Ford Submits Business Plan to Congress
By Chris Haak
Hot on the heels of our earlier report of what to expect in the business plans submitted to Congress, Ford has published its 33-page (excluding appendices) presentation to the Senate Banking Committee.
We are all aware that Ford is in better financial health than its competitors due to Alan Mulally’s decision to mortgage nearly the entire company shortly after he joined the company, giving them access to working capital needed to complete the company’s restructuring and product lineup changes. In light of Ford’s healthier situation, the company is NOT asking for immediate money, but rather a credit line of up to $9 billion as a backstop in the event that market conditions further deteriorate. However, Ford expects under the “slightly improved rates” assumption (below) that the company can return to profitability, or at least break even, by 2011.
In the business plan document, Ford laid out three different industry sales scenarios – basically bad, worse, and worst – and what its government assistance needs would be under each scenario.
Industry Sales at “Slightly Improved Rates”
2009: 12.5 million
2010: 14.5 million
2011: 15.5 million
Ford’s assumptions of not needing to access the credit line that it’s asking for are based on the assumption that industry sales will slightly improve over their current pattern, based on historical precedent set by the time it took for the economy to recover from the early 1980s recession (peak to trough GDP decline of 2 to 2.5%. Ford estimates that it would need access to a $6 billion credit line in the above scenario, to only be drawn down if necessary.
Industry Sales at “Current Rates”
2009: 11.0 million
2010: 12.5 million
2011: 14.0 million
If the current recession turns out to be worse than the early 1980s recession – either deeper or longer term – Ford projects industry sales as shown in the “current rates” model. Under this scenario, Ford sees a 3% peak to trough GDP decline, and that the median age of cars on the road would increase to over 10 years (from 8 years earlier in this decade) as consumers stop replacing older cars. Ford would need up to $9 billion to sustain itself through the above scenario.
Industry Sales at “Worse Rates”
2009: 10.5 million
2010: 11.0 million
2011: 12.0 million
If indeed this economic downturn is the worst one since the Great Depression (a scenario that seems, unfortunately, to be increasingly likely), would reduce industry sales volumes by over 9 million units from historical levels over a three year period. In that scenario, Ford projects that it would need up to $13 billion in assistance to survive.
In its business plan document, Ford also laid out the steps that it has taken to restructure its business in the past several years prior to the genesis of the current economic crisis. These included shuttering plants, eliminating the dividend, white collar job eliminations (including several corporate vice presidents), eliminating the 401(k) match, and other austerity measures.
Finally, Ford made the case for assistance for the industry as a whole because even though in a vacuum, Ford could survive some pretty bad news thanks to its available cash and credit, the interdependence within the industry among suppliers (GM, Ford, and Chrysler have an 80% overlap in supplier networks, and nearly 25% of Ford’s top dealers also own GM and Chrysler franchises) means that if GM or Chrysler goes belly-up, the sudden lack of demand for parts from the shared supplier network would cause a chain reaction of supplier bankruptcies, which would threaten Ford’s production – not to mention the health of its dealer body.
Kudos to Ford for presenting a coherent argument to Congress – and for being the first of its peers to do so – even though it’s a lot of the same information that we’ve already seen from Ford. It’s obvious from the tenor of the hearings in November that Ford, GM, and Chrysler needed to do a much better job of altering lawmakers’ perceptions of their products and companies before they would receive any money. When the Chrysler and GM plans emerge, we’ll carry details of those as well.
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