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US:Ford feels heat to cut more

Ford feels heat to cut more

Automaker's weak third-quarter results could force it to ratchet up aggressive restructuring.

By Bryce G. Hoffman / The Detroit News

Now that General Motors Corp. has announced its breakthrough health care deal with the United Auto Workers and other aggressive turnaround moves, all eyes are turning toward crosstown rival Ford Motor Co.

While Ford isn't expected to post the staggering third-quarter loss today that GM reported Monday, the Dearborn-based automaker is struggling with the same issues of manufacturing overcapacity and high labor costs, leaving workers and Wall Street wondering when more sweeping cuts will come.

"Our sense is that GM and Ford are both working on fairly aggressive cuts to North American manufacturing capacity," Deutsche Bank analyst Rod Lache said in a report released Wednesday.

Ford officials say the company is not ready to announce how many plants and workers it will cut during today's earnings release. But executives are certain to face tough questions.

Most analysts expect Ford to post a modest overall loss for the third quarter, and more red ink is expected to flow from the company's core North American automotive unit.

"We are looking for Ford to lose $1.02 billion (pretax) in North America," Lache said.

"With market share and mix deteriorating, focus will be on restructuring."

Ford's share of the U.S. vehicle market stands at less than 18 percent.

Its North American operations lost $907 million before taxes in the second quarter -- a $1.4 billion decline from the same period in 2004.

Ford Chairman and CEO Bill Ford Jr. and Mark Fields, the automaker's new president of its Americas division, are pushing for cutbacks and more efficient processes across Ford's far-flung operations.

In July, Ford Chief Financial Officer Don Leclair said "nothing is off the table."

The automaker also is in discussions with the UAW for a health care agreement that's similar in scope to the deal GM struck with the union.

"We believe that it's inevitable that Ford and the UAW will strike a new health care agreement similar to GM's," said Peter Nesvold, who follows Ford for Bear, Stearns & Co. Inc.

"The timing is uncertain."

By the end of this year, or early next year, Ford expects to unveil a broad restructuring that will mean a leaner and hopefully more profitable company.

Bill Ford's first major cost-cutting campaign began in January 2002, when he announced plans to eliminate 21,000 jobs, close parts and assembly plants and kill unprofitable models.

His plan worked for a while. After losing $6 billion in 2001 and 2002, the company returned to profitability and managed to make $4 billion over the next two years.

But rising gasoline prices knocked the bottom out of the profitable sport utility vehicle, a key source of profits in North America.

As Ford's credit rating sank into junk-bond territory, Bill Ford abandoned his stated goal of generating $7 billion in pretax revenue annually by 2006.

Instead, he began cutting white-collar jobs and eliminating contract employees. By August, the automaker had eliminated 1,100 salaried positions and was promising to cut 1,750 more by October -- a goal it met through a combination of retirements, voluntary departures and layoffs.

Ford also suspended matching contributions to employee retirement accounts, as well as management bonuses.

In August, Ford sold its Hertz rental car division for $5.6 billion in cash, giving the company much-needed capital and helping to offset its bailout of principal parts supplier and former subsidiary Visteon Corp.

But Wall Street wants more.

Global Insight Inc. estimates that Ford's North American factories are currently running at about 72 percent capacity. Global Insight's Catherine Madden said anything less than 90 percent is unprofitable.

GM said Monday it will close plants and cut 25,000 jobs in an effort to boost its capacity utilization from less than 85 percent to 100 percent by 2008.

"(Ford's) problem is much more long term," Madden said, adding that the company has no choice but to close more plants and close them soon.

"It's a crucial factor in the restructuring of their business moving forward."

Ford has already announced plans to shutter its assembly facility in Lorain, Ohio. Its assembly plants in Wixom and outside St. Louis are likely candidates for closure, Madden said.

The St. Louis Assembly in Hazelwood, Mo., builds the Ford Explorer and Mercury Mountaineer SUVs.

So does Ford's assembly plant in Louisville, Ky., and there may not be enough demand to justify keeping both factories open. The St. Louis plant was marked for closure as part of Ford's initial restructuring plan, but union leaders managed to keep it open.

In August, Ford announced that the next generation of Lincolns will be built in Atlanta, rather than at the brand's traditional home in Wixom. Coupled with Ford's plan to build the new Lincoln Zephyr in Mexico, the decision left Wixom with no solid product plan for the future.

While the details of GM's agreement with the union have not been released, Nesvold expects Ford to convert its defined benefit health care program to a defined contribution program that would cap the amount of money the company contributes to workers' health insurance. He also expects a 20 percent cut in Ford's total obligation, spread over seven years -- a deal that could be worth $7.8 billion to the company. If such a deal were approved this year, it could result in a pretax savings of $1.6 billion, Nesvold said, a gain of 51 cents per share.

"We would expect a relief rally in Ford shares," he said. "Nonetheless, we would expect the shares to thereafter continue to underperform, based on a handful of other structural issues and a weak product lineup."

Ford is trying to address those deficiencies, most notably through the launch of the new Ford Fusion and its siblings -- the Mercury Milan and Lincoln Zephyr.

Ford sales were up in the third quarter, though largely as a result of its aggressive price-slashing promotions.

"Like GM, Ford overproduced in 2004, and like GM, it has had to resort to fire-sale tactics to clear excess inventory in 2005," Merrill Lynch analyst John Casesa wrote in a report released earlier this week. "Currently unable to find a way to effectively differentiate its offerings from its main domestic rival, Ford has let itself be victimized by GM's tactics ... like GM, Ford's already poor fundamentals look likely to worsen further."

My first car was a 67 Mustang Coupe, 2nd one was a 67 Cougar XR-7, 3rd one was a 66 Mustang Coupe. Why did I get rid of these cars for ? I know why, because I'm stupid, stupid, stupid.

My next Ford.....
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