Ford is going bankrupt. Today, they announced a full year AFTER-TAX loss of $12.7 billion. The fourth quarter loss of $5.8 billion, equivalent to $3.05/share, essentially eliminates all retained earnings! While many of these costs were associated with their restructuring (the "big bath") continuing operations, particularly in North America continue to remain deeply unprofitable. Another major loss in 2008, would take a huge bite out of shareholders equity. Such a year is conceivable, particularly if sales of the F-Series do not pick up.
As you are probably aware, I have a background in the auto industry. As a result, I have resisted making predictions on this blog about the future of the industry, and in particular about the future of specific firms. Since I have left the industry, I will now begin a regular update on the industry from the perpective of a sometime industry "insider".
People who have worked with me know that I have routinely predicted that Ford Motor will Chapter 11 before this decade is out. I first made this prediction in 2004, when most of the news was about the problems at cross-town rival, GM. At that time, I was working for another car company, whose American operations were also undergoing significant restructuring. Most of the discussion surrounded the future for GM. At that time, in fact, Ford was actually making a profit. But it was pretty easy to see that trouble was brewing in Dearborn. Now, of course, Ford looks like the sick child in the family.
My prediction is that Ford will be forced to declare bankruptcy as early as 2008 and no later than 2009. Because of the relative price position advantage that a bankrupt Ford would have will likely lead to a bankruptcy at General Motors as well. At that point, it may be possible for the two automakers to defend their turf (and even retake some) from the Japanese and we would then return to something of a stable market environment.
That they are going bankrupt is a certainty. The two companies simply do not have enough cash to do all of the things a successful manufacturer does: invest (in plant, equipment and r&d), operate (working capital), and offer a return to shareholders. Efforts to maintain operating and shareholder-friendly returns have led the company to starve investing. As a result, their products are weak competitors in the market, supported by huge incentives, which then devalue the products and brand even more. Ford is particularly weak, because its capital structure, with two classes of stock and control of the voting power by the Ford family, limits the company's ability to tie up with partners who could really make a difference.
On top of that, they suffer from lack of strategic focus. The companies regularly change their stated strategy and now lack the resources and time to develop options to develop an effective one.
NOTE: I have to stop writing for now, but will resume later with a review of how we got to where we are and a review of the financial position of the Ford Motor Co to support my conclusions.
