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UNDERACHIEVER: Truck-savvy Ford looks to its basics

CEO plans focus on carmaking business

January 5, 2004


Ask any student: It's tough to shake a label.

Through much of the '90s, Ford Motor Co. was a star pupil, but after losing a combined $6.4 billion in 2001 and 2002, it has been branded an underachiever.

Winning back investors' adoration has been a tough task, and it won't get much easier in the third year of chairman and CEO Bill Ford's revitalization plan.

But the Dearborn automaker will get back into the car game -- as opposed to pickups and sport-utilities -- this year with its Year of the Car campaign featuring the Five Hundred, the all-new Mustang and the GT supercar.

Getting Ford's new cars, a full year of the F-150 and lower parts prices from top supplier Visteon Corp. to translate into fatter profits and a thicker share price is the assignment for 2004.

BEST MARKS: Even through the troubles of recent years, Ford Credit has remained the supercharged engine of Ford's business. It is shrinking strategically by cutting back on loans to customers with questionable credit and by passing on loans to buy other companies' cars and trucks.

In 2003, Ford Credit provided virtually all of Ford's better-than-expected operating profit, so much that it could make up for the massive write-offs from Round 2 of its European restructuring and Round 2 of the Visteon spin-off, which was renegotiated last month.

Ford's other old reliable is cash flow, which has run a steady stream for 40 straight quarters. For the first nine months of 2003, Ford pumped $19.9 billion in cash from its operations, an 8.6-percent surge from the same months in 2002.

NEEDS IMPROVEMENT: Although Ford's operating profits are improving, and the operations are generating cash, not much income makes it to the bottom line.

Ford has been trying to get back to basics, but it keeps having to go back and do it again.

In 2000, it hastily spun off its parts division as Visteon to match General Motors Corp.'s 1999 Delphi spin-off. Last month, Ford announced it would take a $1.65-billion charge as part of a renegotiation of that spin-off.

Similarly, Ford's restructuring of its European operations in 2000 was supposed to be the model for how Ford would cure its North American business. But now, it is restructuring in Europe again, taking $600 million in charges this time.

Gary Lapidus of Goldman Sachs argues that Europe might need yet another restructuring to cut costs, either closing another factory or one of the two engineering centers. "World-class, volume car companies are only achieving break-even in Europe, and we would not put Ford Europe in that category, at least not yet," he wrote in a bruising report.

BIG TESTS: Hitting its targets in Europe would be a good start. Lapidus is skeptical that Ford could meet its goals there. And as former Ford of Europe chief Martin Leach testified in a recent legal case stemming from his departure from Ford, Dearborn-based executives are often dismissive of Europe's projections. So meeting its goals there -- cutting losses to about $225 million before taxes -- is big.

Scoring a hit with some cars in the North America is another key for Ford. The company that grew strong with the Taurus then let it stagnate is heading back to the drawing board with its Year of the Car efforts: the Five Hundred, new Mustang, GT supercar and Freestyle crossover. Halting an eight-year market share slide -- at least in the retail market -- is long overdue.

New offerings at Mercury, such as the Montego sedan and Mariner SUV, must take hold for that brand to reestablish its role as the bread-crumb trail from the mainstream Ford brand to Lincoln and the European luxury makes.

TEACHER'S NOTE: Despite a nice run-up in Ford stock in the waning weeks of 2003, the Dearborn automaker has a long way to go in its massive turnaround effort.

Paltry profits in 2003 brought down Ford's grade-point average, though it stayed ahead of DaimlerChrysler AG.

Improved performance in the plants and strong launches at the dealerships need to generate serious profits from the automotive business while Ford Credit copes with higher interest rates and fewer loans.

In short, this student has been acing finance class while double-majoring in pickups and SUVs. It is buckling down in car class, and needs to start showing results this year.

2003 2002
Sales D D
Profit C- D
Shareholder Return D D
Balance Sheet C- B
GPA 1.35 1.50
Ford is a student capable of excellence but prone to letting its mind wander. How else to explain the automaker's excellent line of trucks -- topped by the F-150 pickup, the world's best-selling vehicle -- and its woefully neglected line of passenger cars?

Ford's was fixated on its fancy foreign brands in the '90s, lavishing intense attention on Jaguar, Land Rover and Aston Martin while it allowed bread-and-butter cars like the Taurus to become uncompetitive. The automaker's Lincoln and Mercury brands could also use more attention. The company also must demonstrate it can avoid the sort of product recalls that plagued the launch of its Focus subcompact.

Ford's been cramming for its exam, and the results will show at the 2004 North American International Auto Show this week. Look for a flurry of new cars, including the extraordinarily roomy Five Hundred sedan and Freestyle wagon and the eagerly awaited new Mustang. Lincoln and Mercury will also reveal several new cars and trucks intended to revive their fortunes.

Product grade: C.
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