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Wednesday, July 26, 2006

Ford's Way Forward To Bankruptcy

Stocks: (F)(GM)(TM)(HMC)

Recent news in the car industry has been very bad for Ford. Bad enough that the prospect of a Chapter 11 file has increased significantly.

Honda's earning for the last quarter were outstanding. Net profit rose 30% to $1.23 billion. The company pointed to strong sales of its fuel efficient cars as one of the major drivers of the results. Demand for its Civic and CRV crossover car were particularly strong. These sales, coming during a period when gas is above $3 are likely to take away from the big trucks and SUVs sold by Ford.

Higher raw material costs are pinching margins more than they have in the past for large auto makers. Even the chairman of Ford's European operations is concerned: "2006 will be a bad year for Faurecia," Chairman and Chief Executive Pierre Levi said on July 24. "I decline to make a forecast for the second half or later because of the uncertainties related to the production volumes and costs."

Ford has had to increase incentives on its flagship vehicle, the F-150 pick-up. The truck is not only the largest selling vehicle for Ford. It has also traditionally produced huge margins per vehicle. With incentives now as high as $4,500, that is no longer true.

Ford's loss in Q2 was a surprise, but the company lost money nonetheless, to the tune of $123 million. Ford acknowledged that its model line was out of step with the current can buying environment: "We did anticipate that the world would not remain static and that things like crossovers and cars would actually play a bigger role in the industry's future, and, therefore, we planned them to play a bigger role in our future," Chairman and Chief Executive Bill Ford told The Associated Press. That changeover could take several quarters, at least, and it is time Ford does not have.

Ford's market share in the US is now 17.3%. In 1990 is was closer to 26%. And, the share figure has not found a bottom dropping further this year as car makers like Honda and Toyota suck up buyers at an increasing rate.

Ford has shuttered a number of plans and cut its US workforce. The company has cut its dividend in half, but it was hardly worth it to save $98 million a year at such a large company. And, cost cuts will come more dearly now: "Rob Hinchliffe, an analyst with UBS Investment Bank, said that it is getting harder for Ford to find more cost saving opportunities", quoted at

Industry reports show that 70% of Ford's sales are from SUVs and pick-ups, the kind of vehicles that American buyers are turning away from.

The final, and perhaps most damning news for Ford, is that no one is coming courting to set up a global partnership with Ford. GM has suitors in Renault and Nissan. Toyota has also been rumored to be looking at a GM partnership. But Ford no one has approached Ford, at least not at a level that the company would have to report to its public shareholders.

Ford's future is grim, and bankruptcy may be the only way to shed itself of legacy costs and contracts, even if the Ford family is vocally against it.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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