Ford Motor Co. fuels profits with innovation, not government bailouts

About the only good news in Detroit these days is from Ford Motor Co., which reported profits and record sales in North America and Asia. Photo: Courtesy Ford Motor Co.

WASHINGTON, July 29, 2013 – About the only good news in Detroit these days is coming from Ford Motor Co., which last week reported significant profits in the second quarter and record sales in North America and Asia.

Amid the Motor City’s money woes and rivals’ sluggish performance, the nation’s second-largest automaker has succeeded in reinventing itself based on market demands while eschewing the “quick fix” of government bailouts.

On Wednesday, less than a week after Detroit became the largest U.S. city to file for bankruptcy, Ford announced that its net income rose 19 percent in the second quarter, to $1.2 billion, and that its operating profit had risen by $726 million, to $2.6 billion.

Driving its success has been a focus on efficiency and increasing sales. Ford has kept apace with the bailed-out General Motors Co., the country’s largest automaker.

“Ford constantly monitors the external environment and plans for a variety of scenarios — always aligning our production with the real demand,” said Communications Director Jay Cooney. “We are not afraid to restructure at Ford, wherever and whenever necessary.”

Meanwhile, U.S. taxpayers still are owed $18.1 billion on the $49.5 billion bailout of General Motors, according to a report submitted Wednesday to Congress. GM’s share price would have to nearly triple in order for taxpayers to break even.

“There’s no question that Treasury, the taxpayers, are going to lose money on the GM investment,” said Special Inspector General Christy Romero, who wrote the quarterly report.

When General Motors received its bailout from the Obama administration in 2009, Ford took out a $5.9 billion loan.

Four years later, Ford’s market capitalization of $66.75 billion tops GM’s $60.89 billion. Last year, Ford earned a larger profit than GM from fewer domestic sales.

What explains the reversal of fortune? While GM continues to challenge Toyota Motor Corp. as the world’s largest automaker, Ford dominates the bottom line.

Last year, Ford beat General Motors 9.3 percent to 6.4 percent in earnings before interest, taxes, depreciation and amortization — a key measure of organizational efficiency. Ford also outperforms in return on invested capital, estimated by Goldman Sachs at 16.1 percent for Ford and 11.6 percent for General Motors.

Efficiency, innovation

In other words, Ford is the more efficient automaker, and it is squeezing much more profit out of every vehicle it builds.

Ford’s operating margins in North America are 11 percent, almost double GM’s 6.2 percent. In addition, at the end of this year’s first quarter, GM spent $600 more than Ford did on every vehicle it sold via discounts and incentives.

Moreover, Ford’s pension program is in much better shape than GM’s, and while GM has $21 billion in net cash — $11 billion more than Ford — it will need to use much of that cash just to keep its pension plan solvent.

At every turn, Ford’s management decisions have been superior to GM’s. It is years ahead of GM in reducing its number of global “platforms,” or basic chassis designs, down from 27 in 2007 to 14 next year. It plans to reduce that number to nine by the end of the decade.

The smaller number of platforms means that Ford can produce new car models more quickly and at lower cost — and can redesign them much more quickly — than General Motors.

GM, with 30 platforms in 2010, will have 17 in 2018. Ford’s nimbleness can be seen in its quick redesign its popular F-series trucks. GM’s Silverado and GMC redesigns have lagged.

“Ford is now a leader in innovation in the automobile industry right next to BMW,” said Jacquelyn Giardina, Ford’s chief marketing officer, pointing to the company’s 2013 marketing plan. “By understanding the consumer and focusing their attention on their needs and wants, Ford has successfully reinvented their brand to be quite desirable among consumers.”

This focus on innovation, and consumer needs and wants, was exemplified recently in Ford’s performance in tests by Consumer Reports. The publication determined that actual road tests produce lower mileage results for hybrid vehicles than those reported on vehicle stickers.

Ford moved almost immediately to update software in its hybrid vehicles, taking into account actual driving behavior to improve mileage.

Ford also has been looking at social, technological, economic, environmental and political factors to anticipate consumer needs through 2050. This includes looking at demand for more environmentally friendly vehicles, as well as the needs of an aging driving population.

‘We mortgaged everything’

Ford’s efforts have been a matter of sink-or-swim. Without government bailout money, it has been forced to squeeze everything it can out of its investment efforts.

“Ford was gratified to be in a position where we did not need to take the emergency taxpayer assistance from the federal government,” Mr. Cooney said. “Ford made strategic changes early in 2006 that put us in a very different position from our competitors.

“Our leadership decided to take out the ‘largest home improvement loan in history’ to fix our problems ourselves. We mortgaged everything — including the Blue Oval — to obtain the loan, and once we had it, we relentlessly implemented the One Ford Plan with the simple goal of creating an exciting viable company delivering profitable growth for all,” he said. “And, we paid off the entire loan, early and with interest.”

Ford has had higher debt-service costs than General Motors, partly because it took a loan from the government rather than accepting money for equity. It then borrowed $23 billion from its bankers to restructure its production. It had to repay the money, and that intensified the focus of Ford management.

The GM bailout has not been repaid as a loan with interest, but instead is being recovered by sales in stock.

In 2010, the Obama administration began selling off its GM stock for about $33 a share. Its remaining 189 million shares would have to sell for more than $95 each for the government to break even on the bailout deal.

The federal government currently owns about 14 percent of GM stock and aims to be out of the automaking industry by April.

Industry observers note that GM has moved to improve efficiency. The bailout reduced market pressures on the company and put it years behind Ford on the path to recovery, but market pressures remain.

GM has had Ford’s example to guide it, along with the pressure exerted by a resurgent, confident and fiercely competitive Ford.

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Jim Picht

James Picht is the Senior Editor for Communities Politics and teaches economics and Russian at the Louisiana Scholars' College in Natchitoches, La. After earning his doctorate in economics, he spent several years working in Moscow and the new independent states of the former Soviet Union for the U.S. government, the Asian Development Bank, and as a private contractor. He returned to Ukraine recently to teach principles of constitutional law and criminal procedure at several Ukrainian law schools for a USAID legal development project. He has been writing at the Communities since 2009.

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