Ford (NYSE:F) announced the results for its second quarter this morning. Despite all of the great big bold letters extolling the net profits, things are not looking very good for the future.
In the press release, CEO Bill Ford stated, "Despite [pre-tax] profitability in most regions, our global automotive results were disappointing."
How can this be? South America saw higher sales and profits. Europe saw increased sales (although profits declined). Land Rover led the turnaround in the Premier Auto Group, and the Asian/African/Mazda groups eked out modest improvements.
With all those profits, what's the problem?
North America, that's what.
General Motors (NYSE:GM) and Chrysler (NYSE:DCX) got a jump on Ford with their Employee Discount incentive programs. Volume was down; getting to the party late contributed to a $570 million sales decline. To add insult to injury, higher costs decreased pre-tax profits by $1.3 billion compared with a year ago.
The Finance arm, which continues to carry the company, saw pre-tax profit decline $231 million to $1.3 billion because of higher borrowing costs. While it's great that the Finance group makes lots of money, the reason for the decline, albeit not surprising, is troublesome. Financing money-losing car purchases with high-cost capital doesn't exactly sound like a winning business model for the future.
While Ford's comment that the North American car market is a "fiercely competitive environment" has to be the understatement of the year, a single word mentioned in the first line of the safe harbor/risk factor section got me thinking -- overcapacity. If everyone is flooding the market with cars to get rid of bloated inventories and stave off market share losses to each other, as well as Honda (NYSE:HMC) and Toyota (NYSE:TM), what does that mean for the future? Are people going to buy the new models that Ford et al. are depending on to bail them out? Won't customers expect these lower price points to stick?
Ford's CEO is right to say he wants to attack the automotive company's cost structure. When you're producing almost $40 billion in sales and you can't make any operating profit, you've got a cost problem no matter how competitive the environment. But he'd better do it quick, and he'd better think in terms of lower production volumes. No one wants to be the first to the "shrink-your-manufacturing-footprint" party, but I don't see how all of these car companies can operate profitably with the scale assumptions currently being used.
David Meier owns none of the companies mentioned. The Fool has an ironclad disclosure policy .
