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For Auto-Sector Investors, Ford Truly is the “Better Idea”

By Martin Hutchinson
Contributing Writer
Money Morning

Back in the 1960s, when it was still one of the best companies in the world, Ford Motor Co. (NYSE: F) used its familiar marketing mantra to tell its customers that “we bring you better ideas.”

By opting to go it alone – and eschewing the constraining government support that’s likely to relegate U.S. peers Chrysler LLC and General Motors Corp. (NYSE: GM) to bankruptcy’s death by a thousand cuts – Ford is returning to its roots and demonstrating that it once again has that “better idea.”

Chrysler has already been forced into Chapter 11 bankruptcy and – armed with $11 billion in government aide – is being reorganized by the Obama administration with help from Italy’s Fiat SpA (OTC ADR: FIATY).

GM is inching towards a similar fate as it struggles to turn its business around with $27 billion in government aid. 

For investors, there is only one moral to this sorry tale: Of Detroit’s so-called “Big Three,” the only one worth looking at is Ford.

And here’s why.

Chrysler's business plan doesn't make a lot of sense. Fiat – itself rescued from a near-death experience only a few years ago – is an Italian maker of small cars that pulled out of the U.S. market in 1984 because of quality problems so severe that its market share evaporated. Because of its small-car orientation, it is favored by the Obama administration and by environmentalists, but there is no reason to suppose that U.S. consumers' tastes have changed so much that Fiat-designed cars, manufactured in high-cost U.S. plants, will have much appeal.

Yes, the United States now contains many immigrants from Latin American countries, where Fiat is strong, but there were good reasons they emigrated from Latin America, and one of the major ones was the hope that they wouldn't have to drive Fiats forever.

Of course, the government and the United Auto Workers (UAW) union will jointly control the new Chrysler, and will therefore have considerable influence on the kinds of cars it produces. But I'm not sure that should give us much confidence.

Naturally, if the new "cap-and-trade" costs make gasoline much more expensive, U.S. consumers will presumably migrate to smaller cars, but even if they do, I don't know why they should not migrate to Asian ones, as they have already done for the last three decades.

GM is a somewhat different proposition, whether it goes through a formal Chapter 11 bankruptcy or not – which we'll know by the end of this month. Unlike Chrysler, GM has a full product development capability and has scored some major successes internationally.

For instance, Buick is still a leading brand in the China market, where GM's market share increased from 12.5% to 13.7% in the first quarter of 2009. Furthermore, unlike Chrysler, GM has a full range of products, and is large enough to remain competitive globally – if provided with operating capital.

Nevertheless, GM is losing money at a frightening speed. The company lost only $6 billion in the first quarter of 2009 (sounds like a lot, but the company has lost an aggregate $88 billion since 2006), but it managed to burn through $10.2 billion of cash. To burn through $4 billion of cash above your book loss – in a quarter when sales were exceptionally low – suggests that demand for your products has fallen off a cliff, and that you are producing purely for inventory.

It's not as if the company's piling money into capital investment.

With an average cash drain of $10 billion a quarter, GM's $27 billion capital from the federal government will last less than a year. Furthermore, if the government's plan is adopted, it will be majority owned by the U.S. government and the UAW. That is unlikely to give it either a decent product lineup or a workable cost structure. I don't know about you, but by and large, the types of cars the political classes want me to buy aren't the ones I want to drive.

I suspect that's true for the vast majority of U.S. consumers – and the ones for which it isn't true are already driving imports of one sort or another.

And that leaves us with Ford.

When Ford refused to take government aid back in December, it looked an eccentric decision. Everyone knew Ford was losing billions, too, and the fact that it had raised huge amounts of debt in 2006 to give itself a fighting fund only seemed likely to delay the inevitable bankruptcy or federal cash infusion. Five months later, after the conditions attached to the GM and Chrysler cash injections have become clear, Ford's decision is much more comprehensible – and perhaps even shrewd.

The question is: Can it make the decision stick?

Ford's results for the first quarter of 2009 were significantly better than those of GM. It lost only $1.8 billion; more importantly, its cash outflow was only $3.2 billion – despite capital spending that was $300 million greater than depreciation. With $21 billion in cash, Ford can survive for at least a year at that rate without any danger of running out of cash.

Given that I rather expect a U-shaped recession, with a very slow recovery (even though we are currently nearing the bottom), if all other things were equal that might not be quite good enough. Running out of cash in June 2010 – before sales have picked up – does not give you any measurable strategic advantage over running out of cash in June 2009, as GM is about to do. Presumably, the unpleasant features of a government/UAW takeover would be just as unpleasant next year as they are today; after all, the same guys will still be in control, politically speaking.

However, there is one very important variable. That is the bankruptcy/takeover of GM and Chrysler. I think consumers will only be moderately concerned about service, warranty, or replacement-parts issues with a bankrupt automaker, and only the silliest ideologues would resist buying GM and Chrysler products just because the government and the UAW control the companies. 

But if you combine the effects on product line and quality of government/UAW ownership with a good Ford advertising campaign, you may see a different picture. In the year to date, the big three domestic manufacturers had 44.4% of the U.S. market. Since the product characteristics of U.S. automobiles differ from those of imported automobiles, it's likely that the market share of U.S. automobiles is unlikely to be eroded quickly, provided manufacturers are still making the products that those consumers prefer. However, if the government is mandating product lines at GM and Chrysler, it will push those companies increasingly towards smaller cars, and otherwise away from the characteristics preferred by domestic-automobile consumers.

Because Ford is able to operate much more freely, it is likely that the company will be able to pick up market share from GM and Chrysler in the domestic-auto market. In the last year, Ford has already increased its share of the U.S. auto market to 32.8% from 30.7%, even as the Big Three's share of the U.S. auto market as a whole has continued declining from 49% to 44%. After the GM and Chrysler restructuring, when Ford has become established as the only privately controlled domestic-automobile manufacturer, its market share may pick up considerably. 

In other words, when I replace my ancient Buick about two years from now, it's more likely to be with a Lincoln than with another Buick or a Toyota. I'm a lousy automobile consumer (buy used, and keep them too long), but I'll bet in this respect there are lots of new car buyers who think like me.

If there are, Ford will pick up market share from GM and Chrysler, even if domestic brands overall continue to see their market share ebb. That will reduce Ford's losses, and when the automobile market does rebound, the company that created the original automobile assembly line will move to a position of substantial profitability. For the first time since Henry Ford kept the Model T in production too long in the 1920s, Ford may become the dominant U.S.-controlled automobile manufacturer.

Given its losses and all the uncertainty surrounding the sector and the overall economy, I wouldn't put a lot of money into Ford shares. But at $6 to $7 per share, it might be worth a speculative flutter.

[Editor's Note: Ford Motor Co. (NYSE: F) late yesterday (Monday) announced plans to sell 300 million common shares, and said it would use the proceeds from the offering for "general corporate purposes, and to make a contribution to a fund that pays for healthcare for its retirees. Ford Chief Executive Alan R. Mulally took advantage of that opportunity to say that Ford's management and employees are making "strong progress on our transformation plan – gaining retail market share with great new products, improving quality, reducing costs and positioning Ford for a return to profitability." Citigroup Inc. (NYSE: C), Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS) are acting as joint managers for the stock offering.

Money Morning Contributing Editor Martin Hutchinson is also the editor of the brand new "Permanent Wealth Investor" service. Look for more information on that service in the days to come.]

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  1. Richard Guardiani | May 12, 2009

    You are wrong. Many, many people will refuse to buy cars from GM (Government Motors) and the Chrysler equivalent. They will also refuse to buy from Ford if there is a mere hint of government interference at the decision-making level.

    Also, this "recession" will be "L-shaped", not "U-shaped"; higher taxes, cap and trade, universal health insurance, peak oil, inflation, and general government mucking around will make it so.

  2. John | May 12, 2009

    In the past 40-50 years or so we have wanted to live far from one another – that related to mainly to racial issues, civil rights and so on (though you can publicly say what you want). We have been driven into a "family values" sort of lifestyle retreating from broader society, and instead of buying swing sets for community playgrounds, we have bought them for our individual backyards (same idea with churches, clubs, and we all took out debt to pay for things we should have shared – Yards to mow instead of parks for instance.) Parents wanted their kids to marry within their race, so with busing came private schools, and as white flight turned into suburbs we spent lots of money buying more than we should and taking on debt to make each of these little family retreats a comfortable place to be -even though what we really did is give up time with our families to do so. Lately we have finally found new ways to stay separate (in marriage, not friendship) in cities, and in schools, and now people are moving back closer to one another and to cities and enjoying those benefits while keeping their families the way they want them. Many others will be further forced back closer to one another based on commodity pricing – which will be going back up eventually thanks to all the money the fed is printing and China's emergence as a world power (China being able to pay more for commodities will increase demand whether we have recovered or not.)

    Small cars will be more popular in the future than they are now. Past performance is no predictor of future results. We have been building things in stupid sort of way that cost us billions of dollars extra in gas. One other issue for automakers is that as we have been moving back into better planned towns, we have been able to get back to one car per family.

    Ford is positioning itself to sell smaller efficient cars, and is not taking government money. People will be choosing Ford because of their not taking government money, the other two have a more uncertain future now for sure.

  3. DG | May 12, 2009

    When it comes to automotive quality and marketing perceptions your are still living in the 80s; just like Chrysler and GM were stuck.

    Fiat Automotive is not the same as Fiat Corporation; and even Fiat Automotive has moved on since the 80s.

    Just an example; New Holland; Ford (!!) Tractors and even Magirus Deutz are now all part of Fiat Corp. So are Ferrari and Maserati. Guess what happened to their quality and market share since Fiat CORP took over… right it improved drastically.

    There is a lot of profit to be made in the US car market; it is still the second largest in the world (after the EU common market; that is right Fiat Corp's home market). And some your states are benchmark setters for emissions standards (CAFE).

    It would be unwise to ignore such an important world market for any automotive manufacturer that understand the global consolidation that is currently taking place.

    Fiat Corp and some Chinese brands understand this; heck even some Russian oligarchs get this (Magna Steuer anyone) — and they should seize the opportunity American corporate mismanagement has created and profit from your tax-dollars at work!

  4. Lewis | May 12, 2009

    Ford's principal US competitors will be owned by the UAW and the US government. Both of these have shown that they will play very hard ball when it suits them. Do you believe Ford could survive the combined pressure of its UAW workers and its Washington overseers if they felt GM and Chrysler were endangered by Ford competition?

  5. Mike | May 12, 2009

    Martin, I agree with you r analysis if Ford can hold on they will do well. However your market share numbers are way off. Ford is running about 14-16% of the US light vehicle market, not 32%.

  6. Earl Ellison | May 12, 2009

    I also keep a car until junk time or if repairs equal 15%+ of a new car selling price. It just happen to my "99 ford Escort and I looked at Ford, Toyota, & Hyundai. The Toyota Corolla was great, but steering and cost lead to getting the Hyundai Elantra. Cost, luxury, warranty, roominess, road service, mileage, & consumers reports reliability ratings made it a clear choice even though I tried hard to want a Ford Focus. My last 4 autos were used but, with the sales tax rebate for 2009 new cars, we went for the gold and love it.

  7. Sue Byers | May 12, 2009

    I was very pleased to read that Ford is "taking care of itself".
    we are a Ford and Lincoln family and business. We appreciate the product Ford puts out, a reliable, consistent product. We live in a rural area, and our business takes place in the "country." It takes the toughness of a Ford truck to get the job done and keep on working for 200,000 miles or more. In this age of bailouts, I have to appreciate a management that makes the decision to take care of business, make the necessary changes and try like hell to hang in there. As a business owner doing the same thing, I have major problems with these huge businesses that are failing, and the "big boys" are still getting bonuses.
    Hang in there, Ford. You are now in the role model position.

  8. Audra McKay | May 12, 2009

    I believe that Ford has had themost effective management than any of the other US car operations. They had the foresight to make the cars the public wanted and now they are positioning themselves to again provide the consumer wants.

    Overall, I think this says a lot for the management of Ford. Ford had a conservative outlook and this has paid off. They are surviving without the taxpayers money bailing them out. I am not in favor of using taxpayers money to bail out any industry….what happens to our form of government if we let the government take over the private sector?

    I know, because worked for Ford years ago.

  9. Jose Velez | May 12, 2009

    You are absolutely correct. Even Ford's action today to issue 300 million shares despite short term dilution of my and other current shareholder's value is right. Ford will be the only true US car maker and will be at the top of the global auto manufacturers. So if you want to be investing, Ford is the company today to invest in!!!

  10. TG | May 13, 2009

    Going unnoticed under the radar of the auto bankruptcies is the 2010 Ford line up which rocks. (The Fusion hybrid gets 41 mpg)! I just bought a new '09 Escape to replace my '03 model with 74k miles and never been in the shop. Ford will surprise the markets soon enough in its turnaround results, methinks.

  11. Steve | May 15, 2009

    I have owned a 91 ford aerostar and a 91 alfa romeo spider, the aerostar being new and the spider being used. The aerostars "supperior", ohhh wait "highly supperior" quality burnt my car to the ground almost catching the gas can on fire. Nearly killing me and on comming traffic on a highly busy street. Real nice quality. Real nice. I guess thats the "best detroit has to offer"

    My fricking alfa spider just had some clutch and electrical problems otherwise strong as an ox. Hmmmm Ill take the non life threating " safer" italian car.

    Thanks for your article mr. dumass (Its a pun I know.)

  12. TCN | May 17, 2009

    As an owner of Canadian Private Companies it urked me to see the US and Canadian Governments bailout companies whose management teams not only put them in the hole their in but paid out bonuses to obviously underskilled management. In privately held business you get paid on success not on showing up for work!!! I applaud Ford for their efforts on not using Govt money to survive. I will not buy a GM or Chrysler product again and help the terrible management try to survive. I (and many of my associates) say let them go under and let the strong survive. Our economy will make it without them, we'll just drive other brands and those who it effects will adjust to other jobs. Hail to the free market! Capitalism not Communism is why we live and work in N America.

  13. Kevin Beck | May 19, 2009

    Now, if Fiat can come up with a new version of the X1/9, then maybe they would have a car worth buying; otherwise, they don't have a chance.

  14. Charity | July 6, 2009

    I guess my husband and I are two people with “silliest ideologies” because we just bought a brand new Ford Fusion and we did it purposely desiring a Ford product. We are suppose to be a capitalist economy. If a business is doing bad- let the business take care of it- not the government. Another business that is more efficient will replace it. Supply, Demand, and Common sense is how our economy is suppose to work!


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