Ford, stung by losses and sales drops, will cut production

Saturday, August 19, 2006

A Kansas City plant is on the list to be temporarily shut down.

DETROIT -- Ford announced its largest production cuts in more than 20 years on Friday, blaming high gas prices for pushing many customers away from its pickups and SUVs and toward higher-mileage models.

Ford Motor Co. said it would temporarily halt production at 10 assembly plants between now and the end of the year to reduce the need for costly incentives to trim bloated inventories.

The decision illustrates just how out of step the lineup at the nation's second-largest automaker has become, as it loses market share to mostly Asian competitors under the watch of Chairman and Chief Executive Bill Ford.

Ford announced a turnaround plan in January that called for shedding 25,000 to 30,000 jobs and closing 14 plants by 2012. By year's end, the company was to have cut production capacity 15 percent.

The 'Way Forward'

Bill Ford said last month that the plan -- dubbed the "Way Forward" -- would be accelerated. He said Friday that the details would be revealed in September.

In response to the production cuts, Fitch Ratings downgraded Ford's debt further into junk status, while two other ratings agencies placed the company on review. Analysts said next month's announcements could include more plant closures and job cuts, as well as quicker introductions of new cars and crossovers.

The company said fourth-quarter production would be down 21 percent, or 168,000 units, from last year. Third-quarter production will be 20,000 units below what was previously announced and 78,000 units below last year.

For the full year, Ford plans to produce about 9 percent fewer vehicles than last year for a total of just above 3 million.

"We know this decision will have a dramatic impact on our employees, as well as our suppliers," Chairman and Chief Executive Bill Ford said in an e-mail to employees. "This is, however, the right call for our customers, our dealers and our long-term future."

He said it was the company's biggest North American production cut in more than 20 years.

Dearborn-based Ford, which lost $254 million in the second quarter, said last month that the speed of the market shift away from trucks had taken it by surprise. Like other U.S. automakers, Ford is heavily dependent on sport utility vehicles and other trucks, which have far higher profit margins than cars. Last year, 68 percent of the vehicles sold by the company in the U.S. were trucks, compared with 58 percent for the industry as a whole.

Reducing inventory

"An unprecedented spike in gasoline prices during the second quarter impacted our product lineup more than that of our competitors because of the long-standing success of our trucks and SUVs," Bill Ford said in his note Friday.

The nation's second-largest automaker said that by better matching inventories to demand, it can avoid costly incentives and reduce inventory carrying costs for dealers.

The Wall Street Journal, citing unidentified sources, reported Friday that Ford is considering shutting down more factories and cutting salaried jobs and benefits by 10 percent to 30 percent.

Ford spokesman Oscar Suris declined to comment on the report.

The new production schedule will result in temporary shutdown this year at assembly plants in St. Thomas, Ontario; Chicago; Wixom, Mich.; Louisville, Ky.; Wayne, Mich.; St. Paul, Minn.; Kansas City, Mo.; Norfolk, Va.; and Dearborn, Mich.; Ford said.

Company officials would not say what specific impact the production cuts would have on workers. In general, hourly workers placed on temporary layoff receive 95 percent of their wages through state unemployment benefits and a supplement by Ford.

The United Auto Workers had no immediate comment on the announcement.

In Louisville, which has two affected plants, Mayor Jerry Abramson said he was told by Ford executives that the Louisville Assembly Plant, which makes the Ford Explorer and Mercury Mountaineer, will be shuttered for six weeks. The Kentucky Truck Plant, one of four plants producing the best-selling F-Series pickups, will close for five weeks in the fourth quarter, he said.

Abramson said state and local officials have asked to meet with Ford officials.

The production cuts are the second time this week that slower sales have forced Ford to announce changes. On Tuesday, it said it would trim the number of dealerships it has in 18 metropolitan areas. Dealer profits declined an average of 10 percent in the first half of 2006, the company has said.

In response to the production cuts, Fitch downgraded Ford and its finance arm Ford Motor Credit Co. to "B" from "B+" and lowered its senior unsecured debt to "B+" from "BB-."

"Implicit in the production cutbacks are expectations of continued weak pickup sales that have resulted in extended inventories," the agency said. It added that shrinking sales of Ford pickups and more declines in mid-size and large SUVs would speed up a drop in revenues.

Standard & Poor's Ratings Services and Moody's Investors Service both put Ford's credit ratings on review for possible downgrades further into junk territory.

Ford shares fell 17 cents, or 2.1 percent, to close at $8 on the New York Stock Exchange.

Craig Hutson, an auto analyst at the corporate bond research firm Gimme Credit, said that while the cuts are aimed at matching supply and demand in the long term, "the short-term ramifications will be ugly."

"Trucks are Ford's most profitable vehicles, and the sharp decline in production volumes will make it more difficult to see any signs of a turnaround at Ford," he said in a research note.

The production cuts are likely to affect the revenues of many of Ford suppliers.

"When our customers adjust production up or down, we obviously adjust accordingly," said Jim Fisher, a spokesman for Visteon Corp., Ford's largest supplier.

Fisher said the company was assessing the impact of Ford's cuts.

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