Watching grown companies grovel is not a pretty sight. Last week, General Motors and Chrysler went to Washington to ask for another $22 billion, despite failing to meet the terms of their original loans. If they get the money, the companies will have to run every major business decision by the government for years to come. Their future, assuming it exists, is not a cheery one.
Just in case you might have forgotten about the Big Three's other member, however, Ford had some good news to report: It reached a tentative agreement with the United Auto Workers on pay cuts that would "help Ford operate through the current economic downturn without accessing a U.S. government bridge loan," a company press release claimed.
Call it Ford exceptionalism. In the company's fourth-quarter earnings call last month, CEO Alan Mulally suggested that his only rationale for visiting Washington last year was to "support the industry." Given how many times Mulally described his firm as in a "different place" from GM and Chrysler during the call — at one point he used the phrase three times in four sentences — listeners could be forgiven for thinking Ford was no longer located in Michigan.
As a public relations strategy, Ford's "what, me worry?" approach has been a coup. While GM and Chrysler get spanked for their short-sighted decisions, Ford has piggybacked on its competitors' eleventh-hour negotiations with bondholders and the UAW. In its latest earnings outlook, the company highlights its dealers' comparatively low inventory backlogs, its One Ford standardization campaign, and billions of dollars in cost savings, along with "product highlights" like British auto-mag What Car?'s choice of the Ford Fiesta as car of the year. Despite horrific economic conditions, Ford says its gaining market share against its U.S. competitors because customers believe they can count on Ford's survival.
Yet looking over Ford's financial statements, reason for confidence is hard to find. Income from Ford's financing arm, historically a rare bright spot on Ford's deteriorating balance sheet, swung to a $300 million loss. Inventory is up by $2 billion, and the plummeting value of used cars cost its leasing business $2.1 billion. Ford lost $2.46 per share solely in the last quarter — more than its entire current market capitalization. This year's forecast anticipates the worst sales in decades, and Ford's 40 percent revenue decline in January suggests that even its current-year prediction may be overly optimistic. Most serious of all is the $21.2 billion in cash the company chewed through last year. If the company keeps spending at that rate — though it insists it won't — Ford will face a liquidity problem before the end of the year.
So how is it that Ford, a company that was near bankruptcy during better times a few years ago, now has Detroit's deepest pockets? The answer is that CEO Alan Mulally had very good timing.
A little more than two years ago, Ford secured a $23 billion line of credit to fund its now-scrambled turnaround, then called "The Way Forward." Arranged by Goldman Sachs, J.P. Morgan Securities, and Citigroup, the massive deal securitized and then hocked almost all of the company's North American assets, including the Ford logo. Even at the peak of the credit bubble, Ford's double-down strategy was viewed as reckless. All three major rating agencies downgraded Ford's debt after the deal was announced.
In hindsight, however, Ford appears to have gotten while the getting was good. The deal gave the company access to a cash pile that has set it apart from its rivals: At the beginning of February, Ford withdrew more than $10 billion to bankroll its capital-destroying manufacturing operations. Under the terms of the deal, its lenders couldn't say no. The main reason that Ford doesn't need a government bailout now is that it already received the private-sector equivalent.
Internally, the company has made progress in standardizing its products globally, shuttering a number of manufacturing plants, and moving toward more fuel-efficient vehicles. But some of Ford's key accomplishments exist on paper at best. For instance, the company boasts that it "remains on track for both its overall and its North American Automotive pre-tax results to be at or above break even in 2011, excluding special items." In other words, if everything goes to plan, Ford will stop losing money by 2012 — not counting its potentially massive restructuring costs.
But even that dubiously good news is no longer a safe assumption. Over the last few months, Ford's expectations for overall U.S. auto sales have become conspicuously more aggressive than those made by GM and Chrysler analysts. Ford assumed as recently as last month that at least 11.5 million vehicles would be sold in the United States — 1 million more than GM and Chrysler's newest baseline expectation. By 2011, Ford is banking that annual U.S. sales will return to 15.5 million vehicles, a volume that GM foresees only in the rosiest of three scenarios.
More optimism creeps into the company's appraisal of its current operations. Ford's structural cost efficiencies — $4 billion last year, with an equal amount projected for 2009 — occur only at constant volume and mix, meaning that they are calculated to exclude the change in the number and type of cars sold. Unfortunately, however, Ford didn't sell the same number of vehicles, and its higher margin truck and SUV business took the brunt of the collapse.
Besides, focusing on future cost reductions and profitability may be looking too far ahead. To see 2011 in its current form, Ford needs enough money to cover its bills. At first blush, it appears far better positioned than GM: Both companies need around $10 billion to run their day-to-day operations, and at the beginning of the year Ford had almost $25 billion in cash on its automotive balance sheet compared with GM's $15 billion.
Having triple the cushion of GM, however, doesn't give Mulally much padding. By the end of the fourth quarter, Ford was down to $13.4 billion in cash on hand, an amount that would have brought Ford near its minimum capital requirements by the end of this quarter. To fill the gap, Ford has exhausted its remaining credit lines. (It withdrew the money now, the company said "due to concerns about the stability of the capital markets" — possibly a reference to the several hundred million dollars in guaranteed credit it lost last year when Lehman Bros. went under.)
Even if Ford's overall performance this year is slightly better than it was 2008 — an optimistic assumption, given that the company expects to sell fewer vehicles — it's hard to see how it could avoid bumping up against its minimum capital requirements. That's discounting the occurrence of the eminently plausible events (continued or worsened financial crisis, increased price competition due to overcapacity, a further shift away from trucks and SUV's, financial failure of parts suppliers) that Ford's own safe harbor provisions contemplate. If Ford gets into trouble again, it won't be able to turn to Goldman Sachs and Citigroup to persuade new creditors to come along for the ride.
None of this disproves Ford's contention that it's the strongest of the Big Three — just that it's about time for the company to stop gloating about it. Regardless of whether the Obama administration forces Chrysler and GM into bankruptcy, Washington is almost certain to pour billions into preserving the American automotive industry and squeezing the companies' employees and creditors. And unlike Ford's private creditors, it won't be expecting to see that money back anytime soon.
Seeking more from Washington than a line of credit would be a blow to Ford's pride. But given the new administration's preoccupation with halting job loss at all costs, it's hard to imagine a better time to bargain.
In 2006, Mulally recognized the chance to borrow cheap money when he saw it. If he's serious about repairing Ford, it's time to join GM and Chrysler in Washington — and give up on the idea that Ford is in "a different place."
More on the |