Blog: Dave LeggettLong hard road

Dave Leggett | 20 July 2005

I guess there was not too much to be surprised about in the second quarter financial results released by Ford and GM this week. Both are losing on North American automotive operations big time, with Ford just short of a billion dollar loss in NA during the second quarter and GM a little over that mark. Ford managed to make up the difference with another bailout from financial services, but GM was still in the red after other divisions’ figures were taken into account.

But we’ve got used to seeing such figures. Indeed, the fact that they have lost their shock value is in itself perhaps cause for concern should it give rise to any sort of complacency.

Ford’s CFO, Done Leclair, has said that he reckons there will be a plan by the end of the year to bring Ford’s North American operations into profitability. That won’t be an easy act to pull off (no kidding!).

GM and Ford seem to be stuck in a discount cycle, with a little help from Chrysler, which is going to be hard to break out of. And the US market environment doesn’t look too favourable over the next few years with Japanese and Korean makers adding North American capacity. The profit momentum at Ford Credit also looks to be past its peak now, with interest rates expected to rise in the medium-term. And a still high oil price isn’t exactly helping sales of high-margin light trucks.

More pressure to cut costs – particularly as some out-of-control cost pressures show little sign of abatement - must be building. But another round of squeezing suppliers – the traditional step 1 - is probably not the way to go. The drastic action needed by Ford to bail out Visteon and the numbers of US Tier 1s in Chapter 11 illustrate that point. Not much easily removable fat in the supply chain.

So, for GM and Ford, pricing their way out of trouble is not an option. Squeezing suppliers looks to have gone about as far as it can for now. Ford will have to look at its core NA manufacturing base again and also cast a very critical eye on its products too. Should GM in NA shed a brand? That question may be increasingly asked. Legacy cost issues will continue to loom large for both makers too.

And the big questions will have to be asked again: why are we failing and how do we put a realistic recovery plan in place? What are the key elements? What works, product-wise and business-wise and what doesn’t?

But it’s not all bad news elsewhere for Detroit’s Big Two. Ford’s PAG is actually doing rather well, bolstered by a strong contribution from Land Rover (which actually is an interesting example of how better product-mix and high-margin pricing in the context of favourable brand values, can bring results, even if the unit trails in some areas, like quality). Volvo is looking okay. Jaguar is getting better. And GM reported a welcome profit in Europe in the second quarter. It’s not all bad, sure.

However, the scale of the losses being incurred in North America is disturbing. More discounting initiatives, like employee discounts, may result in higher market share in the short-term and keep the marketing department buzzing, but there is a sense that through such actions Detroit is digging a bigger hole for itself and not addressing the fundamental problems.

That is particularly so when support from financial operations can no longer cover the losses.

GOLDING'S TAKE: Land Rover pulls clear of the deep stuff at Ford


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