Ford Back in Profit, But is it Getting Ahead of Itself?

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Buoyed by enthusiasm following Ford’s return to profitability, various projections are being made for profit growth through 2011, car sales next year and steel demand to support it. Ford posted a near $1bn profit for the 3rd quarter according to the Washington Post, saying it is the first time the North American operation has been profitable since 2005. However should not assume all this came from the US market. Indeed only $357m came from the US, Canada and Mexico combined before taxes. South America contributed $480m and Europe a further $193m. Asia Pacific and Africa was only $27m and Volvo as a standalone business dragged the numbers down with a $135m operating loss. The biggest contributor though was financial services which kicked in $661m profit, up from $159m last year according to freep.com.

On top of North America’s financial improvement was a market share increase from 14.9% to 15.6% following a decade long decline from 25% in 1998. The third quarter numbers were no doubt stimulated by the cash for clunkers program that generated an additional demand of about 700,000 vehicles in July and August, increasing the sales from 1.6m vehicles to 2.3 m and in the process making it probable annual US sales will be over 10m in 2009. The firm says that following aggressive cost cutting and more than 10 plant closures it expects to continue to generate profit even though the clunkers program has ended. In NWI.com Ford said it expects production in the fourth quarter to be even higher than the clunkers program stimulated in the third quarter.

We have to question the logic of that. The third quarter was a good period for Ford. Raw material costs had fallen, sales spiked and Ford had the models that people wanted giving them a distinct advantage over GM and Chrysler. As important they had a range of vehicles, not just one silver bullet, giving them strength in depth across the product range. In response to rising demand, steel producers raised prices over the period but those increases are slowing and most expect falls in Nov/Dec. Scrap prices have already started coming off which is an early sign demand has faltered. Ford could be running production at unrealistic levels which may currently re-fill salesrooms but once that is complete the balance may just generate unsold inventory and worsen cash flow. Ford is already sitting on a debt pile of over $23bn.

If I was in Ford’s supply chain I would welcome the return to profitability but I am not sure I would invest hard cash in gearing up for growth in component demand through the end of this year and first quarter of next. Customer demand just doesn’t seem to be there. With rising unemployment, a moribund contraction market and a fragile recovery, big ticket car purchases are the first to be put on hold without an external stimulus incentive to buy now.

–Stuart Burns

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