Ford restructuring plan brings fear

Carmakers in the United States already have made strides on several fronts.
Christian Science Monitor
BOSTON AND CHICAGO -- Ford Motor Co.'s dramatic restructuring plan -- which would cut 25,000 to 30,000 jobs, fully one-fourth of its North American work force -- conjures up fears in some quarters that Detroit could become a manufacturing ghost town.
But it's not time to write the obituary for the American auto industry. Although it's struggling on its home turf, analysts say, the most likely scenario is continued downsizing and restructuring, from which leaner but profitable U.S. operations will emerge.
In the near term, the road won't be easy. Bankruptcy, which could hurt already weak sales, looms as a remote possibility for Ford, which announced its cuts Monday. It's more of a possibility for General Motors, which unveiled its own restructuring late last year.
"GM and Ford are around to stay, but what their ultimate market share is going to be is difficult to tell at this point," said Don Rosenfield, an expert on manufacturing at the University of Massachusetts. "I think their market shares will continue to fall ... and hopefully they'll find a way to be profitable at those levels."
Already, carmakers in the United States have made strides on several fronts. Their quality has improved, as has factory productivity. Recent deals with the United Auto Workers union promise to lower health care costs.
Overseas, their future looks much stronger.
Worldwide profit
Even as it announced its plan for U.S. restructuring Monday, Ford reported a worldwide profit of $2 billion, its third-straight year of positive earnings.
"Outside of North America, we have made continuous progress," chairman and chief executive Bill Ford said in a press conference.
By contrast, the company's North American operations lost $1.6 billion last year. GM may have lost some $4 billion, analysts say, when it reports its 2005 earnings later this week. North America counts for almost all those losses.
Detroit's challenge on its home turf is twofold. First, global competition in the industry has been growing, with foreign-owned "transplant" factories in California or the South churning out new cars to replace each one no longer made by U.S. carmakers in Flint or Dearborn, Mich.
Second, America's big three -- Ford, GM, and Chrysler -- have been hampered by their own history. As industry pioneers, they built up an early dominance.
But they also built up huge "legacy costs" in pensions and health care liabilities.
Honda and Hyundai are younger companies, and their costs are lower as a result.
That's why some analysts say bankruptcy, clearly a last resort for Ford and GM, is possible. As the companies downsize, their obligations to former workers remain unchanged.
Gas price pinch
Moreover, the Big Three have been hurt more than their main rivals over the past year by rising oil prices. As gas-pump costs jumped, sales of a Detroit mainstay, sport-utility vehicles, have sagged.
For Ford, the decision to cut the jobs was a necessary one, analysts agree, given the company's excess capacity.
"It was a no-choice kind of thing," said David Cole, president of the Center for Automotive Research in Ann Arbor, Mich. "You shrink to grow. ... A general in war will sacrifice a battalion to save a division. Failure to change would be a real disaster."
But the layoffs only solve one piece of a challenge that also involves a ballooning cost structure. According to some estimates, companies like Ford or GM pay $1,300 or more in health care costs for every car they make, two-thirds of which is for retirees.
"Any old organization that has a stable workforce and defined benefit responsibility for retirees has a problem," said Cole, citing industries like airlines. "The new guy has a tremendous advantage."
That's one reason, he and others say, that the new "transplant" companies like Toyota and Honda, which have developed large plants in the South, have been able to be successful. Workers at those nonunion plants still get relatively good wages, but the companies' responsibility for costs like health care is minimal compared with what the large American companies have, particularly for retired workers.
Shift needed
Given the slump in sport-utility sales, U.S. carmakers will have to refine their product mix.
"Ford and GM were depending for profitability on the SUV end of the market," said Jeff Layman of BKD Wealth Advisers, an investment company in Springfield, Mo.
Toyota and Honda haven't had to offer the same kind of profit-pinching incentives to move cars out of their showrooms, he said.
Chrysler, now a division of DaimlerChrysler AG, is smaller than Ford or GM -- and is using size as an advantage. Analysts say it is succeeding as a niche player based on its tradition of stylish designs.
The question is, can the larger Ford and GM find the right mix of cars to retain a measure of their still-large U.S. market share?
"If people were really, really excited about Ford cars, people would buy more of them," noted Charles Ballard, an economics professor at Michigan State University.