive losses come as Ford tries to cope with a major restructuring and downsizing to shrink the company's workforce and number of plants to match its declining market share. Ford's big problem is its North American automotive operations. The company's European and South American operations were profitable. And its financial-services unit earned more than $1.9 billion.

For 2006, Ford's North America automotive operations reported a pretax loss of $6.1 billion, compared to a loss of $1.5 billion in 2005. The increased losses stemmed primarily from unfavorable net pricing, largely reflecting higher incentive spending, a decline in truck and SUV sales, and lower market share. For the year, North America's sales totaled $69.4 billion, compared to $80.6 billion a year ago.

Plant closures
Results for North America in the fourth quarter were a bit worse than analysts expected. "North America remains the biggest challenge, reporting a $2.8 billion pretax loss, even worse than our estimated $2.3 billion loss," noted Merrill Lynch analyst John Murphy.

The Dearborn, Mich. company's losses last year included heavy provisions for its hard-hitting restructuring plan, which foresees 16 plant closures in North America and the elimination of 45,000 jobs by 2008.

Ford Chief Executive Officer Alan Mulally, who took over the top post in September from Bill Ford, who remains chairman, said that while the current financial picture for Ford will remain bleak for two more years, the restructuring is going as planned. "We have an operating rhythm now, and a new attitude at the company," says Mulally.

Rankings slide
In particular, Mulally has been busying himself breaking down a global structure in which Ford Europe, Ford Asia, Ford North America, Ford Australia, and Ford South America had long created redundancies of efforts, products, engineering platforms, engines, and the like as a way of perpetuating each division's independence.

Ford sold a total of 6,597,000 vehicles worldwide last year, a decrease from 6,767,000 in 2005. Ford now ranks as the second-biggest U.S. automaker, behind General Motors. Ford lost its No. 2 ranking worldwide in 2004 to Japan's Toyota, which is now threatening to overtake Ford in the U.S.

While much of the focus on Ford's problems has centered on its core Ford-Lincoln-Mercury business, it also continues to struggle with its luxury portfolio — Jaguar, Land Rover, Volvo, and Aston Martin. For 2006, the Premium Auto Group (PAG) posted a full-year pretax loss of $327 million, compared to a pretax loss of $89 million a year ago.

Conjoined brands
The decline, Ford says, is more than explained by warranty costs and unfavorable currency exchange rates. Jaguars and Land Rovers are built in Britain, and Volvos are manufactured in Sweden. Losses at Jaguar alone are estimated by some analysts to be between $700 million and $800 million, in large part because of extremely high manufacturing costs in Britain. Ford has announced its plans to sell Aston Martin.

But ideas about selling either Jaguar or Land Rover are hampered by the fact that Ford would have extreme difficulty selling Jaguar without also selling Land Rover, because the products and manufacturing of vehicles at both brands have become so intertwined.

Ford is projecting a profit at PAG for 2007 following the sale of Aston Martin, which is expected to bring in more than $1 billion, as well as improved sales at Volvo and further cost reductions at Jaguar and Land Rover. "The product plan and cost-cutting plan at Jaguar and Land Rover is very good and making progress," said Mulally.

Excluding special items, such as buyouts for employees and plant closures, Ford posted an operating loss of $2.8 billion. In 2005, Ford posted an operating profit of $1.9 billion.

Ford has said it does not expect a profit until 2009. Meantime, the company is trying to revamp its product lineup under a team of new designers and a new global product development chief.

The company is trying to bring to market a new group of passenger cars and crossover SUVs to cover for falling sales of its truck-based SUVs and pickups, which for several years had been providing virtually all of Ford's operating profit from vehicle sales. High labor costs and the need to discount heavily have long made Ford's passenger cars, like the Ford Focus and Ford Five Hundred, an unprofitable business. "Making our passenger-car business profitable on its own without being supported by truck sales is a necessity and priority," Mark Field, Ford president of the Americas, said in an interview this month.

Some refreshing news
Ford has been encouraged by successful sales of the Ford Fusion sedan, as well as higher-than-expected sales for the Lincoln Zephyr. Ford's new Edge crossover, launched a few months ago, has been well received by the auto press, but it's too early to tell if the public will scoop it up in sufficient numbers without sales incentives.

Despite longtime criticism that Ford should shutter its Lincoln and/or Mercury brands to concentrate on rebuilding the Ford brand and concentrating on its European luxury cars, the company has decided to fund a future product plan for both. Ford says that 70% of its products will be new or significantly refreshed by 2008 and all of them by 2010.

The yearend earnings report was not without some good news. Ford is out to cut operating costs by $5 billion by 2008. Mulally, a former executive at Boeing, said that the more he learns about Ford's global operations, the more opportunities he sees to overshoot that target.