Behind Ford's scary $12.7 billion loss

The Big Three are hemorrhaging money, and struggling to stay competitive with foreign rivals. Fortune's Alex Taylor crunches the numbers.

By Alex Taylor III, Fortune senior editor

NEW YORK (Fortune) -- An enormous gap still separates the performance of Detroit automakers from their foreign competitors - and it isn't all their fault.

The stupefying $12.7 billion loss that Ford Motor Co. reported Thursday for 2006 comes one year after General Motors' equally horrendous $10.6 billion loss for 2005.

But for all the bad decisions these companies have made by not listening to their customers, they aren't entirely to blame. Structural inequities between the U.S. and Japan - notably in labor costs and currency - account for a big chunk of Detroit's problems.

The evidence can be seen in a report prepared by the Detroit consulting firm Harbour-Felax, first released back in October and updated for Fortune. For anyone who makes a living from the domestic auto industry, it is depressing reading. An enormous and persistent gap separates the home team from the import companies - large enough to question the continued survival of the U.S. companies.

In the case of Ford (Charts), which recently hocked its corporate assets to help fund $17 billion in negative cash flow over the next 24 months, it raises questions whether the automaker can shrink the difference before its money runs out.

According to the latest calculations, the gap between Japanese and American carmakers' profits average out to about $2900 per vehicle, and the home team does not have the advantage.

Cost issues

A big reason is the cost of labor. As analyzed by Harbour-Felax, labor costs the Detroit Three substantially more per vehicle than it does the Japanese.

Health care is the biggest chunk. GM (Charts), for instance spends $1,635 per vehicle on health care for active and retired workers in the U.S. Toyota (Charts) pays nothing for retired workers - it has very few - and only $215 for active ones.

Other labor costs add to the bill. Contract issues like work rules, line relief and holiday pay amount to $630 per vehicle - costs that the Japanese don't have. And paying UAW members for not working when plants are shut costs another $350 per vehicle.

Here's one example of how knotty Detroit's labor problem can be:

If an assembly plant with 3,000 workers has no dealer orders, it has two options. One is to close the plant for a week and not build any cars. Then the company still has to give the idled workers 95 percent of their take-home pay plus all benefits for not working. So a one-week shutdown costs $7.7 million or $1,545 for each vehicle it didn't make.

If the company decides to go ahead and run the plant for a week without any dealer orders, it will have distressed merchandise on its hands. Then it has to sell the vehicles to daily rental companies like Hertz or Avis at discounts of $3,000 to $5,000 per vehicle, which creates a flood of used cars in three to six months and damages resale value. Or it can put the vehicles into storage and pay dealers up to $1,250 apiece to take them off its hands.

Chrysler experienced the vicissitudes of over-production last year when it built cars without dealer orders and was forced to store them in open-air lots all around Detroit while it frantically sought buyers. It damaged relations with its dealers and was eventually forced to cut production anyway.

the exchange rate is another uncontrollable factor that plays into the hands of the import brands. When the yen got cheaper in 2005, Harbour-Felax figures it was worth $1,054 per vehicle to Japanese manufacturers

On the revenue side, it is easier to apportion blame. The lack of pricing power by American producers, brought on by poor quality, unimaginative marketing and sales to rental fleets, cost them nearly $1,000 per car. When everything is added up, the average Japanese automaker reports revenue of $24,289 per vehicle - $2,692 more than the average domestic manufacturer.

All in all, the report paints a bleak picture. While Nissan (Charts) was making $1800 per vehicle during the first half of 2006, and Toyota and Honda (Charts) racked up $1,400 apiece, nine-month results for Ford saw them losing $1,400 per vehicle - a number that will go up when the fourth quarter's loss is tallied - while DaimlerChrysler (Charts) dropped $1100 and GM $333.

But cut Ford and the others a little slack. They have gotten themselves in a deep hole but they weren't the only ones doing the digging.

_______________

GM to delay earnings, restate past results  Top of page