Ford: Waiting for the next shoe to drop
Will plummeting sales at the giant automaker give activist investor Kirk Kerkorian the opening he wants?
NEW YORK (Fortune) -- Bets are running high that next week's report on June sales for the Big Three automakers will be horrible - down as much as 25%. Shares in General Motors and Ford have fallen sharply as the companies whack tens of thousands of pickups and SUVs out of their production schedules to keep inventories under control.
No move has been more shocking than Ford's decision to delay the introduction of its all-new 2009 F-150 pickup truck for two months because it still has too many 2008 models to sell.
Delaying the introduction of a new model to cope with inventory problems is all but unprecedented in Detroit. Automakers depend on new model introductions to boost showroom traffic and stimulate sales of all their vehicles. They want to get new models onto the market as quickly as possible. Recall that just two years ago, GM (GM, Fortune 500) raced to launch its own new pickup trucks 90 days ahead of schedule.
The financial consequences of Ford's move are enormous. By suspending production for two months (and analysts suspect it may be longer), Ford (F, Fortune 500) is giving up any improved revenue and profit contribution it might have gotten by selling the new model vs. the old one, as well as any revenue at all that comes from running the factory. Ward Transportation Research now figures that, with this and other actions, Ford will lose $3 billion pretax in North America this year, up from a previous estimated loss of $1.9 billion.
The F-150 is Ford's most popular model and among its most profitable. By essentially cutting its annual volume by 16%, the company is reducing the profit it will reap on the rest of the production run, as well as wreaking havoc among suppliers, who had based their own cost projections on higher volume.
Brian A. Johnson of Lehman Brothers described Ford's predicament as a "negative feedback loop," in which bad news feeds on itself, creating worse news. In a June 23 report, he wrote: "With gas prices remaining stubbornly high, demand for both new and used large pickups is falling precipitously. As a result, falling trade-in values is [sic] likely keeping buyers out of the market - especially those who might still be repeat buyers of larger vehicles."
Though Ford has been no more prescient than its cross-town rivals in foreseeing the spike in oil prices and the subsequent collapse of truck and SUV sales, CEO Alan Mulally has been quick and decisive in dealing with the situation, cutting production and payrolls and delivering regular public pronouncements about Ford's financial condition.
Critics who say Mulally has been too quick to make cuts overlook the gravity of his plight: He now has billionaire investor Kirk Kerkorian breathing down his neck. Earlier this month, Mulally and Bill Ford, Ford's executive chairman, traveled to Las Vegas to meet with Kerkorian. By rights, Kerkorian should have been furious. Having just tendered for 20 million Ford shares at $8.50 (to go along with the 100 million he already owned), he was facing a paper loss of $64 million.
But Kerkorian apparently said little beyond offering support to the embattled executives. Within hours of the meeting, he disclosed he had purchased another 20 million shares, raising his stake in the company to nearly 6.5%. According to insiders, Kerkorian believes that the delayed F-150 launch is another sign of Ford's "highly rational management."
On their flight back home, Mulally must have wondered whether he simply dodged the first bullet. Kerkorian never remains on the sidelines after buying in and the only question about his greater involvement in Ford seems to be when he will choose to make his move. He has offered to invest more capital in the automaker, a potentially welcome move, since Ford is expected to burn through nearly $20 billion in cash by the end of 2009. But like any investor, Kerkorian would not be expected to hand over his money without some strings attached.
At the very least, Kerkorian's presence is a distraction. Mulally already has to keep the the Ford family in line and surely does not want another back-seat driver. But he's got one now - for better or worse.
Read more auto news on Alex Taylor's blog, The Wheel Deal.