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Ford Motor Company
Way Forward: Commentary

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By GeezerRob
September 18, 2006

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I plan here to make selected comments from my earlier post that includes Ford's press release on the accelerated Way Forward plan, which I have dubbed as Fast Forward elsewhere. I will also comment on what was *not* announced.

In a nutshell though, I would say that employees are both relieved and anxious: relieved that we are moving forward in lieu of waiting for "the announcement", but anxious in that the "details" that affect specific individuals will be slowly rolled out over the next few months still. But...that's a local issue, not a Fool issue...

Cost Reductions
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* Salaried-related work force reduced by a third, the equivalent of 14,000 positions
Being acquainted with Ford-speak and comments elsewhere in the press release, this means:
1) 4,000 of the 14,000 are the folks that left in 1stQ 2006, so this is really a 10,000 reduction
2) The reductions to come from primarily from early retirements, but will include layoffs "as required". Knowing how things work at Ford, there could very well be hundreds to a couple thousand "open positions" eliminated, but this just eliminates open job postings, not people and not costs. But, there will still be a *lot* of people headed out the door. Unfortunately, this will be a multi-month process, which is *quite* a distraction for people.
3) I would expect some more reductions after this cut-back as addition opportunities are recognized...and as share drops further (see below).
4) Management reductions will be significant, with reductions in layers of management as well as increased "span of control" (each manager has more direct reports, enabling fewer managers on each level). All I can say is "Hurray"....this will enable quicker decisions and few meetings.
5) Details of benefit reductions were not made public, but the implication of the Q&A was that they are coming. Pension freeze at least.

* Buy-outs to all hourly, resulting in a 25,000-30,000 reduction
The analyst Q&A provided further info from what the press release indicated, but here is the bottom line:
1) The 25-30k includes the 7,000 who have taken buy-outs so far this year.
2) The overall number also includes all ACH personnel as the ACH operations will all be sold or shut down. As background, ACH (Automotive Components Holdings) was formed when Ford "bought back" a number of poorly performing Visteon plants in order to keep this key supplier from going under. This was accomplished with the cooperation of the UAW and significantly enhanced Ford's excellent relations with the union. You've *got* to work together as a team...or die together as the ship goes down.
3) Ford's hourly demographics show a significantly younger workforce than GM's. It may be that there will insufficient people taking the offer. The result? If not enough hourly people leave on their own, you can be assured that they will go as part of the September 2007 UAW contract.
4) 2007 contract (My opinion only): Expect significant scaling back of jobs bank (you will be paid even if your job is eliminated). Current retirees will escape free and clear except for minor co-pay increases on medical. Workers will have substantial increases in copay. Pensions will be scaled back for future retirees.

Revenues
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Today, Ford announced a number of product actions that have been kept quiet, although I alluded to the nature of some of them in prior posts:

1) 70% of Ford, Lincoln and Mercury products by volume will be new or "significantly" upgraded by the end of 2008. IMO, "significant" is in the eye of the beholder, but here is the announced new "stuff":

a) New Super Duty F-Series pick-up early next year. This is the single biggest money maker at Ford....maybe in the whole automotive industry. Keep in mind that the total F-Series line *increased* market share this year, despite all the other hype you may hear. It'll be interesting to see how the battle develops with the new GM and Toyota product. If you like big, tough trucks....this vehicle will *rock* you. It is quite an impressive product.
b) New F-Series (regular pick-up) in 2008. New, but the biggest changes are apparent inside. To my eye, the outside is an evolution of what you see today.
c) Town Car to continue (but production to move from Michigan to Canada)! The right decision, but I hadn't heard confirmation on that until today. Now they need to upgrade it...no announcement on that and I have no information.
d) New Lincoln MKS sedan (D385) in 2008. *Very* nice car that I would confidently put head to head with Lexus LS.
e) New Focus (C170) for 2008MY. New appearance in and out, but reduced number of body styles. Still not competitive with Civic or Corolla.
f) As indicated on a one of my prior posts, Ford will introduce new vehicles based on global B and C size vehicles....but you wouldn't believe how *LONG* it will be before they reach production. That was not communicated clearly today...and I'm sure that was deliberate because Wall Street would barbeque them for it.
g) Ford "Fairlane" people mover (D471) officially confirmed today for production in 2008. That program has been having problems...and I think it will be hard to keep it in 2008. Not mentioned today is that there is a related vehicle (D472) coming out that looks *quite* different. Some folks at Ford hate it, hopefully some folks will love it....I haven't decided yet....it sure is different...:)
h) New Escape (U377) and Mariner coming out next spring. Mostly new inside and out. New powertrain for the following year.
i) New Mustang (S197) variants every year until the revised Mustang comes out (a looonnnnggg time from now). :(
j) Face-lifted Five Hundred (D258) and Freestyle (D219) next year, along with upgraded powertrain (3.5L V6) and upgraded interior. Next generation vehicle is *waaayyyy* out there.

Beyond these products, there is a super gigantic colossal mega-group of vehicles coming beyond this group. Good stuff. Ford will have a *LOT* of competitive cars, a *LOT* of crossovers and....(I presume) new trucks. (I'm on the car side of the business, in case you didn't realize). I don't want to get into specifics here because I don't want the competition to know. :P

There is also quite a bit being done on the Powertrain side...can't provide details there either. I'd comment on alternative fuels, but that is a huge subject just in itself. I *will* say that most discussion on the subject is poorly informed.

Working Capital
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This is a key...and unfortunately I haven't devoted the time to understand it as well as I should. Even if I *did*, I don't think I could do a proper job due to the complexities of the Ford's global cash needs, it's generation, the interaction with Ford Credit and the rollover of low cost debt into high cost debt due to Ford's credit rating. Keep in mind that there are hundreds, if not thousands, of beanies at Ford trying to keep a handle on it. The key points for the unwashed masses (such as myself):

1) Despite on-going efforts to reduce product development costs, it is *very* expensive to develop new vehicles. An all new product (there are few of these) costs billions, including engineering, tools, plants and launch costs. There are few in the public that understand the complexity of the process. For all programs, Ford gulps billions/year here.

2) Ford is *very* uncompetitive with material and parts costs. I was stunned when I found out the scale of it during a briefing. This will take years to fix. Rolling out new product faster helps fix it faster. In the meantime, Ford will bleed cash.

3) Ford is offering buy-outs to a lot of people. This will cost billions too....3.4 billion with this group (subject to update).

4) Ford is paying off low cost debt (when it had a good credit rating) with high cost debt (now that the rating is "junk"). This will be a drag for years until the credit rating is built up. How long? *Very* long...but I would expect upgrades....in the next decade....

Global Considerations
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Most of this discussion has been focused on North America, where the rising tide of red ink has our immediate attention. The rest of the Ford empire has issues as well:

1) Ford of Europe: Profitable, but declining. Profits are too small to finance the pace of product introduction and market share continues to decline in the face of the Japanese and Koreans.

2) Ford South America: Profitable, but small.

3) Ford Asia-Pacific: Lots of different markets and a complex story. I'll sum it up by saying that they're losing money and market share.

4) Mazda: Profitable and growing...but both profits and the growth rate are small. Ford owns about a 35% share of the company which is the source of all mid-size vehicles at Ford North America.

5) PAG (Premier Automotive Group): Volvo, Jaguar, Land Rover and Aston Martin. Aston is officially for sale. The group loses money like no other automotive group on the planet. I've heard that Volvo is now turning red :(. The future? Painful. Lots of talk of selling everything but Volvo. It's hard to know what makes sense....so I won't try here either. I just know that selling them won't raise much money....and fixing them will take a huge amount.

Final Thoughts
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Today, Ford predicted a North American market share stabilization at 14-15%. I still stand by my 13% prediction (which doesn't look quite so radical anymore, huh ;)...).

Ford also said that full year North American profits will come by 2009. I think profits will *perhaps* show up in 2009, but that they won't be full year. We'll be turning around by then....but we'll still be struggling.

When will Ford be ready to kick butt and take names? Probably never....I would expect some real strength by 2011....but instead of a titan, the Ford Motor Company will be a middleweight. The titans of the automotive world by then? Toyota (duh...), GM (they are coming back more strongly than most suspect) and.....that's it....no more titans.

Not great...but it beats pushing up daisies....

And remember, the titans of old are not to be found today. Toyota and GM could eventually slide down into the dogfight where #1 has just a *little* more share (and profit) than #6.

For investors: Automotive remains an interesting place for stock trading, but I wouldn't recommend it for "widows and orphans".

Rob
Still here at FoMoCo, fairly confident...but watching my back ;)


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