Motor Co. is confident its newly accelerated restructuring strategy will hit internal targets, because it already has ‚Äústress-tested‚ÄĚ the plan against some worst-case scenarios, the auto maker‚Äôs top executive says.
The latest tweak in‚Äôs game plan includes retooling some truck plants to make cars and infusing new, small, more fuel-efficient European-market vehicles into its U.S. Ford, Mercury and Lincoln lineups.
In late 2006, after securing some $23 billion in financing to fund its restructuring program and address near- and medium-term operating losses in North America, the auto maker made sure its plan was sustainable even if U.S. industry sales fell to an annual rate of 14 million vehicles, CEO Alan Mulally says.
Corp. used the same volume assumption for its latest restructuring moves announced last week.
Many industry forecasters now are predicting light-vehicle sales this year will fall to just above that mark.
‚ÄúWhen we laid out the original (restructuring) plan and the financing of the plan, we stress-tested it pretty heavily,‚ÄĚ he says. ‚ÄúAnd when we went to the markets and raised our cash, we made sure we had sufficient liquidity.‚ÄĚ
Ford says it secured the necessary financing by putting up its U.S. plants and other assets as collateral, including ‚Äúcertain intellectual property, certain real property, all or a portion of the stock of certain subsidiaries (including Ford Motor Credit Co. and Volvo Car), certain inter-company payables and notes and up to $4 billion in domestic cash without restriction on its use.‚ÄĚ
Mulally says Ford was fortunate it secured its credit line when it did, as the financial markets largely have cooled.
‚ÄúWe went to the capital markets at the right time,‚ÄĚ he says. ‚ÄúWe can effectively operate through the downturn and grow profitably as the global economy rebounds.‚ÄĚ
Ford raised additional cash by selling off a number of subsidiaries, including Jaguar Cars, Land Rover andLagonda Ltd.
Ford says it now has $26.6 billion in cash on hand, down $10.8 billion from year-ago.
Despite the rapid cash burn, Mulally says Ford has enough liquidity to see through its new structuring initiatives.
The cost of retooling just one truck plant for car production is significant, and Ford plans to convert three ‚Äď Michigan Truck in Wayne, MI; Cuautitlan Assembly in Mexico; and Louisville Assembly in Kentucky.
‚ÄúThe cost of converting a plant is mainly in the area of the body shop,‚ÄĚ says Chief Financial Officer Don Leclair. ‚ÄúIt‚Äôs about $250 million to completely redo a body shop with a fully flexible system.‚ÄĚ
Ford is reacting to a dramatic market shift away from large trucks and SUVs, it‚Äôs most profitable vehicles, to smaller, fuel-efficient cars.
While Ford is prepared to meet customer demand, largely by adding its European products to the North American lineup, squeezing a profit out of smaller vehicles will be challenging.
However, thanks to its experience in Europe, Mulally says Ford has learned how to do that by selling high-quality vehicles with increased content.
|Note: Dollar sales and net income stated in millions; |
unit sales in thousands. E/S is earnings per share.
* Unit sales are worldwide wholesale deliveries. Net Income excludes adjustments.
‚ÄúWe‚Äôre encouraged by our experience with smaller- and medium-sized vehicles around the world, especially Europe, where we‚Äôve had great experience restructuring that product line to make vehicles people want and value,‚ÄĚ he says.
Building the same vehicles worldwide and leveraging huge economies of scale also should provide cost savings.
‚ÄúCommonization on details not only drives quality, but also cost and productivity,‚ÄĚ Mulally says. ‚ÄúAdd those together and we have a different business model that improves our competitiveness.
‚ÄúI believe we can make a reasonable return on all our vehicles.‚ÄĚ
If all goes as planned, Ford‚Äôs North American operations will mirror the success enjoyed in Europe, where the auto maker engineered an extensive product realignment in 2000.
In the second quarter, Ford of Europe posted profits of $582 million, while Ford North America Automotive Operations suffered a pre-tax loss of $1.3 billion, its largest-ever quarterly loss.
Ford has seen increased profitability from some of its North American passenger cars increase, most notably the Focus small car, says Mark Fields, president-The Americas.
‚ÄúWith the current Focus, we‚Äôve (been able) to improve our net revenue by a little over $1,000 a unit,‚ÄĚ he says. ‚ÄúAnd as we switch to global products, (it) turbocharges our ability to make money with higher transaction prices.‚ÄĚ
While Ford currently is planning for the worst, Fields says the auto maker is looking forward to better days.
‚ÄúWe don‚Äôt expect the U.S. economy to recover until early 2010,‚ÄĚ Fields says. ‚ÄúBut as it recovers, (we expect) sales with trend levels of 17 million (units) a year.‚ÄĚ
Fields says sagging fullsize pickup sales should regain some ground in the near future, although demand in the segment never will return to previous levels.
In terms of U.S. market share, Ford expects to average about 14%, with that number rising and falling depending on new-product cadence, Fields says.