Saturday :: Jan 21, 2006

Totalling The Automotive

by pessimist

Dow loss worst since March '03

Stocks plummeted 213.32 points, or 2 percent, to 10,667.39, its worst one-day point drop since March 2003 Friday, as corporate earnings fell short of bloated expectations and oil prices surged past $68 a barrel. The broader Standard & Poor's 500 index lost 23.55, or 1.8 percent, to 1261.49, its worst performance since September 2003. It was down 2 percent this week. The tech-heavy Nasdaq composite index tumbled 54.11, or 2.3 percent, to 2247.70. It fell 3 percent for the week. Crude for February delivery rose $1.52 to settle at $68.35 on the New York Mercantile Exchange, the highest close since Sept. 1.

"You had a lot of negative things all come together at once," said Theodore Weisberg, former president of Seaport Securities, a New York brokerage firm. "It pulled the rug right out from under the market."

Investors also were staggered by revenue disappointments and weak forecasts from Apple Computer, Yahoo, Motorola and other companies, said Chicago investment manager Doug Nardi of Legg Mason Investment Counsel.

"That has called into question whether companies are telling the truth about their profits," said Nardi. "Hopefully, our country's market reforms under Sarbanes-Oxley legislation have taken care of those issues here."

Those problems, while real, aren't the reason the markets are going down. What is? The loss of worker earning power:

The stock market is beginning to reflect a concern that earnings growth in 2006 will not match the levels of the last four years, said money manager A. Gary Shilling. "Companies have done a great job of boosting productivity and pushing the results to the bottom line, but real wages haven't been growing," said Shilling, who heads an investment firm in Springfield, N.J.

Benefits costs, especially for health care, are rising, but "workers are very concerned that their take-home pay isn't keeping up with inflation," he said.

As a result, labor is growing increasingly restive, and companies will face higher costs for workers this year, just as profits are nearing a peak, said Shilling.

But it isn't going to do labor any good to take the traditional stance of animosity - they haven't a single arrow in the quivver. You'll see why as you read more.

First of all, the markets are skittish:

Stocks Dive on Fears of a Faltering Economy

The stock market plummeted Friday in heavy trading, sending blue-chip indexes to their worst one-day losses in more than two years, giving up all of its gains from a rally that had stoked widespread optimism in the first two weeks of the year. The market's mood turned Friday as crude oil prices topped $68 a barrel, nearing the record of almost $70 that was reached shortly after Hurricane Katrina devastated the Gulf Coast.
"The economy is slowing … and the market is waking up to that," said Robert Doll, chief investment officer at Merrill Lynch Investment Managers.

As always, there are Pollyannas spouting economic happy talk:

Some experts cautioned against betting that the economy would continue to lose steam. "Yes, there was a slowdown in the fourth quarter. We know that," said Drew Matus, an economist at brokerage Lehman Bros. in New York. "But I think things are shaping up for a very good first quarter."

Rrrriiiiiiiiiiiiiiiigghhhhht! Some people should pull their noses out of the business pages and read the news section once in a while:

But this week, Wall Street's focus shifted to disturbing events overseas.

Oil prices soared anew Tuesday on concerns about Nigerian militants' attacks on energy facilities in that major crude-exporting nation. Prices also were boosted by fears that the standoff between the United States and Iran over the latter's nuclear research program could lead to a curtailment of oil supplies from that country, even as global demand for energy remains strong. On Friday, as oil prices in New York shot up $1.52 to $68.35 a barrel, some on Wall Street began to throw in the towel on stocks. The market fell at the outset and continued to slide all day.

The sudden turnabout in the market's mood "tells you that geopolitical risk has moved from the back burner to the front burner," said Michael Panzner, head of trading at Rabo Securities.

But there is also domestic dry rot ruining what is in reality a fairly modest improvement in the economy. Maybe that's why there are questions being asked about corporate earnings?

[Reports of corporate earnings shortfalls] have raised worries that corporate America's long streak of robust profit growth was coming to an end. "We have seen a broad swath of earnings misses and warnings" from companies in the last week, said Barry Ritholtz, head of investment firm Ritholtz Capital Partners in New York.
If earnings slow dramatically or begin to decline, investors' interest in owning shares could dim, at least in the short run, because earnings underpin stocks.

Long the king of the American manufacturing sector, the automotive industry has fallen on hard times. Some of America's highest wages were earned by UAW members working at GM, Ford, and Chrysler. But as American wages declined in other sectors, fewer Americans were willing to spend the money on an American car which could be outperformed and underpriced, with higher quality and more features, by one made by a foreign company.

But this wan't the auto workers fault. They did what the employers wanted them to do, deal with sped-up assembly lines, wink at safety or quality problems in the effort to achieve ridiculous production schedules for models that weren't what the American people wanted and needed but were more likely to produce the sort of profits the management had become accustomed to achieving.

Thus, as this next article illustrates, the American auto company has been out managed by its Japanese competitors:

Japanese Auto Plants Run Closer to Capacity

Ford Motor Co. and General Motors Corp. trailed Japanese rivals in operating North American plants close to capacity in 2005 while giving up additional U.S. market share, an auto industry analyst said Wednesday.

Ford, the No. 2 U.S. automaker, was ranked the lowest among six automakers, using 79% of its production capacity, said Ron Harbour, president of Harbour Consulting. GM, the world's largest automaker, was at 87% and DaimlerChrysler's Chrysler unit, 93%.

Toyota Motor Corp., Japan's biggest automaker, ran its plants at a 111% rate, followed by Nissan Motor Co. and Honda Motor Co. at 97% each.
"Plants run by GM, Ford and Chrysler are set up to be profitable when times are good, producing lots of vehicles," said Art Smalley, a consultant for the Lean Enterprise Institute in Brookline, Mass. "When times aren't good, they lose money. The Japanese automakers tend to be more conservative in their assumptions about the market."

Excess capacity adds costs for U.S. automakers, which must pay for nonworking employees while carrying the expense of unused equipment. Ford is scheduled to announce plans for additional plant closings on Monday as it adjusts to a 1-million-unit drop in annual U.S. sales since 1999.

GM Chief Executive Rick Wagoner said in November that he intended to close nine factories and eliminate 30,000 jobs by 2008. GM now sells about 1 in 4 U.S. vehicles, down from about 1 in 2 in the early 1960s.

Toyota, which lags behind only GM in global vehicle sales, has had 10 consecutive years of U.S. sales gains and ended 2005 with a 13.3% share of the market.

Is not sustained profitability the ultimate sign that a company is well-managed?

But I digress.

One sign that a company is poorly managed is when the employees are expected to make all of the necessary changes for a company to survive:

Ford Tells Workers Innovate Before It's Too Late: Doron Levin

Ford Motor Co. is discovering just how far it has fallen from the pinnacle of automaking and the self-reliance and inventiveness that once made it great.
We know this because Ford executives otherwise wouldn't be talking so urgently, suddenly or in such patriotic terms about the need to 'innovate'.
Promising that 'innovation is the compass by which Ford will set its future direction,' Bill Ford Jr., chief executive officer, has been rallying employees to get behind new products and find ways to do things better or -- a bit darkly -- go elsewhere. The message appears in company speeches and as part of a $90 million advertising campaign.

Bill Ford's nightmare is a bankruptcy that could strip his family's control of the company's factories, offices and laboratories. With recent pronouncements about American innovation, he's trying to jolt employees from paralysis or the doldrums, an understandable reaction to impending job cuts and pay reductions.

"I hope what Bill says pans out," said David Lewis, 78, a professor of business history at the University of Michigan who has studied the automaker for a half century. "So often companies make proclamations and move on. I'm hoping, even praying, that it comes to fruition."

Mark Fields, Ford's newly promoted executive vice president, said in a talk earlier this month that "Americans really do want to buy American brands."

"This is for keeps. We have to get better," said Jon Pepper, a Ford spokesman. "That's why Mark Fields is saying things like 'change or die'."

Afterward, Field insisted, somewhat defensively, that "we aren't wrapping ourselves in the flag.


Fields wouldn't be the first U.S. auto executive to deny that his company wants Americans to buy cars from his company just because it's incorporated in the U.S. That honor belongs to Lee Iacocca, a onetime Ford president who later perfected the jingoistic pitch as chairman of Chrysler Corp.

Battered Esteem

Ford's self-esteem lately has been as flat as its credit rating. The automaker, after all, once was an exemplar of corporate America, its name synonymous with fresh thinking. Many still can recall a day when "Ford has a better idea" was a credible slogan.

The late Henry Ford, great-grandfather of Bill Ford, introduced the moving assembly line to factories, created a car that the average person could afford with the Model-T, and paid a $5 daily wage that was revolutionary for its day.

Unfortunately for Ford, some American consumers have defected for good and now drive Hondas, Toyotas and other non-Detroit vehicles.

Mazda's Help

Does the word "innovation" accurately describe a series of cars that differs from the Mazda6 in mostly cosmetic terms? In a sense, yes, for it speaks to Ford's business acumen and its ability to manage an international alliance. But much smaller Mazda, a third-owned by Ford, possesses much engineering talent the Dearborn, Michigan-company lacks.

That discrepancy ultimately spells trouble.

Too many years of mediocre performance may stand in the way of Ford's plan to permit employees to embrace new ideas.

The automaker is in dire financial condition. Although it posted profit of $1.87 billion through the first three quarters of 2005, that's because its finance unit is subsidizing deep automotive losses. Moody's Investors Service lowered its rating on Ford's car-loan division to junk status on Jan. 11, saying "Ford continues to face formidable challenges, the most significant of which will be stabilizing its U.S. share position at 18 percent or higher."

The car-loan division was the last Ford unit with an investment-grade rating. Ford has about $130 billion of debt outstanding.

Ford has undertaken big cutbacks before, usually in response to economic downturns that affected the entire industry. This time, though, Ford and GM alone are the victims, while other automakers flourish. And while some may respond to Ford's latest talk, the company better be sincere about what it's saying, or time truly has run out.

For too many, the closing bell has already sounded:

Black Monday
On Jan. 23, next Monday, the automaker will announce a program it calls "Way Forward" that includes the shutdown of several North American factories and the firing of thousands, and probably tens of thousands, of workers.

Who will no longer be buying cars on the Walmart wage jobs they will be lucky to locate.

Ford and GM in particular have demonstrated a serious strategic short-sightedness, prefering to continue to build expensive-to-operate SUVs instead of smaller fuel-efficient cars with all the news and oil industry studies that scream the end of easy oil is over. There are signs that even that decision is being rethought, but will this next decision of Ford's come back to haunt them?

Ford restructuring may end minivans

In an attempt to exit unprofitable and flagging markets, Ford Motor (F) is expected to say Monday that it will get out of the minivan segment, according to two sources familiar with the plan who didn't want their names used ahead of the official announcement.

Check out the following numbers. Maybe the problem isn't the market segment, but the company that produced it?

Popular minivans
The best-selling minivans last year:

Minivan                    2005 sales      1-yr. change
Dodge Caravan 226,771 -6.4%
Chrysler Town & Country 180,759 31.9%
Honda Odyssey 174,275 13.0%
Toyota Sienna 161,380 1.4%
Chevrolet Uplander/Venture 80,009 13.5%
Ford Freestar 77,585 -25.1%

Source: Autodata

[A tip of the Titanium Tam O'Shanter to The Ghost of Joe Liebling's Dog for the HTML advice!]

What this tells me is that Ford's Freestar isn't a quality product. Ford had some good engineers once, and the American worker is second to none when treated right by management and believes in the product qulaity. They are no different than the workers who made the competing products, all but one of which saw increases in sales last year, so there is clearly a market for that kind of vehicle.

As a result, I have to conclude that Ford's management is to blame for its problems. But in typical Topper style, the worker is expected to eat the crap that comes from mangement mistakes. And for all the talk about teams and competition, those are motivational terms only for others:

If Ford quits making minivans, "What they're essentially saying is, if you can't be No. 1 or 2 in a segment, then it's not worth being there," says David Cole, chairman of the Center for Automotive Research.
Ford's minivans have been weak performers in a crowded segment. Last year, Ford Freestar sales were down 25.1% from 2004, and Mercury Monterey sales were off 53.1%, according to Autodata. Freestar, formerly known as Windstar, was remodeled for the 2004 model year.

"We have to pick and choose where we want to compete," Mark Fields, Ford's executive vice president and president of the Americas, said in an interview last week. "The idea you have to be in all the segments, that's an old way of thinking."

I'm not going to disagree with Mr. Fields' comment, but it does illustrate the fact that they should have been thinking this way a long time ago - before thousands of people became dependent on them making the right decisions:

Ford Workers Anxious as Firm Plans to Cut Jobs, Drop Products

The auto industry is bracing for a Ford Motor Co. downsizing that could rival the size and scope of the one at General Motors Corp., where tens of thousands of jobs are being eliminated and several assembly plants are set to close. Analysts speculate that Ford's cost-cutting moves will be similar to those announced by GM last year, when the world's No. 1 automaker said it would close all or part of 12 plants and cut 30,000 jobs by 2008, after losing nearly $4 billion during the first nine months of 2005.

Monday's announcement will mark the second time in four years that Chairman William C. Ford Jr. has stepped forward to outline substantial cuts in the company that bears his family's name.

Both Ford and GM are struggling to streamline operations as they respond to slowing sales and intensifying competition from global rivals. Ford's U.S. market share slipped to 17.4 percent in 2005 from 18.3 percent the year before, as the overall market grew slightly. Six years ago, Ford had 24 percent of the U.S. market.

Privately, some U.S. auto officials say the painful contraction by the U.S. auto industry giants may be only the beginning.
Anxiety within Ford, the second-largest U.S. automaker, is running high. Ford employees said the past few weeks have been difficult. Many received e-mails just before Thanksgiving saying the company would make a restructuring announcement in January that would include job reductions.

Joe Callahan, a 55-year-old worker at the St. Paul, Minn., plant that builds the Ford Ranger pickup truck, said he is preparing for the worst -- "if it comes to that," he said -- including the possibility of early retirement. "We've been having this hanging over our heads for quite a while," he said.

The Ranger has had slow sales, and the plant has often been mentioned as a target for closing. In 2004, Ford closed a plant in Edison, N.J., that also built the truck.

"The real sad thing about Ford is that we've seen their best shot," said Peter Morici, economist and professor at the University of Maryland's Robert H. Smith School of Business. "One can reasonably conclude that Bill Ford does not know how to build cars that people want to buy. On his watch, Ford will have redone his entire line and failed to accomplish success."
The company has had spotty success with new vehicles. The retooled Mustang, introduced last year, has sold well, but a large sedan called the 500 -- thought of as a replacement for the popular Taurus -- flopped.

Callahan, the Ford employee in Minnesota, understands the tough economics his truck plant faces.

"Ranger pickups are not a high-profit vehicle. We're one of the oldest plants in the U.S., and we're sitting on valuable riverfront property" along the Mississippi River, he said.
On Monday, Callahan said, he and other plant workers will be watching the announcement at the plant on closed-circuit television.

They won't be alone:

Ford to cut 25,000 jobs over 4 yrs.

Ford will eliminate 25,000 or more jobs in the next four years as the world's third-biggest automaker seeks to stem North American losses, according to people familiar with the reorganization.

CEO William Clay Ford Jr. will announce the job cuts, equivalent to about 20% of the company's automotive workforce in North America, on Monday as part of a plan called "Way Forward."

The loss of 25,000 jobs would be the biggest such reduction at Ford since 2002.

"Ford Has A Better Idea." Some say they need one - NOW!

Ford may still need a better solution
Some say restructuring plan -- likely cut 25,000 jobs and shut 10 plants -- may not be enough to reverse losses.

Already some are wondering if shutting 10 plants and laying off 25,000 hourly workers, as The Detroit News and The Wall Street Journal reported Friday, will be enough to reverse the automaker's billion-dollar losses in North America.

Catherine Madden, an auto analyst at the consulting firm Global Insight Inc., said earlier this week the plants most at risk for closure because of the products they make, including sport utility vehicles and outdated sedans, are in St. Louis; St. Paul, Minn.; Atlanta; Wixom, Mich.; St. Thomas, Ontario; and Cuatitlan, Mexico.

"Ford is in a very tough position with the amount of cash they have and the changes they need to make," Madden said.
Ford is under pressure to make a dramatic announcement after watching Wall Street's lukewarm response to General Motors Corp.'s restructuring plans in November. GM's shares fell after it announced plans to cut 30,000 jobs and close 12 facilities.
Both Standard & Poor's Ratings Service and Moody's Investors Service lowered Ford's credit rating further into junk status this month in spite of the upcoming restructuring.
Ford's plan "is going to have to be different," said Detroit restructuring consultant James McTevia.
"I think the time for any of these domestic automobile manufacturers to procrastinate is over with."

Unfortunately, it's clear that 'blame the employee' is still the management strategy:

Ford's labor agreements with the United Auto Workers make it difficult for the automaker to cut excess capacity and jobs.

If you believe this canard, then you haven't been paying attention to the situation involving the airline workers, another segment of high-wage American labor. United and Delta have long been in court seeking the termination of their labor agreements. They have been joined in their efforts by USAir, Hawaiian, and Northwest, all of whom also seek to end labor contracts.

There is reason to believe that eventually every one of these airlines will succeed, for Continental Airlines used emergency bankruptcy power to decertify unions and fire all 12,000 employees in 1983.

So why is the automotive industry crying crocodile tears over the obligation labor contracts?

The only good answer I can come up with is they don't want to threaten bankruptcy in order to achieve the elimination of their contracted obligations. Their shareholders wouldn't like it much.

People like Bill Ford would then lose their phoney-baloney 'jobs' - and the cushy lifestyle that goes along with it.

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