Thursday, February 01, 2007

More Trouble for Ford

Ford released January sales today and the numbers could hardly be worse. Sales were down for nearly every brand, and for nearly every vehicle in every brand. Ford brand sales, particularly cars, were dismal, off 22%. Particularly distressing is that relatively new cars, like the Ford 500 were off sharply. Ford notes that much of this has to do with lower fleet sales, which are usually marginally, if at all, profitable. Its sale of Hertz means that it can no longer use its captive rental company to absorb excess volumes. There may be a silver lining in this, however, and that is that rental fleet sales tend to depress resale value of other cars. Reducing the volume of rental cars may help residual values longer term. That is important for Ford, because higher resale values mean that lease payments on new cars can be lower (the lease payment is a combination of the depreciation on the vehicle, plus the finance charge. If there is a higher residual value, there is less depreciation and this charge can be smaller). Lower payments, obviously, help to entice more buyers.

Still, the results show further sales erosion for Ford's premier brands. Lincoln did report slightly higher sales, but this was based on a new product introduction and the bump may be short lived. Jaguar, which again finds itself on life support, saw double digit sales declines. This is after two consecutive years of sales declines of more than 40%. Sales today are less than a quarter of what they were only a few years ago. Ford has already taken asset impairment charges on its Jaguar factories in England, but without solid sales in the US market, Jaguar's viability has to be questioned. Ford might get a few bucks if it can sell the company, but do not forget that when BMW ultimately had to unload its British possession, MG Rover, it wound up selling the company for GBP10 (about US$20). A similar fate may await Jag.

Much of this is the lingering effect of some extremely bad strategy in the 1990s. During the "New Economy" craze, then-CEO Jacques Nasser decided that the future for Ford was not to manufacture ANYTHING. Instead, he envisioned a $200 billion (sales) company with 300 employees, 200 of whom would be trademark attorneys. Nasser believed that all that really mattered was the intellectual property of brands. The products themselves would increasingly be both designed and built by contractors, leaving Ford to focus on brand management and product extensions. As a result, Ford, despite having record profits on the sale of light trucks, reduced its investment in product, as it instead chose to purchase brands, in the form of weak auto companies. The results, like most automotive mergers, are not positive. Previous examples include Studebaker-Packard (bankrupt in 1964), Chrysler's acquisition of American Motors (nearly bankrupt in 1981), DaimlerChrysler, which nine years later is still struggling to create consistent profits from automotive operations (particularly at the Chrysler Group). The group may yet be split, though , as long as Dieter Zetsche is running the company, this is unlikely. Zetsche was the architect of the "turnaround" plan that saw a profitable Chrysler for a few years.

In fact, the only real automotive tie-up that appears to be working is the Renault-Nissan alliance. Even Nissan is now having product portfolio issues. You can improve profitability in the short term by cutting investments and instead reducing debt (and thus, interest payments) and allowing depreciation to reduce the property account on the balance sheet.

Ford has lacked a coherent strategy for some time. Despite Mulally's record at Boeing, I am highly skeptical that getting smaller is really going to fix Ford's problems. I suspect that it will only exacerbate them, since they really have no halo brand or branded product to carry the standard for the company. Substantially all of Ford's brands are damaged goods, with the possible exception of Ford trucks.