Ford Reports Its Best-Ever Quarter in North America

story first appeared on usatoday.com

Ford reported a third-quarter net income of $1.6 billion, driven by its best-ever quarter in North America.

Pretax profits of $2.3 billion in North America more than made up for a $468 million pretax loss in Europe, but the drag left the net results down 1% from the quarter a year ago.

Revenue was $32.1 billion for the quarter, down 3% from a year ago, and operating profit was $2.2 billion.

While Ford remains very dependent on North America, the company said it reported a profit in Asia and Africa, and remained in the black in South America.

Ford this month had said its losses in Europe this year could exceed $1.5 billion -- up from a $1 billion forecast that surprised analysts in July. Some of the additional loss is related to costs to its plan also announced this month to shutter three operations in the U.K. and Belgium, starting next year. Ford is cutting 5,700 jobs in addition to offering 500 salaried buyouts.

It could take automakers years to right themselves in financially troubled Europe, and the costs will be staggering. Art Wheaton, auto expert at Cornell University's Industrial and Labor Relations School thinks it will cost Ford $1 billion to close those plants.

Wheaton says because of tough actions sooner instead of later, Ford will come out on top in Europe.

The U.K. plants close next year, and Ford plans to shut Belgium in 2014.

The earnings per share of 40 cents beat Wall Street expectations of 30 cents, and surpassed 34 cents a year ago.

The company narrowed its guidance for U.S. auto sales this year to 14.7 million. Until now, Ford gave a range of 14.5 million to 15 million.

As expected, the results were stronger than the second quarter when Ford reported a 57% drop in earnings of $1.04 billion with losses in Europe that reached $404 million. Pretax earnings were $1.8 billion.

South America saw modest operating income of $9 million, below a year ago.

In Asia-Pacific and Africa where Ford is investing heavily to get a bigger foothold in the market, especially China, the automaker had a $45 million pretax profit compared with a $43 million loss a year ago.

Ford's shift to smaller cars should get credit for much of Ford's success, says Jesse Toprak, senior analyst at TrueCar.com. He says North American sales indicate improved profitability for the company.

On Monday, Chrysler reported a third-quarter profit of $381 million, up 80% from a year ago.

General Motors is scheduled to report its earnings Wednesday.

JUDGEMENT REACHED IN FORD CASE WITH DEALERS

Ford's shares recovered some of their losses, but still closed down 1.6%, or 21 cents, at $13.14 today on news of the $2 billion judgment against it in a class action suit by 3,000 Ford truck dealers. Shares had dipped as low as $12.78, or more than 3%, at midday.

The damages ruling in an Ohio state court came late Friday and was based on a February jury verdict against Ford.

A statement from Ford General Counsel emphasized that Ford believes the ruling is wrong and will appeal. They believe the decision made Friday by a state court judge in Ohio is highly flawed, and are appealing.

The judge ordered Ford to pay the dealers $781 million in damages and about $1.2 billion in interest in the suit, which alleged Ford overcharged them for 474,000 600-series and heavier trucks from 1987 through 1997. The suit, filed in 2002, claimed Ford violated its agreements with the dealers by not disclosing discounts on the published wholesale prices that it gave some dealers through its so-called Competitive Price Assistance program (CAP).

Ford’s attorney argued that the evidence they presented at trial showed clearly that the former (CAP) program – which was a common practice formerly used by companies selling in the extremely competitive medium- and heavy-truck market – resulted in thousands of additional sales benefitting customers and dealers, and it did not violate their agreement with dealers.

Ford also took strong issue with the expansion of the suit, initially filed by one dealer, into a class action, leading to the huge award:

They believe among the most egregious errors was the decision to apply alleged damages from this one case to each and every dealer in the class without allowing any evidence of how other dealers might have been affected.

The judge delayed his ruling pending the appeal on the condition Ford post a $50 million bond.

Ford’s statement expressed confidence about the appeal -- and indicated the dealers shouldn't expect a check any time soon. They feel the decision is far outside the bounds of normal legal process, and are confident that the Ohio appellate courts will reach the same conclusion upon review of the matter, which will take several years based on normal timing.

That also would leave time for Ford and the dealers perhaps to settle for a less eye-popping amount.

Auto Bailout Caps Flawed Relationship

As posted by: Wall Street Journal

The news of the once-mighty Big Three auto makers getting a financial lifeline from the federal government is a fitting climax to the long and rocky relationship between Detroit and Washington.

Detroit's car makers helped America win World War II by churning out tanks and planes. They then powered the rise of the blue-collar middle class. More recently, General Motors Corp. helped jump-start the U.S. economy after the Sept. 11, 2001, attacks by promoting zero-interest financing on cars and trucks -- though that move artificially boosted sales, which forestalled painful restructuring moves and left executives unprepared when market conditions contracted.

Over the years, Detroit's auto makers also irritated powerful Washington constituencies by fighting efforts to boost fuel efficiency and vehicle safety, and resisting calls to do more about climate change.

Now, the companies may have no choice but to focus on smaller, more fuel-efficient cars and alternatives to gasoline-fueled motors, as a condition of their rescue by Washington. President-elect Barack Obama, whose administration will pass judgment on GM and Chrysler LLC's restructuring plans, shot a warning at Detroit's management on Friday following the announcement of President George W. Bush's rescue plan.

"I do want to emphasize to the Big Three auto makers and their executives that the American people's patience is running out, and that they should seize on this opportunity over the next several weeks and months to come up with a plan that is sustainable," Mr. Obama said. Mr. Obama has long been a supporter of shifting Detroit's emphasis toward alternative fuels and more efficient technology.

How Detroit's auto makers will be able to stabilize financially in the short run is unclear, since it takes years to redo their product lines. The fastest way to profitability for the Detroit Three, beyond giving haircuts to bondholders and slashing workers wages, would be to take advantage of falling gas prices to sell more of the gas-hungry sport-utility vehicles and large pickup trucks that Mr. Obama and congressional Democrats don't like.

The public ups and downs overshadow a more complex interdependence that has contributed to the troubles now faced by GM, Chrysler and Ford Motor Co.

The Detroit Three's post World War II business strategies -- which relied on large, powerful cars built by richly paid union workers -- were doomed from the day in 1982 when the first Honda Accord rolled off a nonunion assembly line in Ohio. Since then, in good years and bad, the companies missed opportunities to overhaul themselves.

Washington's policies, and the way the government exerted regulatory control over the auto makers, often worked against the profound changes the companies needed to make to compete with foreign makers.

Consider GM Chief Executive Rick Wagoner's concession in recent congressional testimony that GM has "made mistakes," and that one of them was relying for too long on sales of comparatively gas-thirsty pickup trucks and sport-utility vehicles.

Up until this year, Detroit had few reasons not to lean on trucks and SUVs for profits -- and government policy all but invited them to do so. Since the 1980s, Washington's de facto energy policy has been to keep gasoline prices, and gasoline taxes, low. By contrast, European nations for years have boosted fuel prices to around $6 a gallon through taxes, which pushed consumers toward small cars.

The result: U.S. consumers gravitated toward ever larger and more powerful vehicles because the costs to fuel them were relatively low. In 1987, the average American vehicle got 22 miles to the gallon, weighed 3,221 pounds and accelerated from 0 to 60 miles per hour in 13.1 seconds. By 2007, the average car weighed 4,144 pounds, accelerated to 60 miles per hour in under 10 seconds -- and averaged 20 miles per gallon.

Federal fuel-economy rules allow car makers to average the fuel usage of most of their products. They could sell fuel-efficient small cars and trucks at little or no profit to make up for the high-profit, gas-hungry luxury cars and big SUVs they promoted.

Federal tariffs imposed on imported trucks and other quirks in Washington's fuel-economy regulatory scheme also encouraged U.S. auto executives to push trucks and SUVs.

In recent years, GM, Ford and Chrysler made money on trucks -- with profits of as much as $8,000 a vehicle -- and lost money on cars. Detroit made enough money to forestall painful reckonings with spiraling health-care and pension costs.

Federal rules caused Detroit "to cede the car market and make all their money in trucks," said Mike Jackson, chief executive of AutoNation Inc., the nation's largest dealership chain. "If they had been forced to compete up front much sooner, they would not have become overdependent on trucks."

Some in Detroit had misgivings about a strategy that relied on relatively inefficient vehicles. In late 2000, Ford Chairman William C. Ford Jr., great-grandson of automotive pioneer Henry Ford, addressed top executives at the company's product-development center. The topic: Why Ford should invest in hybrids and other fuel-efficient technology to prepare for an era of high oil prices.

Mr. Ford opened the floor for questions, and received just one from the cadre of executives, according to a person who attended the meeting: How could Mr. Ford justify spending billions on unproven technology amid healthy profits in trucks, SUVs and new, powerful luxury brands? Japan's Toyota Motor Corp. and Honda Motor Co. had hybrids on the road, but gas prices were only about $1.50 a gallon and Ford has just posted a profit of more than $7 billion in 1999. The group chuckled.

Mr. Ford briefly reiterated his vision and, after a long silence, left the room.

A Ford spokesman wouldn't confirm the meeting and declined to comment further.

Now, Ford's current chief executive, Alan Mulally, is aggressively trying to shift Ford's lineup toward smaller, fuel-efficient cars, despite the recent slump in pump prices.

"We adopted a point of view that fundamental demand for fuel would outstrip capacity," pushing gas prices up long term, Mr. Mulally said in a recent interview. Unlike GM and Chrysler, Ford said it doesn't need immediate government aid.

U.S. Auto Makers Look to Federal Sales Incentives

As executives from the Big Three auto makers prepare to make a second pitch for a federal bailout, concern is rising in Detroit that it will be difficult to show lawmakers how they can return to profitability with sales at their current depressed level.

Their solution: Get Washington to help them sell more cars.

General Motors Corp., Ford Motor Co. and Chrysler LLC may go back to Washington and urge Congress to take measures to spur consumer demand, in addition to providing the $25 billion in loans the auto companies seek.

"There is no way any car company can make money at the current demand level," said a key executive at a Big Three auto maker. "The government has to get credit flowing so that the market goes back to at least 14 million to 15 million [vehicles].... We can figure out how to survive at that level."

On Monday, Sen. Charles Schumer (D., N.Y.) plans to send a letter urging the Federal Reserve to make financing available for the auto companies' lending arms, which would allow them to offer more auto loans, a spokesman for the senator said. The letter will also ask the Treasury to speed approval of GMAC LLC's request to become a bank holding company.

Vehicle sales are tracking at such a low level right now that most or all auto makers are losing money in North America. Globally, Toyota Motor Corp., Chinese car makers and even Europe's normally recession-proof luxury auto makers are struggling to stanch losses, the executive of the Big Three firm said.

In October, auto sales were running at an annualized rate of about 11 million vehicles a year, well below the level of 16 million the industry considers healthy.

Congress last week rebuffed the pleas from GM, Ford and Chrysler for a bailout, telling them to return by Dec. 2 with credible blueprints showing how they would use taxpayer dollars to become "viable." Top-level auto executives worry they will have a tough time doing that.

As part of its push to Washington next week, GM is working to renegotiate some of its financial obligations, including terms of debt and money it owes to the United Auto Workers union, according to a person familiar with the plan. GM's board, which is open to considering all options for GM's survival, will be meeting several times this week to review the company's pitch to Washington, this person said.

Ford and Chrysler executives also said Sunday that their companies are developing plans.

While the chief executives of GM, Ford and Chrysler were testifying before the Senate and House last week, auto dealers and a few members of Congress called for tax incentives or other measures designed to boost car buying.

In an interview over the weekend, Michigan Gov. Jennifer Granholm, who is serving as an economic adviser to President-elect Barack Obama, said she is working with the auto makers to craft a "definitive plan" to present to Congress on Dec. 2.

Congressional Democrats have urged the Bush administration to provide loans for the auto makers from the $700 billion Troubled Asset Relief Program, but the White House and Treasury Secretary Henry Paulson have opposed that.

Gov. Granholm said one way of getting help from TARP would be to have banks that get some of the $700 billion "steer" financing to the Big Three or provide the Big Three with short-term loans to keep them from running short of cash. (With a rescue far from assured, the auto industry is scrambling to conserve cash. Please see related articles on page B3.)

It is unclear how far along these discussions are, or if there is an appetite at the White House to issue such a directive.

Members of Congress from Michigan have been in contact with Mr. Paulson and Commerce Secretary Carlos M. Gutierrez to push for funding for Detroit, if Congress isn't able to come through with a bailout bill, people familiar with the discussions said Sunday.