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No Easy Answers - FMC

Old 8/6/06, 07:09 AM
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No Easy Answers - FMC

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No Easy Answers

A terse announcement on the Ford website Wednesday confirmed what the Wall Street Journal had reported earlier. Kenneth Leet had been taken on to advise Bill Ford on ’strategic alternatives’. Wall Street, of course, lapped this up (Ford stock rose on heavy volume). Nothing quite like having one of its own (Leet had formerly worked with Goldman Sachs) able to bend the ear of a CEO who has consistently ignored the blandishments and harangues of the analyst community, no matter how extravagent their language, no matter how large their type.
The press, predictably, responded with a flurry of hysterical yammering. Having read the coverage of this decision, many Ford employees could have been forgiven for not coming into work on Thursday, as it appeared that the company would be on the auction block and closed for business by Friday.
Our Dear Mr. Leet finds himself in a situation that offers no easy solutions. Of course, according the the back-benchers, Monday morning quarterbacks, and the guy sitting on the bar stool yelling at the TV, there are several ways to “fix” Ford. I am pleased to collect, in one place, the bulk of them, along with their frequently neglected downsides:
1) Partner with Honda (or Toyota, or BMW, or … )
Downside: This would provide no short term benefit except cash. Cash, it is generally acknowledged is not a short-term problem at Ford. This solution causes new problems while purporting to solve a problem that doesn’t exist.
Ford has little in the way of engines, transmissions, facilities, or platforms to interest other manufacturers. Among those that are likely to see anything worth cherry-picking from Ford, only Peugeot-Citroen (PSA) and FIAT leap to mind, and neither are in particularly good shape these days. Ford’s global reach and solid midsize architectures would be quite attractive to PSA and FIAT, but neither company is in a position to invest heavily in Ford.
2) Sell Jaguar
A favorite of many, the “Sell Jaguar” approach is one that has likely come up many times in house, and has been vetoed each time. Why should Ford keep Jaguar? Among other reasons, it would net a pittance, if sold. We’re talking perhaps as low as the tens of millions of dollars, if Ford only sells Castle Bromwich and the Jaguar name (no one in their right mind would buy Halewood–high quality facility and all, but its only product is the X-Type). Jaguar’s administrative staff, accounting, and U.S. dealer network is thoroughly intertwined with Land Rover’s thus linking the two brands at the hip. Furthermore, the engines for these products are built at Ford facilities.
Make no mistake, there would be no financial benefit to selling Jaguar, save the elimination of a few years of losses going forward. While Ford has not said it, it is quite clear that with the termination of the X-Type, Ford will no longer need Halewood. The closing of Halewood and the cancellation of the X-Type leaves Ford with a single plant and three vehicles that still sell reasonably well overseas. This is a profitable combination, if not necessarily as profitable as the lofty dreams of Rietzle and Nasser.
3) Sell Volvo
Heard less often, but definitely an option that would result in profit to Ford Motor. The only downside is that Volvo’s operations are even more thoroughly intertwined with Ford’s than Jaguar. Volvo’s engine lineup is shared on the small end with dozens of Ford products, and at the high end, the new Volvo I-6 will be shared with Jaguar and Land Rover. The only engine that goes with Volvo, if it’s sold, is the Yamaha V8. Only the S60 and XC70 are built on a platform that is not shared with other Ford products.
Why is this such an issue with Volvo and Jaguar? Because any buyer has to take into consideration the need to remove residual dependencies on the former parent. This results in added expense to the acquirer that comes out of the transaction price. Operations like Hertz that are barely incorporated in the parent company net the highest prices upon sale because they can basically be turned over lock, stock, and barrel.
4) Sell Ford Credit
Another frequently suggested cureall. Ford would in essence permanently forego future profits from Ford Motor Credit, in exchange for a sum of cash now that is not necessarily needed.
Ford’s operations have been consistently (even through the last restructuring) cash flow positive. Ford has ended each year with more cash than the year before for the last decade. They will burn cash this year, but that cash burn, expected to be $3 billion–related primarily to buyouts, does not seriously threaten Ford’s financial situation.
Once again, the “sell Ford Credit” ’solution’ is a red herring. It does not solve Ford’s current problems, and it creates long term problems that must be taken into consideration.
5) Take the company private
This is perhaps the most preposterous suggestion made thus far. It would require billions in debt financing in order to take over a company that is not presently profitable, and which will not in the short term, spin off enough profit to service this debt. Taking the company private would essentially require gutting it of its valuable assets. And for what? The reason advanced is that the Ford family would be able to ‘quietly’ turn around the company without ‘constant scrutiny by the press and Wall Street’. The point missed, of course, is that if you don’t pay attention to what the Street says, or what the media says, you don’t have to worry about them. Besides, there is no guarantee that media hyperbolists would leave Ford alone were the company taken private.
Of course, all this is tired ground that has been gone over many times, here and elsewhere. Ford has two problems that are basically without short term solutions. There are no easy answers.
Ford’s first problem is its legacy costs, and the cost of union labor. In this competitive market Ford is hampered not so much by what it pays in wages to its hourly employees, but the cost of their health care, and retiree pensions and retiree healthcare.
In a perverse twist, Ford and GM are being punished for treating their employees and retirees well. Pensioners for Ford and GM are well taken care of by today’s Ford customers, and not the public at large. The problem, of course, is that there are far fewer Ford customers today than there were in 2000.
The problem with this problem is that there’s not much Ford can do this side of bankruptcy court. Ford is moving to close plants, and likely will speed up the pace of these closures, but apart from closing plants early, there is little they can do. Legacy costs are not going away in the short term, and the UAW is likely to resist strongly any effort to increase employee healthcare expenditures during contract negotiation next year.
Ford also suffers at present from a shortage of attractive product. There are many explanations offered for this (and many solutions suggested). The problem with all solutions is that none can be implemented quickly.
Some suggest that Ford federalize the Fiesta. Ford had this planned, but it involved federalizing the old Fiesta at the end of its life (early next year), and assembling that old Fiesta as an orphaned product for sale at rock-bottom prices in the U.S. alone. This old Fiesta (Hecho en Mexico) was to be Ford’s response to the Aveo, Yaris, Fit, Versa, etc. Unfortunately, it would be out of date on arrival, and would remain out of date throughout its (likely short) life. Ford has scrapped this plan for obvious reasons, but it leaves an expanding hole unfilled for a couple more years.
Another point where Ford missed the boat was the failure to move the North American Focus to C1. In fact the failure is one remove from that. Apparently, Ford North America, very early in the C1 project, decided that they wanted no part in the C1 Focus. Burned by more quality and safety issues than you could shake a stick at, someone at Ford NA apparently said ‘never again’. The logical result was that the C1 was designed with no thought of sale in America at the Focus’ lower prices and margins, and the resultant architecture was not suitable for use in the U.S., even after it became obvious that this was a huge mistake.
The arrival of Mark Fields in the president’s office, and Darrel Kuzak (who led the C1 team) in the catbird seat at product development, brought about a review of Ford NA’s plans regarding the Focus. The decision to update the current Focus for 2008 model year was already made, and work had begun (in November 2005 Ford was well under way with the update to the Focus, with a launch date of mid 2007). The question was what would happen next, and when would it happen. Some were in favor of keeping the Focus on its own architecture, and continuing to update that. The most recent word is that Ford is planning on pulling ahead the launch of C2 (possibly debuting the next Focus in Frankfurt, 2007), and prioritizing a launch in the U.S. as early as 2008. C2 is being designed, from the beginning, with a view towards sale in the U.S.
However, once again, we are talking about a couple YEARS before new C and B cars arrive. Of course, when they arrive, Ford will have one of the broadest array of small cars available. Already its Focus range offers more configurations than any competing compact range. With the possible addition of a Mazda5 sized microvan, a coupe, and three new “B” cars (a sedan, CUV, and coupe), Ford’s small car range looks pretty good. In 2008.
Which of course, is the problem. And the problem with this problem also is that there’s not much you can do about it. Any move to speed up product launches can only shave months (or in some cases only weeks) from launch dates, and these efforts carry the risk of quality defects that Ford can ill-afford.
One hopes that Leet hasn’t been brought aboard to suggest the obvious (sell Ford Credit, sell Jaguar–or some other combination of PAG entities, partner up with another company, or ‘hurry up’).
One hopes that Leet can bring an outsider’s perspective to Ford Motor Company, and recognize opportunities that don’t have “DUH” stamped all over them.
Among them are Ford’s Research and Development operations which are both well funded and well staffed. A frequent criticism of Ford Motor is that they spend $7 billion on product every year and they have no product. This is in part due to a considerable amount of pure research that Ford Motor funds ( nanotechnology research, atmospheric modeling). Researchers at Ford contributed to the development of the internet (Nagle’s algorithm is used to increase the efficiency of TCP/IP traffic), as well as such important vehicle technolgies as the three-way catalyst (the single most important piece of emissions management technology on a car), electronic powertrain management, and pioneering work in alternative fuels (including hydrogen, CNG, and ethanol).
A question to be investigated is whether Ford is getting the best return for its R&D, and whether Ford can derive a greater return through a focus on more universally applicable research. If Ford’s engineers are particularly adept at nanoscale materials, should Ford focus on applying these materials exclusively to automotive use? Is it possible to turn Ford’s nanotechnology research unit into a ‘center of excellence’ offering research for hire to the world at large?
Ford has also pioneered sustainable business practices (including implementation of a global standard for workplace conditions that Ford has extended to Tier 1 suppliers), and Ford’s Dearborn Capital Corporation specializes in financing Tier 1 and Tier 2 suppliers that are minority owned. Ford also has pioneered efforts in brownfields redevelopment. The system of best practices for sustainable workplace practices, environmental impact management, and energy cost and waste reduction developed at Ford can certainly find applications elsewhere. Large and small enterprises that are looking to reduce cost and environmental impact through sustainable practices may be interested in putting to use systems that Ford has developed. Ford’s admirable and successful efforts in these areas can be turned into another ‘center for excellence’ that can be hired out to the world in general.
Ford Credit is one of the best run ILCs (industrial loan company) in the world. There are systems of risk management and securitization in place at Ford Credit that have allowed this unit to continue contributing profit to Ford Motor, even as Ford’s credit rating has slipped farther into junk status. Again, this body of knowledge in risk management and securitization is worth looking into as yet another ‘center for excellence’, with application to mortgage securitization, credit card securitization, and other fixed income entities.
Additionally, with one of the most widely recognized brands in America, Ford may be able to pursue a joint venture into consumer lending and consumer banking outside the traditional confines of Ford Credit. Past collaborative efforts between Ford and TD Waterhouse and Citibank were short lived in part because both TD Waterhouse and Citibank were able to capitalize off the Ford brand name, while Ford received little benefit. A new Ford Bank, with a primarily internet-based presence, offering high yield savings and free checking, along with investment services, modeled after online banks provided by the Principal and ING, would offer an opportunity for Ford to develop a broader reach into the field of personal financial services. From personal banking, it’s a short leap to small-business financial services, another profitable area where Ford already has some presence via Ford Credit.
Instead of selling off a portion of Ford Credit, Ford Credit could look at investing in an online banking venture (Ford’s low credit rating makes the most attractive “Ford Bank” proposition one where Ford Credit holds, at most, a 49% stake).
At times, it’s difficult to see the forest for the trees. Ford Motor has some serious short term problems that need to be addressed: too much capacity, too little product. However, the solutions being advanced by the media in general are unoriginal and do not offer direct solutions to these problems, even as they require sacrificing long term profitability and viability.
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Old 8/6/06, 10:04 AM
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It's amazing how much different information is floating around in cyberspace about the condition of FMC. It's hard to tell what is good and what's not.
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