Ford Reports Improved 2007 Loss of US$2.7 bil.

Ford reported its fourth-quarter and full year 2007 results yesterday, posting dramatic improvements in all regions despite a significantly difficult time in the North American market in 2007. For the fourth quarter, Ford posted a net loss of US$2.8 billion, an improvement of over US$2.8 billion from the same period 2006. For the full year 2007, Ford posted a US$2.7 billion loss, a marked improvement from the record US$12.6 billion loss seen for the full year 2006, which was the largest loss seen in the company's history. Ford is reporting that full-year pre-tax profit from continuing operations was US$126 million, up US$3.3 billion from 2006, while the fourth quarter saw a pre-tax loss of US$620 million, itself still an improvement of US$1.3 billion. All of the company's automotive operations, with the notable exception of North America, generated a profit for the full year 2007. Total revenue was up 8.6% as well, jumping from US$160.1 billion to US$173.9 billion for the full year, due mostly to better model mix and favourable exchange rates, according to the company.

Region by region, Ford continues to struggle for profitability in its North American region, but decent performances in all of its other regions are helping to keep things positive, and the dramatic 42.3% improvement for the full year 2007 in North American fortunes give some credence to the company's claims that the turnaround plan is gaining traction. "Each of our Automotive operations is improving, and we are encouraged by the progress, which validates our strategy and plan," said Ford president and CEO Alan Mulally in a prepared statement.

North America saw an improvement in pre-tax losses from US$6.0 billion in 2006 to US$3.5 billion in 2007, which Ford attributes to higher net pricing, favourable mix, and lower costs that were more than offset by much lower volumes and unfavourable currency exchange rates. Revenue for the region was up slightly, climbing from US$69.4 billion in 2006 to US$70.5 billion in 2007. Ford's sales volume losses were significant in the North American market, where it lost the second place spot in the United States to Toyota for the full year, the first time Ford has lost the number two spot since 1931. For South America, Ford reported a record full year pre-tax profit of US$1.2 billion, nearly double the figures from 2006. Full-year revenue grew a considerable US$1.9 billion, from US$5.7 billion in 2006 to US$7.6 billion in 2007. Ford of Europe also did quite well for the company, doubling pre-tax profit here as well from US$455 million in 2006 to a full-year US$997 million in 2007; full-year revenue climbed from US$30.4 billion in 2006 to US$36.5 billion in 2007. Ford of Europe was awarded Autocar's "Car Company of the Year" award, and the placement of the Focus, Galaxy, and S-MAX on the Euro NCAP Top 10 list earned the company top honours for safety ratings among manufacturers.

The Premier Automotive Group (PAG), the company's luxury division consisting of Jaguar, Land Rover, and Volvo, posted a full-year pre-tax profit of US$504 million, up from a loss of US$344 million in 2006. Ford stated that Volvo posted a loss for the year due to reduced sales, but did not specify the amount; no mention was made of Jaguar, which has traditionally been believed to be unprofitable for quite some time. Revenue was up from US$30.0 billion in 2006 to US$33.2 billion in 2007. In the Asia Pacific and Africa group, a pre-tax profit of US$40 million was reported, down from a pre-tax loss of US$185 million a year ago. Full-year revenue was US$7.0 billion, a slight improvement from the US$6.5 billion reported a year ago; the change in fortunes is attributed to growth in income from Ford's Chinese joint ventures, and sales growth of 26% at Ford's China unit. Mazda did well, earning Ford US$204 million for the year based on the share of the company owned by Ford, up from US$168 million one year ago. And finally, the financial services unit earned a pre-tax profit of US$1.2 billion, down from the US$2.0 billion earned in 2006. Ford cites the "non-recurrence of credit loss reserve reductions, higher borrowing costs, higher depreciation expense for leased vehicles, and higher costs due to Ford Motor Credit's North American business transformation initiative."

Outlook and Implications

For Ford, 2007 capped a year of astonishing transformation. It was CEO Alan Mulally's first full year at the company, and the one in which deductions can be made about the executive's leadership and ability to effect change in the organisation. And while growth and solid turnaround seems to be the order of the day at Ford's divisions outside North America, some of the numbers seen at Ford's North American sector from the past 12 months are truly sobering: 7,800 salaried full-time positions gone, 20,000 hourly positions eliminated, market share down a full 1.4 points, and a US$3.5 billion loss for the sector. But the numbers at the end of 2007 represent a marked improvement from those seen at the end of 2006, and actually do give credence to the company's claim that the slow, steady steps it is taking internally to right-size the organisation to better match market demand are making solid gains. Ford's North American operations have shrunk by an astounding 46,300 hourly and salaried personnel since 31 December 2005, a full 34.5% reduction in staff. In two years, it has eliminated one million units of installed manufacturing capacity in North America. But perhaps most significantly, it has negotiated a new four-year contract with the United Auto Workers (UAW) union that will enable it to significantly reduce labour costs over the next two years with the remaining labour force, and offload billions of dollars in unfunded retiree healthcare liabilities in the form of a Voluntary Employee Benefits Association trust by 2010. From an operational side of the business, Ford has been getting its house in order in the one sector of the global market where it has been in deep, deep trouble.

But despite these signs of improving health, the company is by no means out of the woods yet with regards to its North American unit. The first half of 2008 looks set to be extremely difficult, despite sudden and drastic rate cuts by the Federal Reserve, and Global Insight has pegged the recession risk at 50% with the total industry volume forecast now sitting at 15.25 million units; Ford has a more optimistic view for North America. The company will be introducing three key models in the United States this year: the redesigned 2009 Ford F-150 full-size pick-up, the Lincoln MKS luxury sedan, and the Ford Flex large crossover-utility vehicle (CUV). But in terms of new product, this may simply not be enough. Ford's biggest risk is that it will not be able to return to significant profitability quickly enough, and the company's product introduction schedule is concerning to many in the industry.

The Ford Verve B-segment concept is scheduled to be introduced this year in Europe as a replacement for the Fiesta, but the U.S. market will not see it until 2010. The Flex is generating a lot of pre-introduction buzz, but it is still eight months away from introduction, and will come into a market already dominated by the GM offerings that have had a full year already to build buzz and gain a following. Flex will be introduced at roughly the same time that Chevrolet will be launching the lowest-cost version of its Lambda-platform large CUVs, the Traverse, which according to GM will have the largest projected volume of any of the big GM CUVs. The redesigned MKS has been given mostly favourable "thumbs-up" by critics, but driving impressions are not yet published, and the vehicle will not have the highly touted EcoBoost engine option until late this year or early next. Ford's F-150 arrives at a time when the pick-up segment is facing very stiff competition, with new entries from all of the major producers hitting the market. Should a recession hit, the housing market would take an even bigger hit than it already has, and pick-up sales would likely fall through the floor. And finally, the accidental announcement earlier this week that Ford is redesigning the Taurus to be "the car they should have produced years ago" is not likely to help the lacklustre sales of that sedan in the market either.

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