Mulally Spurs Ford Growth With $2,700 More Revenue per Vehicle

Mulally Spurs Ford Growth With $2,700 More Revenue per Vehicle

By Keith Naughton

 

Nov. 3 (Bloomberg) — Ford Motor Co. Chief Executive Officer Alan Mulally, after cutting nearly half the automaker’s North American employees, is commanding $2,700 more revenue per vehicle as he looks to put the company on a path to growth.

Mulally posted his first back-to-back quarterly profits at Ford yesterday with a $997 million net income. The carmaker was expected to make a $632 million loss, based on the average of eight analyst estimates. Ford’s U.S. market share grew even as it cut discounts, delivering $1.9 billion in additional revenue, 74 percent of it in North America.

That progress, boosted by Consumer Reports magazine declaring Oct. 27 that Ford’s quality is now “world-class,” had a bigger effect on the bottom line than the additional $1 billion in savings the automaker recorded in the quarter. New models, like the redesigned Ford Taurus and Fusion sedans, also sold with more options, like voice-controlled audio systems.

“During the worst of times when we were restructuring ourselves to the lower demand to get back to profitability, we also continued to invest in a new product line,” Mulally said on Bloomberg Television yesterday. “It’s both having the vehicles that people really do want as the economy recovers but also having a very competitive cost structure to compete with the best.”

Ford will again seek savings from the United Auto Workers union, whose members rejected proposed concessions yesterday. And it is continuing work to strengthen its balance sheet, seeking to raise as much as $3.3 billion in convertible notes and common stock.

Ford gained 58 cents, or 8.3 percent, to $7.58 yesterday in New York Stock Exchange composite trading. The shares have more than tripled this year.

Growth Begins

Ford has already begun growing. It increased its U.S. market share 2.2 points to 14.6 percent in the third quarter over last year, the automaker said. The biggest growth, though, came in pricing power. Ford reduced discounts and boosted prices to gain $1.4 billion in higher payments for its models in North America, equating to $2,700 per vehicle.

This year, Ford has posted a net income of $1.8 billion and a pretax operating loss of $1.3 billion.

Mulally has now promised that the Dearborn, Michigan-based automaker will be “solidly profitable” in 2011. Analysts and investors say he’s being conservative.

“He’s under-promising in hopes of over-delivering,” said Bernie McGinn, president of McGinn Investment Management of Alexandria, Virginia, which owns about 320,000 Ford shares. “He has enough good news out there, why spoil people? But I absolutely do expect profit in 2010.”

First Annual Profit

If so, it would be Mulally’s first annual profit since he arrived at Ford from Boeing Co. in October 2006, just as the automaker was sliding into the biggest crisis since the Great Depression. Shortly after taking over, Mulally, 64, signed off on a plan brought to him by then-Chief Financial Officer Don LeClair to mortgage the entire company for $26 billion in loans.

Those loans, which came just before credit markets froze, saved Ford from needing a government bailout and falling into bankruptcy like General Motors Co. and Chrysler Group LLC.

He also focused Ford on its namesake brand and sold off European luxury lines Jaguar, Land Rover and Aston Martin.

Next to go is Volvo. On Oct. 28 Ford said it selected as its “preferred bidder” a team of investors led by Geely Holding Group Co., China’s largest private automaker. Geely is offering about $2 billion, less than a third of what Ford paid for the Swedish automaker a decade ago.

Debt Disadvantage

Ford can use the money. Its debt load is larger than GM’s or Chrysler’s, whose debts were reduced in their restructurings. GM’s liabilities will be $22.3 billion in 2011, while Ford’s will total $38.1 billion, Barclays Capital auto analyst Brian Johnson said in an Oct. 20 research note.

After the market closed yesterday, Ford announced a plan to raise as much as $3.3 billion, while paying down and pushing back the maturity of a $10.7 billion credit line by two years to 2013 to give it breathing room to pay its debts.

“We expect the moves will enhance Ford’s automotive liquidity and over time reduce the company’s debt burden, providing an additional cushion given the still-uncertain state of the economy,” Mulally said in a statement.

Economic anxiety played a role in Ford’s 41,000 U.S. hourly workers rejecting $1,000 bonuses in exchange for concessions Mulally sought to gain labor cost parity with his U.S. rivals. The UAW agreed to givebacks in March that Ford said cut its annual labor costs by $500 million.

This time production workers turned it down by 70 percent, while 74 percent of skilled-trades employees rejected it, the union said.

‘Had to Push Back’

“Ford has been seeking concessions from the UAW for three years and at some point they had to push back,” McGinn said. “Will it cost them? Yes. Will it cost them much? I doubt it.”

Mulally has already closed 13 factories since arriving in 2006 and has plans to shut five more by 2011. He isn’t ready to give up achieving parity with GM and Chrysler, who received a six-year ban on strikes over wages and benefits and a freeze on wages for new hires until 2015.

“The last thing we were talking about was the two or three things GM and Chrysler had coming through the bankruptcy,” Mulally said on Bloomberg Television. “So we’ll continue to work on these because everybody knows that our future is based on being competitive with the very best in the world.”

Even without new concessions from the UAW, Mulally is over- achieving in his cost cutting. Through September, the company said it had cut $4.6 billion in structural costs, overshooting the annual target of $4 billion in reductions. Now Mulally has raised the bar to $5 billion in cost-cutting this year.

Showroom Test

The real test of Mulally’s plan, though, starts now as new products roll into showrooms. The early results are good.

Sales of the redesigned Taurus increased 60 percent in September over the old model that was once popular in rental-car fleets. Sales of the Fusion family car are up 14.5 percent this year, when the overall U.S. auto market is down 27 percent so far this year. Ford’s total U.S. sales are down 22 percent through September.

Ford has said its data shows it is attracting buyers who are impressed that it didn’t take a bailout or go bankrupt. Mulally’s challenge now is to hold onto those buyers with better offerings than Ford has had in a long time, said Jeffrey Spotts, a New York-based portfolio manager at the $250 million Prophecy Fund, which has been accumulating Ford shares since February.

“The image of not going into bankruptcy is great,” said Spotts. “But they’re just making better cars now and that’s really the message that Mulally has to get out.”

To contact the reporter on this story: Keith Naughton in Southfield, Michigan at Knaughton3@bloomberg.net

Last Updated: November 3, 2009 00:00 EST
 

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