Ford's Raw Deal

We knew General Motors (NYSE: GM  ) and Chrysler were too optimistic when they said they could be profitable as long as the domestic car market achieved 12 million to 13 million in annual vehicle sales. After all, they were selling cars at an annual run rate of just around 9 million cars.

Now with the pressure of bankruptcy filings behind him, GM CEO Fritz Henderson can finally admit that 10 million cars is a more realistic number. And with the May sales numbers showing a run rate of 9.9 million vehicles, the new reorganization target at least seems doable.

The problem is that the carmakers are structured as if we were still buying the same 17 million cars a year that we did at their peak. GM has a network of approximately 6,000 dealers, Chrysler has just less than 3,200, and Ford (NYSE: F  ) more than 3,700. Having that many outlets simply doesn't make sense if the market can't support that level of sales anymore. In contrast, Toyota (NYSE: TM  ) has just 1,200 dealerships.

That's why GM and Chrysler need to shed about 3,400 dealerships, but what's right and necessary isn't always simple. A patchwork quilt of state franchise laws makes it expensive, if not impossible, for the carmakers to eliminate dealerships while they're going concerns. GM was sued a few years ago when it wanted to retire the Oldsmobile nameplate and ultimately paid $1 billion to settle the matter, with $583 million going to the dealers.

Bankruptcy removes a lot of those hurdles and was one of the arguments in favor of filing for Chapter 11 protection. Unfortunately for Ford, its decision to forgo government handouts won't do it much good. In the words of President Obama, when GM and Chrysler emerge from court protection, they're going to be leaner, meaner, and more financially secure.

Sure, the failed carmakers would have been able to shed their dealerships had they gone through bankruptcy without government aid. But by appealing for Washington's help, they also got billions in bailout money and got taxpayers to pay their suppliers, while they were able to strong-arm their bondholders into accepting pennies on the dollar for their debt. They also got the unions to give up payments to their health-care trust fund, and they gave their credit units large cash infusions to make car financing easier. Ford doesn't have any of those options available to it.

Still, there's a small window of opportunity available. Although U.S. car sales fell by 34% in May to 926,000 vehicles, Ford's sales dropped by "only" 24%. That was Ford's smallest year-over-year decline since last July, and its sales actually increased by 20% sequentially. Ford also recorded its biggest market-share gains since 2006 and is ramping up production to crank out more cars while its rivals are reorganizing.

The biggest losers in all of this were the Japanese automakers. Toyota and Honda (NYSE: HMC  ) both reported sales fell 41%, while Nissan (Nasdaq: NSANY  ) said sales were off 33% from the previous year.

For anyone who's gone through the high-pressure process of buying a new car, it's tough to feel any empathy for car dealers now that they're on the receiving end. But a dispassionate look at the situation shows that if we're serious about rebuilding the U.S. car market -- and since we've sunk tens of billions into the effort so far, we'd better be serious -- then having the carmakers get out from under their dealer obligations is essential to right-sizing the industry.

It's difficult to say that Ford is a good investment right now. Having made the tough choices early and showing that you don't need the government running a car company to succeed in this market, Ford remains at a disadvantage because its main rivals are the beneficiaries of government largesse.

That's going to make them formidable opponents when they emerge financially squeaky clean. It's therefore not a stretch to say that this process may also be Ford's ultimate undoing.

These related Foolish articles also touched a raw nerve:

Nissan Motor is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 08, 2009, at 10:42 AM, coyoteman44 wrote:

    I do believe this why Ford is moving forward with production and is setting it's targets for the customer's purchasing in the 12-18 month window. They are hoping to be in your face as the economy recovers in a way that GM and Chrysler might not be. Despite what the pundits are saying about a Chrysler-Fiat marriage, and a GM quick bankruptcy, the internal fallout from these restructures will resonate for months, if not years. Ford is the only U.S. manufacturer with it's "rear in gear" - pardon the pun. The number of dealerships is a problem for Ford - potentially - or they could be an asset, if they do steal enough market share from failing rivals.

  • Report this Comment On June 08, 2009, at 10:54 AM, pondee619 wrote:

    "On February 26, 2009, at 6:41 AM,

    TMFMarlowe wrote:

    pondee619, I'm planning to do an article talking about the F preferreds sometime early next week. I've got several thoughts on 'em; I'll collect them there. Short answer: Very, very tempting.

    John Rosevear"

    Is this article still coming, or has it been forever lost? I am still curious on anyone's opinion of the Ford Prefereds.

  • Report this Comment On June 08, 2009, at 11:33 AM, camitch wrote:

    I do agree that there is some risk to Ford but I also think the article is missing two key points, first one being that GM and Chrysler will have to pay back the billions the taxpayers "loaned" them and second, are people going to be lining up to buy the cars that the government THINKS people want.

  • Report this Comment On June 08, 2009, at 12:04 PM, optomist1 wrote:

    There are other risk factors regarding Ford; the Ford PR machine has been working overtime; first a "fool" should realize that the "main" reason, Ford is in a relatively better position then its two domestic rivals, is that due to planning or serendipity Ford secured and mortgaged every last asset physical and spiritual while the credit markets were still open and relatively accessible. With this in mind, the problems and factors that afflict GM and Chrysler also affect Ford, too few hybrids way too late, a bloated beau racy and persistent legacy costs and unimaginative models that in a large majority of cases continue to lag behind transplants in terms of quality and reliability.

    From my perspective, the Malaise in Motown will continue for sometime; despite the cheerleading by all the employees and affiliated lending institutions who have pumped up the stock's value and company's apparent posture. Given the events of the past year, the core problems have been talked about with little substantial corrective action taken. Proceed with extreme caution.

    Ford hybrids; it is my understanding that each hydrid Ford sells contains the "Synergy Drive Technology" it purchased or licensed from Toyota....buy American?

    Lastly, the buy American mantra has once again reared its ugly head in the Detroit area; "Buy American", is merely code for buy one of the big three vehicles and support our broken, bloated and outdated business model. Food for thought, The Ford Fusion is manufactured in Mexico, the Pontiac G line is manufactured in Australia, many of the transplant vehicles have a substantially greater US content then the big three vehicles.

    It may well be a good investment given the above

  • Report this Comment On June 08, 2009, at 12:13 PM, Bikeopath wrote:

    The real difference here is Ford is showing product that's actually good looking, forward thinking and exciting.

    Haven't been able to say the same for Chrysler or GM in years (with the exception of Cadillac).

    I think Ford will clean their clocks.

  • Report this Comment On June 08, 2009, at 12:24 PM, Jazzenjohn1 wrote:

    Ford has gotten the benefit of a renegotiated labor contract and has retired a pretty fair chunk of debt. They have divested themselves of retiree healthcare too.

    All these are far larger issues than the dealer network, besides, they sold nearly as many cars as GM with 2300 less dealers. Even after GM breaks the contracts with the 1100 dealers on the list so far, Ford will still have 1200 fewer dealers. Fords market share has increased 7 of the last 8 months and has shown no signs of losing steam.

    Waggoner wasn't the greatest CEO of GM, but that doesn't mean he was wrong about everything. He insisted that declaring bankruptcy would be deathly to GM. It is bearing out at Fiat/Chrysler so far and next month it will at GM too.

    Fiat/Chrysler and GM can't get away with ripping up the dealers contracts, Crushing the stock and bondholders, and taking staggering amounts of taxpayer money without suffering a horrible backlash. That backlash will far exceed the monetary benefits of screwing so many people and communities.

  • Report this Comment On June 08, 2009, at 12:29 PM, cwhoyt wrote:

    Fools indeed. If you think GM & C can come fighting back without a distribution footprint that covers the sort ot American landscape it is accustomed to doing business in, well...you all seem to forget that it's their dealers who buy the vehicles & parts and who persuade the consumers to buy them.

    This argument that too many dealers is the problem is a complete sham. Ford has a powerful, irreplaceable advantage. It will be able to reach deeply into the quilt that is America, and through it s dealers, be able to sell products where the Weak 2 may no longer find it so easy to get people to drive an hour to do business.

    We can criticize their need to refinance & restructure, sure. But however they did it, Ford didn't borrow taxpayer money.

    Turns out that to a lot of potential customers, that is something they are beginning to recognize and honor with their purchases.

    None of you scribes have evidently driven a Ford lately. You should do your leg work next time before you are so quick to presume what you know to be accurate. A lot has changed.

  • Report this Comment On June 08, 2009, at 12:46 PM, masterN17 wrote:

    Yes; regarding their products Ford has made many improvements and diversified its offerings tremendously. Overseas it is also doing quite nicely. I would buy a position long F if I had the balls.

  • Report this Comment On June 08, 2009, at 1:36 PM, FoolsAuInIN wrote:

    @ optomist1: Your 'understanding' regarding Ford hybrids is incorrect. Ford and Toyota hybrid technology are similar. So similar in some areas that some patents tend to tread heavily on one another. Rather than fight out these points, the two apparently agreed to let these areas ride. Ford uses Ford developed technology. Toyota used Toyota technology. Nissan is the manufacturer which licenses Toyota technology. A little research will help give credit where it is due. In fact, it seems that some Toyota techies were a bit taken aback by Ford's new hybrid system - the Fusion hybrid.

  • Report this Comment On June 08, 2009, at 1:40 PM, Gradeless wrote:

    Dear Rich-

    Quoting the mantra to eliminate the dealers. The dealers are independant business who are sales agents for the car manufacturer. How short sighted. Chrysler eliminated their only dealer in this county the next county and closest dealer in the next county. More than 100 miles round trip to get a car serviced. Step outside the metropolitain area and you find lots of American Cars because there are no foreign car dealers here. Maybe you would do the 100-300 miles round trip drive to your nearest automobile dealer but I and lots of other American's just don't do that. Assuming you even own a car! GM and Chrysler close their new car dealer and who's left in town FORD. If you are the only new car/truck dealer in the area your sales might just go up.

  • Report this Comment On June 10, 2009, at 11:02 PM, bigjohnson2 wrote:

    GM AND CHRYSLER MAY WELL PARALLEL NAVSTAR FORMERLY KNOWN AS INTERNATIONAL HARVESTER.

    IH HAD SEVERAL DIVISIONS BEFORE IT WENT UNDER: AGRICULTURAL, CUSTOM CABS AND SMALLER VEHICLES. THE UPPER MANAGEMENT AND THE UNIONS BLED THE COMPANY DRY.

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