Ford Motor Co., which has already slashed thousands of jobs, will cut even deeper and draw on available credit lines after the auto maker burned through $5.5 billion in cash in the fourth quarter and posted its third consecutive annual loss.For the fourth quarter, Ford recorded a net loss of $5.9 billion, or $2.46 a share, as its full-year loss ballooned to $14.6 billion compared with $2.72 billion for 2007.
Ford, which succeeded at easing its cash burn during the fourth quarter, now has $13.4 billion on hand to get it through 2009.
Keep in mind that this is the auto company in the best shape of all the US domestics. Whether through luck or wily strategy, Ford managed to mortgage everything but the little blue logo before the financial crisis hit. They're drawing down about $10 billion in credit to supplement the $13 billion worth of cash they finished up the fourth quarter with.
Meanwhile, back at the ranch, GM has announced that it's putting an end to the program that has annoyed anti-union forces more than any other: the jobs bank. About sixteen hundred workers are going to have to go on unemployment, which GM will top up to about 72% of salary and benefits. There's little realistic hope that those people will ever work as auto workers again:
The automakers instituted jobs banks at a time when they were modernizing their factories and needed to win labor support for innovations that would mean a loss of jobs.
The auto companies provided nearly all of an autoworker's pay and benefits when he or she was put into a jobs bank. UAW members went into a jobs bank if they remained laid off beyond 48 weeks.
Jobs bank compensation is different from the money the company pays workers who are laid off -- which is known as sub pay -- to offset government unemployment benefits.
"There's a huge difference in terms of what the supplemental unemployment -- the sub pay -- was doing and the jobs bank. The jobs bank was when they completely eliminated your plant and they had almost no hope of ever being called back," said Arthur Wheaton, a labor expert from Cornell University.
"Sub pay was: You're on unemployment and it's going to have all of the same rules and requirements, you're only allowed so long, and there's a big component in there to say, 'OK, you've got to go back and get some retraining or you've got to get some education or do something to get back to work.' "
The elimination of the jobs bank was one of the conditions that were placed on government money. Though I don't think the defenders of the UAW were correct to say that labor relations aren't a serious problem at the Big Three, they are right that cuts like this will not be enough to save the firm. The credit contraction has been catastrophic for auto sales--I don't believe, as some news reports claim, that no one with a sub-800 credit score can get a loan, but there's no denying that the cutoffs for credit quality are locking a major percentage of potential buyers out of the market.
How long until Ford has to step up to the government handout window, and start dancing to Uncle Sam's tune? They say they have at least enough money for a year, but I don't see how they make it. The folks in the finance divisions at Chrysler and GM have got to be talking seriously about the attractive prospect of a competitive bankruptcy to shed debt and contracts--they're only held back now because of warranty worries. And if they don't go to a bankruptcy judge, the signs are very clear that they'll be heading back to Uncle Sam. Even though its operations are in better shape, and its management has a much firmer tether to reality, Ford cannot compete indefinitely against free financing from the Feds.
Megan- It sounds like one of the most exasperating and depressing parts of the current economic mess is that people with good credit--by any historical standard, not the recent debased standard--can't get cedit. What say you to a government program (of course!) that specifically guarantees those loans by TARP-assisted lenders? That removes from banks any risk excuse, it stimulates consumer spending, and the exposure for the government ought to be minimal if indeed the non-lending says more about banks' issues than highly-rated prospective borrowers' issues.
Can I have my Presidential Medal of Freedom now?
McCardle, I didn't like your anti-Detroit posts back in December, as the progressive in me conflated those posts with the silly attacks on the union and all the regular people they represent.
But the MBA in me is now ready to say let the free market run its course with Detroit. This whole auto bailout now has the smell of a black hole, without the systemic benefit. I heard a Detroit supporter say "Obama has to figure out a way to increase demand." And I thought to myself that's where I get off this train.
k1
ryanculver.blogspot.com
How long until Ford has to step up to the government handout window, and start dancing to Uncle Sam's tune?
Why do you think they have to dance to Uncle Sam's tune if they take bailout money? The banks took money. They aren't dancing.
Of course, the banks are far better politically connected, at this point, than Detroit. So maybe you're right.
As above, what dance are the banks doing except the 'fuck-you' shuffle?
Two things the government can do- quit giving the automakers money so that bankruptcy goes forward, and scrap CAFE so that the automakers can actually focus their efforts at salvaging their most likely profit avenues while canning the least profitable ones.
Neither of these are going to be done, of course, so we may as well learn to live with the brand new US State Auto.
Ford managed to mortgage everything but the little blue logo before the financial crisis hit.
A friend of mine who trades auto-bonds told me recently that they mortgaged that as well.
"and scrap CAFE so that the automakers can actually focus their efforts at salvaging their most likely profit avenues while canning the least profitable ones."
That's not going to work, as soon as the economy recovers, the price of oil will spike and the demand for gas hogs will implode. They need to be in a postion to offer both 4Runners and Yari, Pilots and Civics, and the only path to that is through bankruptcy.
If they focus on SUV alone they will be bankrupt again as soon as prices rise.
I don't believe, as some news reports claim, that no one with a sub-800 credit score can get a loan, but there's no denying that the cutoffs for credit quality are locking a major percentage of potential buyers out of the market.
I don't buy it. I know half a dozen recent Filipino immigrants with virtually no credit history who bought cars over past few months. The people being locked out of the credit markets are the ones who shouldn't be getting loans anyway.
Creating another subprime lending crisis is not the answer.
And yes, let the automakers declare bankruptcy. They aren't any different from other industries, excepting of course their swollen sense of entitlement.
Hmm. One auto credit datum:
I graduated from college in May and have a credit score around 730 - absolutely solid job and credit history, no loans to pay off. I also had no auto loan history.
I was about to buy a used $10k car on finance with a Wachovia loan at the dealer's; the caveat is that the interest rate was borderline usurious at 12.5% APR. Several weeks later, I received five or six letters in the mail from other banks notifying me that they'd denied my application.
I was later able to refinance down to 4.75% with a credit union in another state I've banked with since before I could walk.
"scrap CAFE so that the automakers can actually focus their efforts at salvaging their most likely profit avenues while canning the least profitable ones."
Seriously, who could possibly think this is a good idea? One of the main reasons they're in trouble and the Japanese aren't is that for so long they completely ignored the inevitable reality that fuel prices would rise in the future, and so they devoted way more of their product line than they should have to large SUVs and other low-gas-mileage vehicles. Because people buy them when gas is $1 but not when it's $3, so sales slump when gas goes up. Gas will continue to inevitably go up.
To honestly suggest doing *more* of that would be a profitable strategy to get them back on the road to recovery shows a complete lack of any kind of serious thought about the auto industry. It sounds like you just hate CAFE because it's something Al Gore would approve of.
A significant portion of the market was selling to people who really should have been in the quality used market.
I've seen several times car loans to people making 30-40k a year with 800-1200/mo car payments.
It sounds like one of the most exasperating and depressing parts of the current economic mess is that people with good credit--by any historical standard, not the recent debased standard
What are the underwriting standards you'd use for auto loans? How do those differ from the underwriting standards currently being used?
"A significant portion of the market was selling to people who really should have been in the quality used market."
Well, a great many people are in 20k used SUVs who should have been in new 15k civics.
Adam,
One of the reasons the Big Three are up against the wall with blindfolds on is that they were forced by CAFE to build so many money losing vehicles for the last 30 years. The Japanese companies didn't succeed because of CAFE, but because they could build the smaller cars at a profit.
Interestingly enough, quality used market is where one is strongly attracted after credit ceases to be an issue. Manufacturer-sponsored financing has been distorting the prices for a long, long time... but when your rates for new and used are within 1%, why would you take that initial depreciation hit?
jmo: You just made me fondly remember my late Tahoe -- which was indeed bought for 20K -- and sold for 10K five years later, with nary a mechanical problem and tear-free leather. Who said GM can't build good product? They sure can -- only it ain't worth that number on the sticker.
Max,
What do you mean? A civic will retain 50% of it's value after 5 years just like the Tahoe. Why take the risk buying someone else's lemon?
But a new civic for 15k sell it in 5 years for 7500. Buy a used tahoe for 20k sell it for 10k in five years. The civic would be 2500 cheaper and you would save on gas and maintainence.
I remember reading awhile back that one of the reasons Ford was so reticent to enter bankruptcy was because the Ford family would effectively be wiped out. This could be complete b.s. Though, at this point they already have been to the extent they have equity stakes.
jmo: uh... there's a bit of a difference between the Civic and the Tahoe. Like, being able to lay down and relax the tired back while the spouse takes the wheel for 3 hours. Even with $3+ gas I'd be hard pressed to forgo that... or to leave some of my bags at home when headed for a vacation ;-)
As to maintenance, you're mistaken. I've owned Hondas before -- Tahoe did not look inherently problematic even in that lofty company. Being a dumb low-tech truck definitely helps longevity.
My point was simple: while most large American-made SUVs are probably good vehicles, they are priced way, way above their worth when new. Which the used market corrects in a jiffy.
Speaking as a satisfied Civic owner here, a Civic is not cheap to maintain, certainly not as cheap as the American cars I've owned.
"Ford managed to mortgage everything but the little blue logo before the financial crisis hit.
A friend of mine who trades auto-bonds told me recently that they mortgaged that as well."
They did indeed. Nothing left to mortgage.
Max,
My issue is with people who buy 20k used cars and claim the financially responsible high ground and cast dispersions on those who buy cheaper new cars.
If the choice is between a 20k used Tahoe and a new Camry the new Camry is the more finacially responsible choice.
Adam: The theory of CAFE isn't the problem -- it's the practice. Specifically, the need to maintain the mandated average, separately, on domestically-produced and internationally-produced fleets. That is, the small car Ford builds in Brazil can't be used to offset the Explorer they build in the US. There's no reason for that split, as far as I can tell, other than to force the Big Three to build small cars in the US using union labor.
Why is this a problem? Because it forces them to use expensive domestic labor to build small cars whose profit margins are far less able to absorb the higher labor costs. It's a lot easier to hide an extra $1K in labor costs in the price of an Explorer than it is to try to hide the same in the cost of a Focus. Consequently, Ford makes money on Explorers, and loses money on the Focus.
Given that their labor force is more expensive in the US than outside the US, the sane thing to do is to use the US labor to build expensive cars, while using cheaper foreign labor to build the inexpensive ones.
Claiming that elimination of CAFE (or somehow altering it) will save the Big Three ... is kind of missing the point. CAFE has been around for a long time. The Big Three have had just as long to adapt to it. If they couldn't *somehow* work something out, that's a sign of incompetence, and all the more reason for bankruptcy rather than altering current laws.
It's completely irrelevant that CAFE, and all other haphazard fuel-efficiency regulations, should be replaced with a simple carbon tax or cap/trade. Obviously, changing the rules in the middle of the game is going to help those who optimized for a different set of rules. But if you're going to try that trick, you might as well impose a non-American-brand tax. That would be more upfront and honest. And if you can't justify that, then you can't justify a CAFE trick either.
Silas,
Any regulation that forces a company to make money losing products for 30 years needs to be abolished. It is simple stupidity to continue this feel-good charade.
I never said abolishing it would save them, but doing so can't do anything but help. Had we not had this silly law for the last 30 years, the US automakers would not be in such dire financial shape today.
There's no reason for that split, as far as I can tell...
...other than the Big Three lobbied hard for it when it was first enacted as a protectionist measure.
We could keep CAFE but simply allow imports to count, which would solve the problem Matt identifies. I believe that US marques are profitable abroad, where tiny cars are the rule.
If the choice is between a 20k used Tahoe and a new Camry the new Camry is the more financially responsible choice.
Even if we set aside the differences between the vehicles themselves (I'm hard pressed to see them as competitors), the above still makes no sense. With a 20K used Tahoe (think 3 years old, 2 if you're real lucky) you won't be upside down on your loan after first 6 months or so, assuming 0 downpayment. With a new Camry, it'll take you 2 years at least to get even. 50% residual in 5 years for a new Camry is a stretch too, but let's accept it. Where's the advantage? Maybe 10 years down the line.
Yes, I'll grant that buying a high quality brand new vehicle and keeping it with you as long as its wheels stay attached is indeed a sound proposition -- if you like that kind of thing. You'd have to coddle it all the way too, which is not really a prerequisite for a shorter term of service.
@Yancey_Ward: Surely, you know me well enough not to accuse me of wanting to keep CAFE. Yes, it should be abolished. To the extent that fuel does throw of genuine, objectively-demonstrable violations of others' rights (and yes, permanently flooding someone's long-ago-homesteaded land counts as that), that problem with fuel can be taken care of with far more efficient, property rights-based means.
I simply disagree that it's somehow responsible for their condition. CAFE did *not* force GM to be stupid. They could have retooled and reworked contracts (over several years) to make a more financially-sound business model. If they really found CAFE so offensively stupid, they could have engaged in a protest of it by ignoring it and then committing money to environmental restoration to prove that they weren't against the program's goals.
But they didn't! The reason for that, I think, was that the Big Three really had no reason to regard the government as their enemy. Yes, it burdens them with CAFE and numerous regulations, but it makes up for that by far with protectionism and other ways of protecting them from the competition that would arise.
The Big Three's problems today can only be explained by their historic problem of promising benefits without pre-funding them. Over time, that puts them in a condition where they have so much unproductive debt that they simply can't competitively build lower-priced cars. Not even a Big-Three-exclusive genius pill could improve their engineering and decision-making, because any suddenly-genius GM worker would ditch GM to go work for a foreign company that could pay him his full worth.
I have a sub-800 credit score (638), with a bankruptcy discharged last March, and it took me 10 minutes to get a loan at a less than 8% and 100% LTV on Monday. I also got offered 16.99% with $750 down and more requirements by another lender. (I'd name the good one, but I wouldn't want you to think I'm spamming. So anyone in the market should just remember they have 2 weeks to shop around and all the inquiries will only count as one on their credit score.)
Unfortunately for the Big Three, I bought a Hyundai yesterday because the Big Three warranties are worthless when they shut down and their cars in the same price range aren't as good.
Borrowing is getting a bit easier in the US as it is on the other side of the pond. It is even showing up in he Bank of England statistics for December, and bank lending figures always lag.
That said, it is over a decade since I have been able to make sense of Ford's balance sheet without rose tinted spectacles. Nowadays, Ford offers the investor any colour he or she wants, except black.
Ms. McArdle,
I'm surprised you don't know the difference between a balance sheet and income statement. (It's a common mistake, but hopefully not for people with MBAs.)