Ford slashes production
Automaker to have 10 plants idled for significant periods during the rest of the year as it cuts fourth-quarter output 21% from prior-year level.
NEW YORK (CNNMoney.com) -- Ford Motor Co. slashed its production plans and announced that 10 North American plants will be shut for extended periods much of the rest of the year as it tries to trim costs and deal with slumping sales of its light trucks.
The automaker said Friday the move will result in a 21 percent drop in production in the fourth quarter compared to a year ago, as it makes 168,000 fewer vehicles.
Ford also trimmed third-quarter production by an additional 20,000 vehicles from its previously announced production target, leaving it 78,000 vehicles short of year-ago production.
"We know this decision will have a dramatic impact on our employees, as well as our suppliers," said a statement from Chairman and CEO Bill Ford. "This is, however, the right call for our customers, our dealers and our long-term future."
The already-battered shares of Ford (down $0.13 to $8.04, Charts) were off about 2 percent in early-afternoon trading Friday on the announcement, after being down as much as 4 percent earlier in the day.
While downsizing by a company normally cheers Wall Street, the production cuts will do little to trim costs in the short-term, and are simply an indication of further weakness in the demand for the company's products.
"There's not much there in terms of cost savings," said Kevin Tynan, auto analyst with Argus Research. "You're basically paying everyone anyway."
The 10 plants have about 30,000 hourly and salaried employees, but they will be paid nearly their full salaries during any weeks the plants are idled. Pay guarantees negotiated with the United Auto Workers union and extended to salaried staff are one of the reasons the U.S.-based automakers are finding themselves at a cost disadvantage when competing with automakers based overseas.
Credit agency Fitch Ratings, which like other services already has a junk bond rating on Ford debt, said it is further downgrading its ratings on Ford. It said the lower demand for pickups and SUVs would hurt the company's cash flow. It said it also expected Ford may end up announcing payments to union employees in order to cut staff, which would also reduce its cash reserves. Moody's cited the same factors in announcing it was putting its ratings for Ford under reveiw.
Putting brakes on F-series
The company's four F-series pickup truck assembly plants - in Kansas City, Mo., Norfolk, Va., Dearborn, Mich. and Louisville, Ky - are among the plants that will see the additional downtime between now and the end of the year.
The other six plants that will see periods of closure are in Chicago, St. Paul, Minn., the Michigan Truck plant in Wayne as well as the Wixom Mich. plant, the St. Thomas, Ontario, and another Louisville plant that makes the Ford Explorer and Mercury Mountaineer.
While adjusting production to respond to changes in demand is a normal event in the auto industry, this is the deepest cut in production at Ford since the 1981-82 downturn, according to George Pipas, the manager of sales analysis at Ford.
Three of the plants with additional downtime this year - Wixom, St. Paul and Twin Cities - have already been identified by Ford for eventual closure as it tries to trim costs long term. The company plans to close 14 plants in the coming year as part of an effort to cut costs and return to profitability.
Bill Ford said the decision to slash production and idle plants now is part of broader efforts to accelerate the company's North American turnaround effort. He said full details of additional actions will be announced in September.
The Wall Street Journal reported Friday that the company is also looking at closing more factories and cut salaried jobs and benefits by between 10 to 30 percent as it weigh how to make additional cost cuts. The paper cited people familiar with the automaker's plans.
"Whatever it is, it will be sizable enough to be material and needs to be announced," one of the paper's sources told the paper.
Company spokeswoman Oscar Suris declined to comment on the company's plans for additional reorganization moves that will be announced next month.
Shift away from trucks
The company has seen particularly weak sales of its light trucks - such as pickups, SUVs and minivans - in the face of high gasoline prices. Unfortunately for the company, it has become overwhelmingly dependant on light truck offerings for its sales volume and profit margins.
Year-to-date its companywide light truck sales are off 16 percent, while its car models have actually seen a 3 percent gain in sales compared a year earlier. Because of the shift in buyer demand, the new production targets will have the company making 118,000 more cars in 2006 than it did in 2005, while cutting light truck production by 404,000.
Among the products targeted for the most severe production cuts is the F-series pickup truck, the nation's best-selling vehicle, but one which has seen its sales hurt by high gasoline prices.
Ford's sales of the F-series pickup were off 46 percent in July compared to a year earlier, and for the year sales are down 12.5 percent.
At the end of July, the company had 277,000 F-series in dealer inventories - or a four-month supply given the sales pace in July. About 41 percent of vehicles on dealer lots at the end of July were the F-series pickups, compared to about 34 percent of the company's inventory at the end of 2005.
The supply of F-Series at the end of July was actually down from 311,000 at the end of June, but the cut in inventory was accomplished by the company's normally scheduled two-week systemwide shutdown in July rather than strong sales.
Pipas said that while sales of the F-series and the large pick-up segment as a whole held up pretty well in the first quarter, rising gasoline prices started trimming into demand for the large pickups in April.
Sales tracker Autodata estimates that the industrywide full-size pickup sales are off 15 percent for the first seven months of the year.
Part of that may be due to competitor General Motors (Charts), which is rolling out a new design of its full-size pickups later this year. Fans of those trucks, such as the Chevrolet Silverado or GMC Sierra, may be delaying their purchases as they await new models.
Pipas denied that competition from the new GM pickups or the entry of Toyota's first true full-size pickup early next year is the reason behind slashing F-series production.
"This action would have been taken with or without new entries or updated models in the segment," he said. "The buyers in this segment are fiercely loyal to the different brands."
Argus Research's Tynan said that Ford will be hurt by the competitors' new model, particularly Toyota's entry into the market segment. And he said that Ford may have to bite the bullet and consider adding one of the F-series plants to the list of plants to be closed when it rolls out its revised cost-cutting plans in September.
"One of those (F-series plants) probably needs to go away," he said. "All signs point to (the idea) that would be the smartest thing to do. That's what the market is signaling. Whether they perceive that to be the smartest thing remains to be seen."
Tynan said the most important thing for the company to do at its September announcement is set some firm closing dates for some of the plants, and start moving towards offering the kind of incentives to workers to retire or leave the company that GM used to trim nearly 35,000 union members from its payroll.
"I don't think you can put a target out of '30,000 jobs by 2012' as they have done," said Tynan. "They need to pull a lot of more of that potential cost restructuring into the here and now."
The company reported a net loss of $123 million in the second quarter, and a loss excluding special items of $48 million, or 3 cents a share, at a time when analysts had been forecasting a 12 cent a share profit.
In July, its U.S. sales fell behind those of Toyota Motor Corp. (Charts) for the first time in its history, as overall vehicle sales fell 34 percent in the month from a year earlier. Ford's year-to-date U.S. sales are down nearly 10 percent.