Automotive Trendlines: Will Ford Last Another 100 Years?
MiBizWest • July 2003
by Jim Gillette
On June 16, the Ford Motor Company celebrated its 100th birthday. Quite an accomplishment in a time when many companies fail before the ink is dry on the stationery. When it comes to automobile companies, Ford is still a youngster. DaimlerBenz (arguably the same company as DaimlerChrysler with the “Chrysler” tacked on in 1998) was founded in 1883. Peugeot started making autos (it previously made bicycles and sewing machines) in 1896 and Renault began in 1898. The soon to be only a memory Oldsmobile was given birth by Ransom Eli Oldsmobile in 1897.
During the “golden early years” of the auto industry, there were hundreds of automakers. Although industry consolidation began in earnest prior to the 1930s, the Great Depression brought an end to most of the weaker players. The dominance of the Big Three in North America eventually drove out the rest after World War II with names like Hudson, Packard, Studebaker, Nash and American Motors disappearing.
We have been hearing of late that Ford or “one of the Big Three” could be headed for bankruptcy. This is certainly disconcerting for their parts suppliers, many of whom have already lost millions due to the financial problems at their tier customers.
Such talk about Ford is even shocking to the general public as the lore of the company and its founder is an integral part of our lives and culture, especially for those of us who grew up in Michigan. Henry Ford ranks right up there with Paul Bunyon and George Washington as a mythical hero. Myths about the company are so prevalent that during one speech, even Lee Iacocca made the common error of proclaiming that Ford invented the automobile. As with most myths, there is probably a little truth in the bankruptcy warning. I believe, however, that it is for the most part just so much smelly exhaust.
Let’s set the record straight with facts. First, the world’s leading credit rating firms, Standard & Poors and Moody’s, maintain “investment grade” rating on all three companies. S&P gives Ford and GM “BBB” and DaimlerChrysler is a notch higher at “BBB+.” While admittedly this is the lower end of the investment grade range, it isn’t junk.
It’s true that the rating agencies took some criticism for not recognizing the coming failure of Enron far enough in advance. Enron, however, was playing a complicated game that had some of the sharpest minds in finance fooled. (A number of college finance texts written prior to public announcement of the troubles highlight Enron as leader in using state-of-the-art financial techniques.) And there was widespread alleged fraud in its financial reporting. Building and selling cars and trucks is a much more straightforward business that is easier to analyze. There is also the fact that the rating agencies are being much more cautious these days in order to avoid future embarrassments. If something smells, they will issue a downgrade.
Second, each of the Big Three has a substantial cash hoard. As of the end of March, Ford had over $19 million, GM nearly $27 million andDaimlerChrysler$ 12 million. To put this in perspective, when Kirk Kerkorian at tempted a hostile takeover of Chrysler in 1995,he complained that the $7.5 million then held by the company was well in excess of what was needed to run the business day-to-day. There is no doubt each company could run through their cash should industry sales tank, but such liquidity does provide a substantial cushion.
Third, each company has some flexibility to sell off under perforrning assets to substantially reduce cash drain. The most obvious at Ford is the Premier Auto Group, its luxury brands that include Jaguar. Volvo and Land Rover that have as of late been losing hundreds of millions of dollars. I certainly hope Ford finds a way to turn them around, but if they don’t, I’d advise cutting the losses quickly.
Pensions and health care are the big problems
The big problem for the carmakers re mains the unfunded pension liability and projected health care expense, both of which have been widely discussed in the business media. Help, unfortunately, is not on the way. The Portman-Cardin ill pension reform bill currently being considered in Congress proposes an accounting gimmick to delay recognition of the ultimate required cash outlay, but does nothing to relieve the carmakers of the burden: Good decision or bad, the unions fought for the benefits and management promised the companies would pay them.
Chapter 11 bankruptcy may end up the only solution for one or more of the carmakers to force restructuring of their benefits package. While this will be a distressing process with promises broken and the relative com fort of retirement shaken for many, the continued existence of companies will not necessarily be put in doubt due to this issue. It is also difficult to see this as a near-term possibility.
What doesn’t kill you will make you stronger
History has shown us that an occasional brush with death can be a catalyst for corporate revitalization. Chrysler, for example, has been in serious trouble at least four times during my car-buying lifetime. The recoveries from its early 1980s and early 1990s debacles were spectacular, first bringing us the minivan and then a cornucopia of sport utility vehicles.
Many analysts believe that the reason it took General Motors so long to change its ways dating to the 1970s was that so few within the company really believed it could possibly go out of business. “GM, after all, is too big to fail.” was the refrain heard in the halls of the GM building. No one there had yet experienced what one management guru called “a significant emotional event.”
While Chrysler’s problems were well publicized in 1980, Ford came nearly as close to failure shortly after. Chrysler came out with the minivan in 1983, putting it back in the black, and Ford followed with the successful Taurus and Sable in 1985.
Let’s hope the people at Ford are frightened enough once again to come up with new product that will launch the company into its second century with a strong bottom line. As to all this bankruptcy talk, to para phrase Mark Twain, rumors of Ford’s death are greatly exaggerated.