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Tuesday, August 5, 2008

Is There a Ford in Our Future?

It’s interesting times (darn Chinese curse!) for the US car business. The world’s third largest automaker is now…VW! VW sold 3.31 million cars in the first half of 2008, while Ford sold 3.09 million. Ford’s US sales are down 14% for the first half of 2008, but worse, truck sales are down 36% (and probably more). For July 2008, Ford’s sales were down 15%. It would be about the equivalent of a couple making $100,000 a year suddenly making $85,000, but still having car payments, house payments, medical bills, kids, and so on. The auto industry’s annualized selling rate for July was 12.5 million cars and light trucks, the lowest since March 1993. Full-year sales in 2007 were 16.1 million. The industry is in trouble. So the question on my mind is: what’s going to happen next?

For Ford (I’ll talk about the other car companies in a minute), what I see is a glimmer of hope in a sea of darkness. The basic fact is that Ford is bleeding in North America. As most readers know, I feel that North Americans (what the heck, let’s indict the Canadians as well) have been drunk on oil and profligate with energy use. We figured it out for a while, and then my 105 pound petite wife decided she needs to drive a Yukon XL, along with a myriad of other moms. (Don’t get me wrong, I drive a GMC Sierra pick-up, so I’m equally part of the problem). We guzzled oil at a rate almost twice other countries. Now, oil speculation did what no president or elected official had the mettle to do (insert alternate adjective of your choice). Suddenly, everyone has oil prices on their mind, and the Truck/SUV business is in a ‘loop’. Oil prices rise, causing consumers to look at smaller cars. Pick-up and SUV sales fall. Trade in values on SUV’s and pickups fall (26% decline in trade in on full size pickups in one year 5/07-5/08), causing sales of pick-ups and SUVs to fall more, which causes used prices to fall more, etc.

The loop is ugly, and Ford (or anyone else) can’t escape the loop easily. If you go on the Detroit River, you’ll see the big lake freighters heading down the river. If a loaded freighter encounters a problem, like a wreck by the Ambassador Bridge, the captain can reverse the engines, kicking two 16 cylinder engines generating 19,500 horsepower to work. And the 78,000 tons will stop…in two miles. Ford has to get out of the loop and stop the freighter, but in much less than two miles. Ford’s approach is an unprecedented gambit to switch a Truck Plant into a car plant, fast. If they pull it off, the freighter might dodge the crash.

What could you switch to? How about a Ford Fiesta, which in the ECOnetic gets a mere 63.6mph/city or 73.5mph highway. 0-100kph in 12 seconds, top speed 111mph. Or a Mondeo (go see the James Bond flick) that gets 28/48 mpg and looks very cool (I’ll take the Titanium). Or the one that has baffled me, the European Ford Focus, which is an awesome fast car that gets combined gas (diesel) mileage of 42mpg. I love the idea of great fuel efficient cars, why do we have to be on our deathbed to get them?

So my bottom line is this: Ford makes money in Europe and makes great cars. If Ford can switch to European style cars here, it might just be the ticket. IF they can switch before they run out of money and time.

What about the other two of the formerly Big Three? (Or as I’m starting to think, the Little Two, or the Little One?) I’m starting to think GM now stands for “Giant Mess”. GM needs about $10B in cash and is possibly negotiating with the UAW to borrow $8B from the Union’s VEBA (now there’s an interesting twist!) If the VEBA can strike a deal with GM, it will allow the car company some breathing room. Until then, Wall Street is making Wagoner dance and sing about how GM is not going bankrupt. On August 1, GM announced a quarterly loss of 15.5 Billion dollars (the 3rd worst qtr in the companies history), a 26% decline in July sales, and is further offering pension buyout packages to salaried workers (my intelligence on the package suggests that it’s a very good deal and most eligible with 30 years or more should take it). Take that onto the 53,000 hourly workers that have left and you will have a lot smaller car business (The Little Three have cut 150,000 jobs since 2005). On the other hand, GM has a profitable business overseas (same North American Malaise as Ford), and is hanging a lot on the Chevy Volt. The Volt is a unique EREV (Extended Range Electric Vehicle) that allows you to drive up to 40 miles a day with NO GAS. The Volt has a supplemental motor, but doesn’t work like other hybrids. If you drive less than 40 miles, you get infinite gas mileage. GM has some dandy overseas vehicles with good mileage figures as well. The GM North American question, like the Ford North American question is can they re-tool and move the freighter before it hits the bridge? All this while the clock ticks…

And then there’s Chrysler. Chrysler’s July sales fell 29% and recently announced it will no longer lease cars. In my humble opine, this is very bad news. Car manufacturers have used leasing as way to move cars by modifying the residual values. Without Chrysler Financial, buyers will have to lease through banks or other finance arms. It is unlikely that banks will utilize the same residuals, so lease deals will vary from place to place and dealer to dealer. Chrysler is owned by Cerberus, a private equity firm. Cerberus has had its hands full with GMAC announcing a $2B loss (Cerberus owns 52% of GMAC). GMAC, by the way, announced it was no longer leasing in Canada. I’m thinking it’s highly likely that Chrysler will be sold, or more strangely, is already sold. Cerberus bought Chrysler (and GMAC) with a ‘bundle’ of 90 other investors. The wild thing about private equity is that they don’t have to disclose who the investors are. So, Cerberus can create a private equity pool (e.g. ‘Cerberus Pool X’) and spin investments (like perhaps Chrysler and GMAC, and maybe Tower) and have the investors own the pool. Who are the investors? They could be Renault or Tata, or private investors. It could be stranger partners. The Chinese government (unlike the US, the Chinese actually have$66B in their Social Security fund) owns an 8% stake in Blackstone. Private equity makes for strange bedfellows: The Carlyle Group has investors that include the United Arab Emirates, Osama Bin Laden’s brother, George H. Bush, and the government of Dubai.

My bottom line: Oil prices dropping is good (see my previous blog on Wyoming wheat and Canadian Crude). GM borrowing from the VEBA is good. Ford being able to pull off the retool from trucks to cars is good. Buyouts of salaried retirees is good. Chrysler? My mom always told me if I didn’t have anything good to say, don’t say anything.
Regards,

Leon LaBrecque