03 April 2009

Ford Fears Rivals' Revamps

As Posted to The Wall Street Journal

Having declined federal loans, Ford Motor Co. has been watching the car industry's bailout drama from the sidelines. But now, company officials worry that a bankruptcy filing by a cross-town rival could severely disrupt Ford's operations.

A bankruptcy reorganization by either General Motors Corp. or Chrysler LLC -- as suggested by President Barack Obama this week -- could damage the networks of suppliers and dealers shared by Detroit's three auto makers, throwing uncertainty into Ford's parts deliveries and its retail operation.

Moreover, Ford officials are concerned that bankruptcy could allow GM or Chrysler to restructure more fundamentally and exact deeper concessions from unions and bondholders. That could leave a rival in better competitive shape than Ford, unless Ford can gain the same concessions.

Ford, which is trying to engineer a turnaround on its own, has already reached agreements with its union to reduce wages and restructure retiree health care costs. It also offered bondholders a deal to shed some debt. The company has said the steps will put it in a better position than competitors to ride out the recession.

Ford expects to report another deep slide in car and truck sales of at least 40% when March figures are disclosed by auto makers Wednesday. But George Pipas, Ford's sales analyst, said the company also expects to post its largest retail market share for a single month in more than two years.

The auto-supply industry serves multiple car manufacturers but operates on thin profit margins that could evaporate if one of the auto makers stopped paying for components under bankruptcy or went out of business.

"The collapse of one of our competitors would have a severe impact on Ford and our transformation plan, because the domestic auto industry is highly interdependent," Ford Chief Executive Alan Mulally warned late last year in testimony before the U.S. Senate. "It would also have devastating ripple effects across the entire U.S. economy."

Even without a bankruptcy, some Ford officials fear that the uncertainty surrounding the car makers over the next few months could keep shoppers from considering a vehicle from a domestic maker.

"I think the Obama announcement is a near-term depressant on auto sales and the economy," said one Ford official Tuesday. "It introduces uncertainty and confusion among most consumers. And it's the uncertainty that's driving consumers into the cave."

To reassure jittery customers, Ford on Tuesday introduced a plan that will cover car payments for up to a year if a customer loses his or her job. Under the program, , Ford also is offering 0% financing on some vehicles. The job-protection program started at Hyundai Motor Co. and was quickly matched Tuesday by GM.

To be sure, Ford has been able to move much further and faster in trimming costs and debt than its two domestic competitors, which are propped up by $17.4 billion in U.S. loans approved in December. And it also has started to see some promising sales trends, with more consumers gravitating from the other car makers toward Ford's vehicles.

"I think it's more important that in the last 60 days, we've gotten more consideration for our new products." Ford sales chief Jim Farley said in an interview Tuesday, downplaying the potential impact of a GM or Chrysler bankruptcy on his company. "There's concrete research around this."

He cited CNW Marketing research that shows in the first two months of the year, 19% of consumers who had planned to buy a GM car instead bought a Ford, Lincoln or Mercury. And some 15% of people who set out to buy a Chrysler or Dodge in January instead switched to one of Ford's brands.

Ford has also been able to continue to invest in new products. A person familiar with the company's plan confirmed Tuesday that its Chicago assembly plant has been selected to produce a new version of the Explorer sport-utility vehicle for 2011, which will lead to the callback of hundreds of laid-off full-time workers.

Ford's healthier prospects were the principal reason the United Auto Workers union approached Ford months ago in the hopes of setting a floor that would be matched by agreements at GM and Chrysler, according to people involved in the talks.

Union members reopened their Ford contract to make concessions in cost-of-living increases, vacation, overtime and the so-called jobs bank, which paid laid-off workers. The union also agreed earlier this month to let Ford use stock instead of cash to fund up to half its future obligations to a retiree health-care fund.

Ford says those givebacks will reduce its average hourly labor cost, including benefits, to $55, putting the auto maker on a clearer path toward competitiveness with foreign makers that build vehicles in the U.S., which have total labor costs of about $49 an hour.

Ford estimates the savings to be as much as $375 million this year and $500 million or more in subsequent years.

Ford's finance arm doubled the size of one part of a planned debt buyback to $1 billion after seeing significant investor interest. Ford announced the buyback in early March in an effort to retire up to $10.4 billion in debt through a combination of cash and stock.

Ford on Wednesday will offer buyouts to all 42,000 of its U.S. hourly workers. But company officials expect a relatively low take rate because workers worry it may be difficult for them to find other jobs.

Company officials say they're confident that if the UAW or debt holders make new cost-cutting deals with GM and Chrysler, the Dearborn, Mich., company could return to the bargaining table to match the gains.

But a nagging concern remains: So far, GM, Chrysler and their stakeholders haven't budged in their negotiations, and the Obama administration has set a strict timetable for the two companies to reach agreements to qualify for further government aid.

To get those deals done, President Obama said, GM and Chrysler may have resort to a bankruptcy filing, which could result in much deeper cuts.

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