07.26.07

Ford Leaders Killing The Company

Posted in General Management at 01:17 by lnxwalt

http://news.yahoo.com/s/nm/20070725/bs_nm/ford_results_preview_dc_1

Ford, the longtime number 2 in the U.S. market, continues to lose money. According to the article, Ford lost $1,200,000,000.00 last year and $282,000,000.00 the first quarter of this year. Ford’s recovery plan is simple: sell off the profitable British luxury brands to get enough cash to finance closing plants and cutting employees, then stick it to whomever doesn’t leave during contract negotiations.

Ford’s problems are really not labor-related. Ford made a big bet on the SUV and light truck market. For several years, it paid off nicely. Many of the top ten selling models each year were made by Ford. I can still recall hearing Lindsay Wagner on their commercials saying “doesn’t anybody else make cars any more?”

So what happened? Two things:

1. Ford missed out on the hybrid market. They then promised to bring hybrid technology to their big selling models. Meanwhile, Toyota and Honda were selling hybrids like hotcakes. I think that once Ford actually did start to bring out some hybrids, sales were not as great, so they vacillated.
2. Ford’s focus on big, gas-guzzling vehicles got them caught off-base when the price of fuel rose. For a good portion of the past three years, regular unleaded gasoline has been at or above three dollars per gallon in Southern California. At certain times, the price has neared four dollars per gallon. Suddenly, many buyers were looking for hybrids and economobiles again. Ford had little to offer to those buyers.

I believe they should have anticipated these things. Way back in the late 1970s, during the original gas crisis, the OPEC oil embargo, Ford and Chrysler had been focusing on higher-margin large vehicles (remember “land yachts”?) and suddenly could not even give their huge and thirsty vehicles away. After that time of hardship, no automobile manufacturer should ever cease to have a ready supply of economical vehicles available for just such an occurrence. Oil prices rise and fall based on events in a very unstable part of the world. What kind of executive fails to account for the risks that oil price increases will stall sales of the largest and most profitable vehicles?

Ford acts as though its only problem is its labor costs, after its executives made such a critical error. Granted, the UAW contracts may raise its costs above those of its Japanese-owned competition. In that case, Ford’s leaders should have openly advocated for federally-required employer-paid health insurance and pension plans at some standardized level–imagine how their labor relations would be right now if they had done this–which would have placed those competitors in exactly the same position.

Ford is in an industry where there is a tremendous capital investment necessary to begin or to continue to compete. There are possibly even greater investments necessary to exit the business, with all of the potentially toxic metals and compounds that are used. This makes it a field where smaller, locally-owned, owner-managed businesses are not going to enter and could not be viable competitors if they did enter. This gives the choices that are made by a few people in a small number of boardrooms an enormous impact on American competitiveness.

It is important for Ford, Chrysler (are they still DaimlerChrysler?), and GM to recognize that the rules have changed. It may have been management against labor years ago, but if American-owned automobile manufacturing is to continue, labor and management are going to have to unite around what is best for the company and its employees, even at the cost of getting rid of executive dining rooms, company-supplied vehicles, special parking areas, anti-fraternization policies, and bonus packages.

Tax policies affect the weighted average cost of capital. If American companies have a significantly higher WACC than their foreign counterparts, such as return on equity needing to be higher because dividend payments are taxed first at the corporate level and then at the individual stockholders’ level, then Ford and other companies that are affected by the issue need to make it clear to citizens and congressional representatives that this is a problem. This could, if true, cause companies to seek riskier capital structures based on leverage.

If these were tiny companies, they would see that you can only go so far by laying off productive employees. You eventually have to keep the people who make your product or service and the people who sell it to customers, while trimming down and lowering the pay of those whose only contribution is telling productives what to do. Because these companies are so large, we see wave after wave of the same failed strategies: layoffs and plant closings, with rebates and other financial incentives to try to stimulate sales from people who would not otherwise buy at the time.

Big companies, with their overpaid big-egoed CxOs, are failing because they are still living in the late 19th century. Those days are long gone, thank God, and American businesses need to be smaller, locally-owned, owner-managed, and closely associated with their employees and their communities. SLOBs and OMBs are the future of American business in most industries.

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