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Ford Reports $5.8 Billion Loss: Time for Bill Ford to Resign

Prof. Peter Morici - 10/24/2006

On Monday, the Ford Motor Company announced a third quarter loss of $5.8 billion. Excluding special items associated with restructuring, continuing operations lost $1.2 billion. North American operations posted a $2.0 billion pre-tax loss.

In addition, Ford announced it will restate earnings from 2001 to the second quarter of 2006 owing to the failure to properly account for derivatives transactions

Contrary to its publicity, Ford anticipated higher fuel prices by introducing a whole new line of sedans and smaller SUVs over the last several years, concluding with the Fusion, Milan and Zephyr trio. Ford’s new sedans have failed to excite car buyers because they do not measure up to Toyota and other Japanese offerings in content and expected reliability. Hampered by a cost disadvantage in the range of $2500 per vehicle, mostly stemming from its uncompetitive contract with the United Automobile Workers, Ford simply cannot compete.

President for North America Mark Fields and Ford CEO Alan Mullay have failed to publicly recognize Ford’s fundamental labor cost disadvantage and articulate meaningful solutions. The basic problem is that Ford Chairman Bill Ford simply refuses to recognize reality, and these two seasoned managers are hamstrung by family control.

GM entered the last crisis in as poor a situation as Ford but has moved more quickly to address some of the problems besetting domestic automakers. While GM has not moved as fast or broadly as will be needed, it is ahead of Ford, and Ford is the least competitive of the three largest U.S. automakers—GM, Toyota and Ford.

Investors should take no comfort that $4.6 billion of the loss was from special charges. Ford has been restructuring and downsizing for the last two decades. Ford likely will have to abandon one or both of its premium brands—Mercury and Lincoln—because the automaker has been simply rebadging too many Fords and trying to pawn them off on car buyers as premium Mercury and Lincoln vehicles. Abandoning Mercury or Lincoln will require more restructuring costs.

Ford is a family run business competing with global titans—the family and the company are simply outclassed. If the Ford family is not willing to relinquish control, investors should dump Ford stock as quickly as they can write a sell order. It may be possible to make some money buying Ford on the dips, but long term, Ford is a loser.