2006-11-30

Capitalism at its Finest Part 2: Ford Bets the House on Turnaround

Executives at the Ford Motor Company have insisted they are willing to bet the company’s future on a turnaround plan put in place earlier this year.

On Monday, they essentially did just that, mortgaging nearly all of Ford’s domestic assets — its plants, office buildings, patents and trademarks — along with stakes in Ford Credit and Volvo, to raise $18 billion.

Ford will use the money, which includes cash and an expanded line of credit, to cover several years of restructuring costs. Under a plan called the Way Forward, Ford expects to eliminate more than 40,000 jobs and close more than a dozen plants.

Remember, this is a plan to become a "profitable company" again. Not to regain the market share it is losing to foreign automakers. Not to improve its quality or to produce more fuel efficient vehicles. Not to increase lagging sales.

For decades, its credit was so good that it could easily borrow without pledging assets. But it is now taking out the corporate equivalent of a home equity loan and in doing so, signals that it expects even more stormy times before its restructuring is complete.

Analysts said the step, which Ford executives signaled early this fall, could put the company’s independence at risk. If management fails to make the ailing company profitable, Ford may be left with little choice but to find a buyer or merger partner or file for bankruptcy protection.

“It’s a historic moment for the company,” said Sean Egan of the Egan-Jones Ratings Company in Wynnewood, Pa. “It underscores the gap between the domestic manufacturers and Toyota, who’s sitting with over $80 billion of cash on its balance sheet and a stellar credit rating.”

There could be hope in the future then. Just as the merger with Daimler saved Chrysler, perhaps a merger with Toyota or Honda could save this Detroit Dinosaur and install a new business model. The old model obviously isn't working, and by taking out essentially a "home equity loan" management isn't demonstrating a changed attitude.

Henry Ford is looking on from that great executive boardroom in the sky wondering why his legacy is being mortgaged when the obvious answer for the company is start building cars that people want to buy. Of course, Ford was the one who created that philosophy when he said consumers could have any color Model T they want as long as it's black. Sounds like the same family is running the company, doesn't it?

2 comments:

Paul Hue said...

Nadir: I don't understand your anxiety here. A greater fraction of Americans today own cars than ever before, and those cars have higher quality, more features, better gas mileage, longer lives, and lower inflation-adjusted cost than ever. How did this happen? It certainly did not happen by closing foreign automakers off from the domestic market. US auto leaders -- management and labor -- made poor decisions relative to others in the world.

The market spoke. A shift is occurring. Everybody on the planet with an economic interest in this scenario shares at least one common necessity: the overall wealth of America's population. No economic player benefits from a high concentration of wealth in the US with the vast majority of people living in poverty with no hopes of advancement. If only for pure selfishness, the richest Americans need as few poor people and a many affluent people as possible, if only because you can sell more goods and services to affluent people than to poor people.

One thing that benefits the vast population is an increase in income, of course. But another benefit is lower costs and better quality for necessary goods, including autos. The miracle of capitalism has provided lower cost, higher quality cars to Americans.

The overseas automakers aren't building a bunch of plants here in order to sell cars to a sinking ship of American workers.

It bothers me as well as you that American auto companies have not won the competition to produce the best cars. That is the fault if its leaders, not capitalism. Is there even a possibility that your economic proposals -- which you don't call socialism -- could provide such benefits to Americans?

Nadir said...

"I don't understand your anxiety here. A greater fraction of Americans today own cars than ever before, and those cars have higher quality, more features, better gas mileage, longer lives, and lower inflation-adjusted cost than ever. How did this happen? It certainly did not happen by closing foreign automakers off from the domestic market. US auto leaders -- management and labor -- made poor decisions relative to others in the world."

I have no anxiety at all. I know that soon the only sector of North America that will be exporting is culture and media which is what my products and services are designed to exploit.

I agree with you on this point. This is how capitalism is supposed to work. That's why I titled the posts "Capitalism at its Finest".

Automakers are following the growth and profit scenarios. US automakers have screwed up in North America, and are losing marketshare. They are gaining marketshare in other countries, so they are pursuing those nations, and are bailing from North America.

Foreign automakers are capitalizing on US automaker weakness and are pouncing because they know there is demand in the North American market that the Big Three are not addressing. Soon there will be many more fuel efficient cars and SUVs on the market in North America, but they won't be provided by American automakers. They fucked up and are either scrambling to catch up, or are running to emerging markets.

The Japanese are filling the void in North America AND are targeting the new markets. They have a superior business model.

"If only for pure selfishness, the richest Americans need as few poor people and a many affluent people as possible, if only because you can sell more goods and services to affluent people than to poor people."

I agree with you here. We see US automakers closing plants in North America and opening plants in India and China because those are emerging markets with growing incomes. They see the North American market as either a slow growth market or as declining.

What they aren't doing is understanding taking responsibility for the loss of jobs, income and wealth in the US. Frankly, they don't care about US workers. They can sell their products elsewhere in the world. This is why they are going overseas with both manufacturing and sales operations. Meanwhile, the North American labor market is drying up.

"One thing that benefits the vast population is an increase in income, of course. But another benefit is lower costs and better quality for necessary goods, including autos. The miracle of capitalism has provided lower cost, higher quality cars to Americans."

This is also true. You're batting 1000 today, Paul!

It is the US labor market that is failing. Wages are going down and jobs are moving offshore. The lower costs of goods produced in other countries have flooded US markets and US manufacturers can't compete. US workers also can't compete at the lower wages because most (autoworkers excluded) can't survive on the low wages they receive already.

US workers will have to come up with different options if they are going to survive.

I haven't made any economic proposals (socialist or otherwise) except to say that US workers must understand that corporations are multinational, and they have no allegiance to American workers. Nationalism is dead. If the US economy is going to survive, US workers will have to find another way. You can't just work for a corporation and expect that your future is secure. US corporations already have found another way - they are going elsewhere.