TALES OF THE TAPE: Competition May Slow Ford's Turnaround
28 Feb 14:00
By Jocelyn Parker
Of DOW JONES NEWSWIRES
DETROIT (Dow Jones)--As Ford Motor Co. (F) faces growing competition and
rising incentive levels, there's some doubt as to whether the No. 2 auto maker
can meet some of its turnaround targets.
Ford's plan to deliver $9 billion profit improvement by mid-decade could be
particularly tough, experts say. Sales and earnings will likely remain under
pressure due to heavy vehicle discounting and a steady stream of products from
its competitors.
"I think they are going to meet the cost side of the equation, but that's
easy to do," said Bear Stearns analyst Domenic Martilotti. "The revenue side
will be more difficult to meet because Ford doesn't have the products to get
it, and there's poor pricing."
Turnarounds can be difficult, as evidenced by DaimlerChrysler AG (DCX). The
auto maker said earlier this month that it wouldn't meet its 2002 profit target
because of unfavorable economic conditions.
Some say Ford may have to go beyond its original plan if the industry becomes
more fierce. For now, Ford plans to slash 35,000 jobs and shutter several
plants to save money.
"In a nutshell, I think the plan will work to return Ford to $2-a-share
annual earnings," said Jim Zhao, an investment analyst with Federated
Investors, a Ford shareholder. "But the target is always moving. They might
have to cut more jobs and close even more plants in the future."
Ford was flying high last year, but its plan to expand beyond its core auto
business and rising competition sparked its tumble from the top. Excluding
charges, Ford lost $782 million in 2001 compared with a profit of $6.67 billion
in 2000.
The company once dominated the highly profitable truck and sport-utility
market, but Japanese rivals, and most recently General Motors Corp. (GM), have
been snatching market share as they have steadily rolled out new SUVs. Ford's
market share fell to 22.9% in 2001 from 23.9% in 2000.
The incentive game has also become extremely fierce. Following the Sept. 11
terrorist attacks, GM began heavily discounting its vehicles through
interest-free financing and later with $2,000 rebates. Since consumers tend to
flock to the best deal, Ford has had to match some of them.
Given GM's lower cost structure and its determination to maintain market
share, analysts don't expect the company to let up on incentives.
Adding salt to the wound are the massive tire recalls of the past two years.
Although U.S. regulators have decided not to investigate the safety of the
Explorer sport utility vehicle, Ford still faces potential lawsuits and the
Explorer's image might be tarnished for years to come, experts said.
The impact of the company's woes has been apparent. Shares of the auto maker
traded Thursday at $15.07, less than half their 52-week high of $31.42 reached
last April. The shares reached a 52-week low of $13.90 earlier this month.
Of the 16 analysts reporting to Thomson Financial/First Call, two rate Ford a
strong buy, four rate it a buy, eight rate it a hold and two rate the company a
sell.
Diverse Ventures, Competition Take Their Toll
Analysts were praising Ford last year because it seemed fittest among the US
auto makers to withstand declining vehicle demand and increasing competition.
On the surface, it appeared to make sense. Ford had just launched its
hot-selling Escape compact sport-utility and the 2002 Explorer was on the way.
What many observers didn't realize, however, was that Ford had already made
several risky business ventures. Ford's goal was to be a leading consumer
products company, so its chief executive at the time, Jacques Nasser, had Ford
investing in everything from e-commerce ventures to Kwik-Fit, a British chain
of auto-repair shops.
Meanwhile, its rivals, primarily GM, were focusing on their automotive
businesses. GM began reducing its capacity and manpower to deal with issues
such as falling market share. GM officials also realized the need to freshen
its stale product line-up and began developing a whole new line of stylish
trucks, analysts say.
UBS Warburg analyst Saul Rubin said GM eventually became a lower-cost
producer than both Ford and Chrysler. At the end of 2001, GM's variable costs
as a percentage of revenue were 60.8% compared with 65.1% for Ford. This cost
advantage gave GM the wiggle room to offer big discounts to its customers and
at the same time gain market share, Rubin said.
"Management diversions into non-auto adventures during the Nasser years were
a chief failing," Rubin said. "In an industry such as this where there is a
large incumbent with plenty of excess capacity, the top priority at all times
for other manufacturers must be to maintain a competitive variable cost
structure against the large rival. This prevents the incumbent from using
excess capacity to drive others out."
Jim Padilla, Ford's chief of North American operations, told Dow Jones
Newswires that he "fundamentally doesn't believe" that GM is a lower-cost
producer given the current economic environment.
"I don't believe they have more money to give away," he said.
Turnaround Appears To Be On Track
Most of Ford's restructuring program entails getting back to basics, meaning
that Ford, like its rivals, will concentrate on making and selling cars, Ford
officials said.
Though the turnaround will take years, the company is already making strides
in many areas, Padilla said, and is also mending strained relationships with
dealers and employees.
"I have done more than 25 Town Halls and addressed 12,000 employees, hourly
and salaried," Padilla said. "I have gone into a plant we're going to shut
down. There are tough questions, but we have to be honest with our people.
There was a good reaction to where we are heading."
Ford's product launches this year, which include the Expedition,Lincoln
Navigator and SVT Focus, are also on track, Padilla said. Additionally, the
company is making improvements in quality, he said.
Fresh vehicles, along with the successful launch of those models, will be key
to Ford's recovery because it could enable it to reduce incentives, said
Bernstein analyst Scott Hill.
"They have to have product that resonates with consumers so they don't have
to offer such high incentives. The problem is that I don't see much of that for
two years," said Hill, adding that the next couple of years will be difficult
for Ford.
Ford plans to introduce 20 new or updated models in the U.S. between now and
mid-decade, and for that reason, Hill said Ford will likely reach its targets.
It's premature to say whether Ford's turnaround will extend beyond the
initial targets, but if there's a compelling reason to change the plan, the
company will do so, Padilla said.
Despite Ford's actions, its shares aren't likely to rally soon. Some analysts
say the stock has hit bottom, but the company's problems will keep the shares
from moving up.
"I don't see a lot of appreciation," Martilotti said. "It is sort of dead
weight right now."
-By Jocelyn Parker, Dow Jones Newswires; 313-963-7810
jocelyn.parker@dowjones.com
(END) DOW JONES NEWS 02-28-02
02:00 PM |
