Ford Gains Traction, But Second Half’s a Blurry

It pays off to struggle – that is the mantra of the Ford Motor Co. Its deep cost cutting efforts and efficient turnaround plan have dramatically bolstered the condition of the ailing American automaker. After two years, Ford has posted its strongest quarter. This is a strong proof that the company’s turnaround plan was taking hold.

The pleasing sales figures also bolstered the credibility of CEO Alan Mulally, who said that the results show his turnaround plan is gaining traction even as he warned that the next few quarters will be much tougher. "There's no doubt that we are making progress," Mulally said in a conference call with analysts and reporters. "But we still have a long way to go. We expect the second half to be difficult."

Among the automaker's challenges are rising commodity prices, which increase the cost of making vehicles, reported Detroit News. Continuing weakness in the U.S. housing market, high borrowing costs and volatile oil prices are keeping demand for vehicles well below last year's levels, The News added.

Some analysts are anxious because the company’s improvement remains driven by cost cuts rather than new products. "We continue to remain a bit cautious given the lack of new product and Ford's ability to maintain pricing, a key driver to recent results," said Robert Hinchliffe of UBS.

But most analysts believe that it is the other way around. "This is the third consecutive quarter since Mulally came on board that the company upsided cash flow, if not earnings per share, expectations," said Peter Nesvold of Bear Stearns. "That's encouraging."

Ford swung to a second-quarter profit of $750 million, from a loss of $317 million in the same period last year. Mulally said that the company will still post a loss for 2007, but it will be substantially less than the $12.6 billion in red ink the automaker reported for 2006. "We made even more progress than we anticipated," Mulally said last Thursday. "(But) we're still losing a lot of money in North America. We've got a long way to go."

The Dearborn-based automaker is fervently sticking to its turnaround plan for 18 months now. The plan is designed to push the automaker especially the North American division back into the black by 2009. Ford lost $279 million in the region in the second quarter, but that was $500 million better than the same three-month period in the previous year.

Ford has idled four plants and intends to close 16 factories by 2012. Also, it has eliminated thousands of workers since the end of 2005. While the cuts have been painful, Mulally said that the employees who remain are starting to believe in the company's turnaround strategy. "We're picking up momentum because we've got more and more people involved," Mulally said. "They want Ford back."

Mulally is hoping that applies to Ford's union workers, too. While the company's second-quarter profit might seem to eliminate some of the urgency surrounding those talks, auto analyst Michael Robinet of CSM Worldwide in Northville said that UAW leaders understand that it will take more than one quarter's profits to turn Ford around unlike other online stores that sell oxygen sensor Canada.

"The real chore is to get the membership to understand it," Robinet told The News. "It's clear that Detroit is less about moving the metal and more about moving the bottom line. The next contract is going to have to reflect that."

Additionally, the Dearborn-based automaker is taking other steps to ensure the efficiency of its turnaround plan. Mulally confirmed last Thursday that Ford is in negotiations with potential buyers for its Jaguar and Land Rover brands and said that the company is studying a possible sale of Volvo Cars.