Posted: August 21, 2006, 9 a.m., EST
From USA TODAY
DETROIT — A rapid decline in pickup sales helped push Ford Motor’s decision to slash fourth-quarter production by 21 percent, a move that will take the automaker to its lowest production level since the fourth quarter of 1981.
Sluggish pickup sales have hobbled the restructuring program Ford laid out in January. The production, cut to 625,000 vehicles in the fourth quarter, is designed to jump-start the restructuring.
"We know this decision will have a dramatic impact on our employees, as well as our suppliers," CEO Bill Ford said in a statement Friday. "This is, however, the right call for our customers, our dealers and our long-term future."
The restructuring plan announced at the beginning of the year called for closing seven assembly plants, cutting the workforce by 25,000 to 30,000 people, and slicing 1.2 million vehicles from its production capacity.
That could have been a fix, had sales of pickups — Ford’s most profitable and sizable market — stayed stable. Ford makes about 30 percent of its annual revenue from pickup sales.
Instead, high gas prices and weakening consumer confidence began eroding truck sales, including pickups and the also-profitable SUVs, in April. The new production schedule will result in downtime at 10 plants, including all the ones that make Ford’s F-Series pickups.
Production cuts are more significant to an automaker’s bottom line than sales figures. Automakers book revenue for a vehicle once it leaves the factory, not when it sells. The announcement prompted Fitch Ratings to downgrade Ford’s credit rating. Fitch estimates Ford will have $7 billion in negative cash flow for the year. Two other credit firms put Ford on watch.
Investors were skittish, too. Ford’s shares fell 2 percent, or 17 cents, to $8 Friday. The automaker has lost $1.4 billion through the first half of the year, compared with a $2.1 billion profit in the first half of 2005.
Ford spokesman Oscar Suris said the production cut is larger than the adjustments the automaker made after the Sept. 11 terrorist attacks. Then, domestic automakers heaped on incentives such as rebates and low interest rates to prop up demand and keep production relatively stable.
But after three years, the rebates lost their ability to spur sales while they were diluting the residual values of the vehicles.
Now Ford has decided to cut production rather than build so many vehicles that it has to use incentives to sell them. "I think we see what that buys you," Suris said of incentives. "It eats into your profitability. It’s an operating model we’re trying to move away from."
David Cole, chairman of the Center for Automotive Research, said Ford’s production cuts show the automaker is finally grasping the reality of its place in the market. At the end of July, Ford’s share of the North American market for the year was 18.1 percent, down from 19 percent a year earlier.
"The tendency was to produce and then put on incentives, or do whatever it takes to sell," Cole said. "That’s not a long-term successful strategy."
Earlier this month, Ford hired Goldman Sachs banker Kenneth Leet, a mergers and acquisitions expert, as an adviser. Ford has said it is exploring all its options to help restructure the company.
Mark Fields, Ford’s president of the Americas, said recently that the automaker will announce further restructuring plans after its board meets Sept. 14. "Nothing is off the table," he said.
Copyright 2006 USA TODAY, a division of Gannett Co. Inc.
