Give a company a serious crisis to deal with once in a while and it’s amazing how much money it can save. Ford took $5bn of costs from Ford US last year while losing $1.9bn on that business in the last quarter.
For the year as a whole, Ford lost $14.6bn. The cost savings, the cash in hand of $13.4bn, and new loans of $10.1bn are what have to keep Ford afloat until demand starts to revive (in the second half of this year according to Ford).
Many observers assumed that if the market is down by a massive amount such that Ford makes fewer cars, of course there is less in the cost line on the p&l; less labour and fewer parts for a start.
But no: Lewis Booth, the Brit now in place as CFO for the group, having previously been fixer-in-chief for Ford of Europe, patiently explained on the analysts’ webcast for Ford’s 2008 financial results yesterday, that all volume-related savings are removed from the arithmetic before the cost savings are calculated.
The Ford group had revenues of $140bn in the year. Saving $5bn is equivalent to boosting margin by 3.5%. If you make cost savings of 3.5%, that is a better margin than any volume car maker has ever made over the long run. Why do car companies never keep their cost in line with revenues during the good times? Why does the industry always play for the vanity of market share rather than the sanity of profit?
And is it not just a little bit naughty to do the heavy-spending routine during the uptick and then fly the corporate jet to Washington to crave a loan when the tick goes down?
To be fair to Ford, it is the only one of the three US manufacturers that is not in the queue for cash (other than the $10bn it hopes for from the Department of Energy as “grants” towards fuel saving engine development and research). It plans to make a similar application to the European Investment Bank for a similar amount for Ford of Europe’s research.
In fact Alan Mulally, the chief executive has upped his game a bit this quarter to say categorically that Ford can survive the recession without bail-out cash. Up until recently the language was suggesting there was no guarantee that it could go on without help.
The change of tack was maybe a clever idea. Ford’s market share in North America went up 6% in the fourth quarter. Maybe it’s a good idea to stand away from the bail-out money and tell the consumer that you are the strongest of the three providers. New-car buyers like to imagine that the warranty is worth something.
If the position of confidence was good strategy, Ford has done two other things that were smart. One was to mortgage all the property in the company and earmark the money for survival funds. The other was to draw down the $10.1bn credit facility it negotiated with the banks some time ago at reasonable rates and before the banks imploded. Ford announced the decision to take all of that money yesterday.
Mulally has become robotic on these conference calls. “I am more certain than ever the strategy we have for Ford is the right one….,” is the mantra. A bit more passion and improvisation would be welcome. But there is one area in which he is certain to be right and where change has long been overdue. By 2013, he disclosed, all Ford cars will be available for all markets. Small cars for Europe will be the same small cars sold in the US.
The ‘One Ford’ vision that he has been banging on about for the last two years is now just four years away.