Bail Out the Big Three? History Suggests “Don’t Do It”!

November 11, 2008

It would be catchy to lead with something like “I’ll give you fifty-billion reasons why the US government shouldn’t bail out the Big Three automakers.” Instead, I’ll just write: don’t do it.

I need to make something crystal clear here. My views are not ideologically-based. If you’d like some Republican versus Democrat, free market capitalism over big government socialism, Apple against Microsoft rants, you’re not going to find it here.

What you will find is a simple statement: history and common sense intersect at a point with a big marker titled “STOP”.

The Meat Of the Deal

Congress has already given General Motors, Ford and Chrysler around $25 billion so they can retool for production of more fuel-efficient cars. Last week the three CEOs returned to The Hill to ask for as much as $50 billion more to keep their companies floating while they hemorrhage cash in the down economy.

It is true that consumers are not buying new cars right now. That’s a huge problem for all automakers, not just the Big Three. When they start buying cars again, fuel-efficient vehicles like hybrids and compacts will be in demand. Actually, if we’re being truthful here, these vehicles are in demand right now. Just go try to find a Prius on a dealer lot.

So the Big Three CEOs have the audacity to go to Congress and say “give us money so we can ride out the bad economy and have what the consumers will want when they are ready to buy.” Audacity? Why did I choose that word?

Simple, because unless you’ve been living in cave for the last decade, you’ll know that even when GM, Ford and Chrysler were selling SUVs and trucks faster than a Ramones drum beat, they were largely losing money. Keep in mind that SUVs and trucks had a hell of a lot higher profit margin than compact and hybrid cars could ever hope to attain.

Imagine if the CEOs told Congress: “we need money, because we couldn’t make profits when we were selling high-profit vehicles. Since we pocketed that money in salaries, union deals, benefits, and executive bonuses, and got drunk on cheap gas (although in our hearts we knew it wouldn’t stay that way, but we hoped we’d be retired by the time it hit $4 per gallon), we never spent enough on R+D, so we didn’t have vehicle products ready to go for this current marketplace.” Unfortunately, that’s the truth.

Here is a scary reality
If Congress gave $50B directly to American consumers with the condition that we went out and bought new cars, here’s what would happen: $50B would buy 1,666,666 cars, based on the current average price of around $30,000 each. Given the current market share, GM at 22.4 percent would sell 373,333 vehicles, Ford (14.8%) would move 246,666 units, and Chrysler (11%) would sell 183,333 units. In other words, with fifty billion dollars going directly into the hands of consumers to buy a new car, the best any of the Big Three could do would be to sell a group of additional vehicles equating to less than one year’s worth of Honda Accord sales in America. (392,231 Accords were sold in the US in 2007.) Think that’s enough to keep them (or dealers) from failing? Nope!!!

Inevitably, there are those out there who will say the Big Three are “too big to fail”. Television news channels are already reporting huge job loss potentials if the companies go out of business—from a few hundred thousand to somewhere around 1.5 million. For every one job at GM, Ford and Chrysler, there are seven positions at vendors providing parts and services for domestic auto production. In other words: if they fail, we’re in a depression with millions of unemployed workers.

The logical conclusion, claim these folks, is to keep the government money flowing– no matter how long it takes, otherwise the companies will implode, everyone in the industry will be out a job, and a depression is unavoidable. To these people I have just two words:


Allow me to follow up those two words with a description of why this is critical history for every Member of Congress to know. England used to be tied with America as the automotive powerhouses in the world. We had Ford and Chevy, while they had Austin and Morris. Just like the contraction of companies in America that formed Ford-Lincoln-Mercury and General Motors, Austin joined Morris in BMC. Standard joined with Triumph, which was joined with Jaguar. Finally, by 1968 most British-owned brands were rolled into British Leyland.

Thanks to equal parts ineptitude, greed and lack of ethics, BL drove the British car industry into the ground. BL executives blamed the economy (including an oil crisis) and labor. Everyone else pointed the finger at products that were inferior to foreign competition, as well as short-sighted contracts and profiteering.

Despite selling forty percent of the vehicles in Great Britain, by 1975 British Leyland was broke. The British Government sank millions into the group and became the majority shareholder. The corporation was reorganized, and millions more went to cure production and labor problems.

The company was again reorganized into saleable units. Jaguar-Daimler was sold-off in 1984 (two years later it went to Ford). The Leyland truck and bus unit was merged with Dutch DAF in 1987, which later sold bus operations to Volvo. Just a year later the Rover Group (including most of the remaining car business) was sold to British Aerospace, which turned around and immediately sold this remaining part of Great Britain’s auto industry to German BMW.

Which puts us back to GM, Ford and Chrysler

If Congress simply let nature take its course, there is a strong chance that all would fail. But we need to DEFINE “FAIL”. In this case, do we honestly think that if any of the Big Three “fail” everything the company owns would simply be auctioned off to the high bidder in front of the local courthouse? Of course not.

All three companies own valuable plant assets. All still have cash. All own products and technology that are profit centers. There is certainly a big financial value to Chevy’s Volt product, as well as Chrysler’s ultra-modern flexible plant locations, Ford’s Mustang brand, Corvette production, F150 fleet sales, the “Hemi” trademark…

Considering that Porsche just tried unsuccessfully to buy VW, it puts them back in the market for an entity that will enable them to meet 35-mpg CAFE standards. By the way, Porsche has also been one of the most profitable automakers of the last decade. (Turns out that selling overpriced sports-SUVs is a cash cow.) So even after the botched buyout, they have money to burn.

Hyundai is also a strong competitor without a good hybrid play, as is Mitsubishi. Both have money. Mitsubishi’s dedication to cars might be questionable, but Hyundai’s certainly is not. Honda could use a more diverse product range, especially upmarket. Even Toyota could make a case to buy one of the Big Three — Chrysler for flexible production facilities or GM for Volt plug-in technology (since it could take a big bite out of Hybrid Synergy Drive sales).

Then there’s BMW – the same company that at one time or another has purchased Rover, MG, Rolls-Royce, Bentley, Austin/Morris/Mini, and still retains the rights for Triumph. They have cash and good credit…not to mention a pretty good history of acquiring, absorbing, improving operations, and remarketing companies. (We’ll give them a pass on Rover, which was a debacle, only because nothing short of a neutron bomb could have solved that company’s issues.) Finally, BMW has banked way too much on hydrogen over plug-in hybrids, so they could benefit from buying the technology, rather than developing it in house.

Don’t count on Mercedes to get involved. The company is still sore from its marriage to Chrysler. It turns out Mercedes was ill prepared to deal with the complexities of a merger with such a dysfunctional corporation at a time when it was challenged with its own operational and technical issues. Consequently, Mercedes lost more money than a drunk billionaire trying to impress the hotties at the high roller baccarat tables.

Hyundai, BMW, Porsche…Any of these companies could benefit by buying GM, Ford, or even Chrysler.

All have experience designing, building, marketing, selling, and servicing in America already, and do so with high profit margins.

No doubt each and any foreign buyer would bust the unions and negotiate dumping retirement benefits on the US government. Then the companies would kill poor performing legacy products, as well as the people who continued to push losing strategies. Good niche brands and solid future technologies would be exploited, while albatrosses like Hummer would likely be closed down or sold to a greater fool.

In the end, America would have to let go the concept of the American Big Three. One could get caught up in buzzwords like “failure”, but the goal is to save money and jobs.

No matter how we look at it, American jobs will be lost. The difference is that if the US Congress pushes the Big Three to sell, more people will actually be able to keep jobs. Granted some will do so at reduced wages and most at decreased long-term benefits. Wouldn’t it be better, however, for these people to work for a competitive company again – one that isn’t in jeopardy of needing to make more layoffs or beg for more government money next year?

Congress might still decide to throw good money after bad at GM, Ford and Chrysler, just like the British did for BL, but the best course of action is to allow these dinosaurs implode under their own weight sooner rather than later, and work to convince German, Japanese and Korean automakers to bring them back to life as more efficient, better targeted and longer-reaching versions of their old selves using the American workers and suppliers who are willing to adapt to a new world with a view far beyond the self-interests of Michigan and D.C..

Editor’s Note: We here at the Four Wheel Drift realize that this whole bailout issue is far more complicated than can be summarized in one article. We expect that if Alan Mulally or Rick Wagoner read the above article, they’d accuse us of missing important details. (We’d expect that Bob Lutz would say we’ve got our heads up our asses if we thought it was that simple.) The fact is that it isn’t simple. It took nearly a century for GM, Ford and Chrysler to create the mess they’re in, and there are no easy answers. We simply are taking a stand unpopular with car folks, especially those emotionally tied to the long history of American auto producers, and suggesting that the only way to stay competitive is to admit that there is no way to stay competitive by just taking government money and tightening belts.


GM and Ford Ask US Government: “Can You Spare Some Change?”

November 7, 2008

Chairmen from GM, Ford and Chrysler went to D.C. yesterday to ask for a handout. Evidently, the $25B they are receiving for retooling to produce high MPG cars isn’t enough to keep them afloat. They asked for an additional $25B for operations.

Some might ask “do they really need it?” The answer is pretty simple — look at today’s financial announcement from GM:

GM Reports Third Quarter Financial Results

Unprecedented economic and credit market turmoil dramatically impacts auto industry and GM results
Market volatility results in $1.5 billion in non-cash charges for commodity and currency hedging
Company anticipates soft U.S. market for remainder of 2008 and into 2009
Emerging markets beginning to show impact of credit crisis
Third Quarter
2008 2007* O /(U) 2007
Revenue (bils.): $37.9 $43.7 $(5.8)
Adjusted automotive earnings before tax (bils.): $(2.8) $0.1 $(2.9)

Reported automotive earnings before tax (bils.): $(.95) $(1.6) $.65
Adjusted net income (bils.): $(4.2) $(1.6) $(2.6)
Reported net income (bils.): $(2.5) $(42.5) $40.0
Reported earnings per share: $(4.45) $(75.12) $70.67
Adjusted operating cash flow (bils): $(6.9) $(2.5) $(4.4)
* 2007 figures reflect continuing operations

DETROIT –General Motors (NYSE: GM) today announced its financial results for the third quarter of 2008, reflecting rapidly deteriorating market conditions in the U.S., slowdowns in other mature markets around the world, and continued losses at GMAC Financial Services (GMAC).

During the third quarter the turmoil in the global credit markets resulted in the worst financial crisis in more than 70 years. The upheaval has had a dramatic impact on the auto business in particular, especially in the U.S. and Western Europe.

Tight credit, rising unemployment, declining income, falling stock markets, and continuing deterioration in the housing market in the U.S., resulted in an abrupt halt in consumer spending, with most consumers exiting the vehicle market. Many of those still intending to purchase vehicles were denied financing, or found the cost of financing prohibitive.

“The third quarter was especially challenging for the auto industry. Consumer spending, which represents close to 70 percent of the U.S. economy, fell dramatically, and the abrupt closure of credit markets created a downward spiral in vehicle sales,” said Rick Wagoner, Chairman and Chief Executive Officer. “The U.S. government’s actions to help stabilize the credit markets and eventually ease the credit crunch are an essential first step to the economy’s and the auto industry’s recovery, but further strong action is required.”

GM reported a net loss of $2.5 billion or $4.45 per share for the third quarter, including special items. That compares with a net loss from continuing operations of $42.5 billion or $75.12 per share in the third quarter of 2007, which included a non-cash charge of $38.3 billion to establish a valuation allowance against some of the company’s net deferred tax assets.

On an adjusted basis, GM posted a net loss of $4.2 billion or $7.35 per share, compared with a net loss from continuing operations of $1.6 billion or $2.86 per share in the same period last year.

Revenue for the third quarter was $37.9 billion, down from $43.7 billion in the year-ago quarter, reflecting dramatic sales declines across the industry driven by unstable market conditions, instability in the credit markets and dramatic retraction in consumer demand, especially in North America and Europe.

GM recorded net favorable charges of $1.7 billion for special items in the third quarter. Included in the charges was a curtailment gain of $4.9 billion resulting from the UAW Settlement Agreement becoming effective. The curtailment represents the accelerated recognition of net prior service credits, largely relating to the 2005 GM UAW healthcare agreement, scheduled for amortization after January 1, 2010.

The curtailment was recorded because GM’s UAW retiree health plan will not exist after January 1, 2010, and therefore no further basis for deferring unamortized prior service credits exists beyond that date. The $4.9 billion curtailment gain was partially offset by a non-cash $1.7 billion settlement charge related to the elimination of post-65 salaried retiree healthcare coverage, including the cost of increased pension benefits that were announced in July as part of GM’s operating actions to improve liquidity as well as the recognition of accumulated deferred losses related to the healthcare plan.

In addition, GM reported charges of $652 million relating to its commitments as part of Delphi’s bankruptcy proceedings, $251 million for impairment of investments in GMAC, and $641 million in restructuring-related and other charges. Details on these and all other special items are in the financial highlights section of this release.

GM Automotive Operations

GM reports its automotive operations and regional results on an earnings-before-tax basis, with taxes reported on a total corporate basis.

GM recorded an adjusted automotive loss of $2.8 billion ($947 million reported loss) in the third quarter 2008. The loss compares with adjusted automotive earnings from continuing operations of $98 million in the third quarter of 2007 (reported net loss of $1.6 billion).

The results reflect losses in GM North America (GMNA) driven largely by the U.S. industry volume decline of nearly 20 percent, and shifts in product mix. In addition, Europe saw rapid auto market contraction, leading to sharply lower GM Europe (GME) sales volume in the third quarter. GM Asia Pacific (GMAP) results were down due to commodity hedging charges and moderating demand in key markets including China, Australia and India. These losses were partially offset by very strong results in the GM Latin America, Africa and Middle East (GMLAAM) region.

GM’s automotive results in the third quarter include $1.5 billion of expenses related to mark-to-market changes in the value of GM’s commodity and foreign exchange hedging contracts, due almost entirely to falling commodity prices.

GM sold 2.1 million vehicles worldwide in the third quarter, down 11 percent year over year. Sales in GMNA were down 19 percent compared to third quarter 2007. GM global market share was 13 percent, down 0.7 percentage points compared with the third quarter of 2007, due largely to weakness in North America and Western Europe.


Third Quarter

‘08 O/(U) ‘07

Revenue (bils.)

Adjusted Earnings Before Tax
$(2.3) bil.
$(298) mil.
$(2.0) bil.

Reported Earnings Before Tax
$(395) mil.
$(1.8) bil.
$1.4 bil.

GM Market Share
(1.0) p.p.

GMNA revenue and earnings in the third quarter reflect dramatic industry deterioration and a sharp fall in consumer spending driven by the weak U.S. economy and a very harsh credit environment. Earnings were impacted by lower volumes, rapid shifts among U.S. consumers away from trucks and SUVs toward smaller cars, and unfavorable mark-to-market adjustments on commodity hedging.


Third Quarter

’08 O/(U) ‘07

Revenue (bils.)

Adjusted Earnings Before Tax (mils.)

Reported Earnings Before Tax
$(1.0) bil.
$(398) mil.
$(602) mil.

GM Market Share
(0.6) p.p

GME revenue was down 15 percent in the third quarter amid industry-wide volume declines ranging from 10 to 35 percent in certain major markets including the U.K., Spain and Italy. Overall GME sales volume was down 12.3 percent year over year, while up 10 percent in Eastern Europe. Earnings were largely impacted by the lower volumes, and unfavorable mix and negative pricing. In addition, unfavorable foreign exchange relating to the weakening of the British pound and the mark-to-market of commodity hedges negatively impacted earnings. Results were partially offset by favorable structural cost performance.


Third Quarter

‘08 O/(U) ‘07

Revenue (bils.)

Adjusted Earnings Before Tax (mils.)

Reported Earnings Before Tax (mils.)

GM Market Share
0.4 p.p.

Results in GMAP were impacted primarily by unfavorable mix and negative pricing. In addition, GMAP results were impacted by unfavorable hedging, which was largely offset by the favorable foreign exchange impact of exports.

Industry sales for the region were down by 134,000 units or 2.7 percent in the third quarter. Despite the slowdown, GM reported a 2.6 percent increase in sales volume, and modest gain in market share. Markets in the GMAP region are expected to remain soft through the fourth quarter, with further slow downs anticipated in Australia, China, South Korea and India as the contagion of the faltering U.S. economy and tightening credit conditions expand to other regions around the world.


Third Quarter

‘08 O/(U) ‘07

Revenue (bils.)

Adjusted Earnings Before Tax (mils.)

Reported Earnings Before Tax (mils.)

GM Market Share
(.4) p.p.

GMLAAM saw double-digit revenue growth, up 15 percent, and earnings, up 37 percent, in the third quarter, fueled by strong demand for Chevrolet and Cadillac products. GMLAAM sales volume was up more than 3 percent compared to the same period last year. Sales were especially strong in key South America markets, including Brazil, Chile, Ecuador and Peru, each setting all-time GM quarterly sales records. The region is on track for another year of record sales, although the effects of the global economic slowdown on credit availability and consumer behavior are likely to result in some moderation of demand in the fourth quarter.


On a standalone basis, GMAC reported a net loss of $2.5 billion for the third quarter 2008, down $900 million from the year-ago quarter. GM reported an adjusted loss of $1.2 billion for the quarter attributable to GMAC, as a result of its 49 percent equity interest.

GMAC’s automotive finance operation experienced pressure from lower used vehicle prices and weaker consumer and dealer credit performance. GMAC’s ResCap operations reported further losses as a result of adverse market conditions, which drove high credit-related provisions and weak revenue. GMAC’s Insurance business remained profitable.

Cash and Liquidity

Cash, marketable securities, and readily-available assets of the Voluntary Employees’ Beneficiary Association (VEBA) trust totaled $16.2 billion on September 30, 2008, down from $21.0 billion on June 30, 2008.

The change in liquidity reflects negative adjusted operating cash flow of $6.9 billion in the third quarter 2008, driven by the industry-wide slowdown in vehicle demand and compounding credit crisis, especially in North America and Europe. During the quarter, GM drew the remaining $3.5 billion of its secured revolving credit facility and made $1.2 billion in payments to Delphi as required by agreements between the companies as part of Delphi’s bankruptcy proceedings.

GM expects adjusted operating cash flow in the fourth quarter to be much improved versus the third quarter, and more consistent with the first half of the year. Improvements in fourth quarter cash flow are largely driven by anticipated improvements in working capital in North America relating to sales allowances, and lower fourth quarter finished vehicle inventory in Europe.

Improving its liquidity position remains a top priority for the company. In response to deteriorating market conditions, GM announced today that in addition to the $15 billion in liquidity initiatives it outlined in July 2008, it has identified $5 billion of incremental liquidity actions. Cumulatively, GM has announced actions aimed at improving liquidity by $20 billion through 2009. To date, $10 billion in internal operating actions have either already been completed or are on track for full execution by the end of 2009.

Even if GM implements the planned operating actions that are substantially within its control, GM’s estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business. Looking into the first two quarters of 2009, even with its planned actions, the company’s estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs, or some combination of the foregoing. The success of GM’s plans necessarily depends on other factors, including global economic conditions and the level of automotive sales, particularly in the United States and Western Europe.

Further detail on the additional liquidity actions and GM’s current liquidity position and outlook will be disclosed in a Form 8-K filing with the Securities and Exchange (SEC) later today.

Not to be outdone, Ford released its less-than-stellar earnings announcement:

Download Full Financial Release

Download Slides

Net loss of $129 million, or $0.06 a share, for the third quarter of 2008
Pre-tax loss of $2.7 billion from continuing operations, excluding special items ++
Favorable curtailment gain in excess of $2 billion related to approval of retiree health care agreement
Company remains on track to achieve $5 billion in cost reductions in North America by the end of 2008 compared with 2005 (at constant volume, mix and exchange; excluding special items)
Automotive gross cash (including cash and cash equivalents, net marketable securities and loaned securities) on Sept. 30, 2008 totals $18.9 billion +++
Available credit lines total $10.7 billion; overall liquidity totals $29.6 billion
Company planning further cost and cash improvements to continue implementing Ford’s product-led transformation plan and offset continued weakness in the global automotive industry
Financial Results Summary
Third Quarter
First Nine Months

O/(U) 2007
O/(U) 2007

Wholesales (000) ++

Revenue (Bils.) ++
$ 32.1
$ (9.0)
$ 110.1
$ (18.2)

Continuing Operations ++

Automotive Results (Mils.)
$ (2,906)
$ (2,544)
$ (2,924)
$ (2,715)

Financial Services (Mils.)
( 111)

Pre-Tax Results (Mils.)
$ (2,747)
$ (2,941)
$ (3,035)
$ (3,781)

After-Tax Results (Mils.)

Earnings Per Share ++++

Special Items Pre-Tax (Mils.)
$ 2,207
$ 2,557
$ (6,219)
$ (6,199)

Net Income

After-Tax Results (Mils.)
$ (129)
$ 251
$ (8,696)
$ (8,784)

Earnings Per Share

Automotive Gross Cash (Bils.) +++
$ 18.9
$ (16.7)
$ 18.9
$ (16.7)

See end notes on page 9.

DEARBORN, Mich., Nov. 7, 2008 – Ford Motor Company [NYSE: F] today reported a third quarter net loss of $129 million, or 6 cents per share. This compares with a net loss of $380 million, or 19 cents per share, in the third quarter of 2007. Ford’s third quarter pre-tax operating loss from continuing operations, excluding special items, was $2.7 billion, down from a $194 million profit a year ago.

The company also today announced additional actions to reduce costs and improve Automotive gross cash to enable Ford to continue to implement its product-led transformation plan despite the continued weakness in the global automotive market and economic environment.

Improvement actions include: an additional 10 percent reduction in North American salaried personnel-related costs; a reduction in capital spending enabled by efficiencies in Ford’s global engineering and product development; a reduction in manufacturing, information technology, and advertising costs due to the company’s “One Ford” global operations; and a reduction of inventories globally. Ford also said it would continue to explore divestitures of non-core assets and utilize equity-for-debt swaps and other incremental sources of financing to strengthen the company’s balance sheet.

At the same time, Ford reiterated its continued investment in the smaller, more fuel-efficient, high-quality products that will result in a more balanced global portfolio. Ford confirmed that nearly all planned product programs remain on track and on time – aside from a few select vehicles that will be deferred until industry volumes recover. Ford will, however, reduce spending for large vehicles in declining segments.

“We continue to take fast and decisive action implementing our plan and responding to the rapidly changing business environment,” said Ford President and CEO Alan Mulally. “We have a strategy that is broad and specific enough to handle the dramatic changes in today’s environment. We will continue to assess the rapidly changing business environment and modify implementation of our plan accordingly.”


The 2008 operating data discussed below exclude Jaguar Land Rover, which was sold on June 2, 2008. Jaguar Land Rover and Aston Martin data are, however, included in the 2007 data, except where otherwise noted. See tables following “Safe Harbor/Risk Factors” for the amounts attributable to Jaguar Land Rover and any necessary reconciliation to U.S. GAAP.
On an after-tax basis, Ford’s third quarter operating loss from continuing operations, excluding special items, was about $3 billion, or $1.31 per share, compared with a loss of $24 million, or 1 cent per share, a year ago.

Ford’s third quarter revenue was $32.1 billion, down from $41.1 billion a year ago. The decline reflects lower volume, the sale of Jaguar Land Rover, changing product mix and lower net pricing, partly offset by favorable changes in currency exchange rates.

Special items improved pre-tax results by $2.2 billion in the third quarter, or $1.25 per share, which is primarily due to the retiree health care curtailment gain in excess of $2 billion related to the approval of the retiree health care settlement agreement with the United Auto Workers.

Automotive gross cash, including cash and cash equivalents, net marketable securities and loaned securities, was $18.9 billion on Sept. 30, down from $26.6 billion at the end of the second quarter. The decrease primarily reflects Automotive pre-tax operating losses, changes in working capital and other timing differences, and upfront subvention payments to Ford Credit.

Ford’s Automotive cash flow during the third quarter was significantly affected by a number of unique factors during the quarter, including the decision to reduce truck production to allow for an orderly sell-down of dealer inventories to make way for new models. Overall, Ford’s global third quarter production levels were more than 100,000 units below retail sales and nearly 500,000 units below the second quarter levels. This had a substantial impact on profits, and the decline in production resulted in about a $3 billion reduction in payables during the quarter.

“Strengthening our balance sheet has been and remains a core element of our transformation plan,” said Lewis Booth, Ford executive vice president and chief financial officer. “We were fortunate to have gone to the markets at the right time two years ago to obtain significant liquidity to implement our plan and invest in the new products that will secure our future. We will continue to aggressively reduce costs and manage our cash with absolute discipline to ensure we have the resources to fund our plan going forward.”

In addition, Ford said it will continue working with a number of governments around the world to maximize the availability of funding to provide further protection against the uncertain economic environment that the entire automotive industry is facing.

The following discussion of third quarter highlights and results are on a pre-tax basis and exclude special items. See tables following “Safe Harbor/Risk Factors” for the nature and amount of these special items and any necessary reconciliation to U.S. GAAP. Discussion of Automotive operating cost changes is at constant volume, mix, and exchange, and excludes special items.

Launched the new 2009 Ford F-150 full-size pickup with best-in-class capability and unsurpassed fuel economy. The F-Series remains the No.1-selling truck in America for 31 years running.
Launched the new Ford Fiesta small car in Europe, the first of Ford’s new global small cars. Production began in Cologne, Germany, and the car is now going on sale in Europe. Fiesta also is beginning to now go on sale in Asia and will be introduced in North America in early 2010.
Debuted at the Paris motor show the all-new Ford Ka, a stylish subcompact car that goes on sale in Europe late this year and is featured in the new James Bond movie “Quantum of Solace.”
Launched the Ford Focus in China and the Ford Escape in key Asia Pacific and Africa markets.
Improved vehicle quality again, marking four consecutive years of progress. Ford, Lincoln and Mercury vehicles collectively reduced things gone wrong by 7.7 percent compared to last year, pulling Ford into a statistical quality tie with Honda and Toyota atop the list of seven major automakers in the U.S. Global Quality Research System study.
Achieved the leading number of “Top Safety Picks” from the U.S. Insurance Institute for Highway Safety with the 2009 Ford Flex and Lincoln MKS earning top honors. This builds on Ford’s achievement of the most U.S. government 5-star safety ratings in the auto industry.
Achieved total company cost reductions of $300 million despite commodity cost increases of more than $1 billion. During the first nine months, Automotive costs are down about $3 billion globally, and the company now is on track to reduce costs by about $4 billion for the full year.
Confirmed that Ford North America remains on track to achieve or exceed its commitment of reducing $5 billion in annual operating costs by the end of 2008 compared with 2005.
Achieved continued strong results for Ford South America with a profit of $480 million.

Automotive Sector* Third Quarter
First Nine Months

O/(U) 2007
O/(U) 2007

Wholesales (000)

Revenue (Bils.)
$ 27.8
$ (8.5)
$ 96.9
$ (18.1)

Pre-Tax Results (Mils.)
$ (2,906)
$ (2,544)
$ (2,924)
$ (2,715)

*excludes special items

For the third quarter of 2008, Ford’s worldwide Automotive sector reported a pre-tax loss of $2.9 billion, compared with a pre-tax loss of $362 million during the same period a year ago.

The deterioration was due to lower volume and unfavorable mix, particularly for North America and Volvo, unfavorable net interest expense and related fair-market value adjustments, and lower net pricing, partly offset by favorable cost changes.

Worldwide Automotive revenue in the third quarter was $27.8 billion, down from $36.3 billion a year ago. The decline reflected lower volume, the sale of Jaguar Land Rover, unfavorable product mix and lower net pricing, partly offset by favorable changes in currency exchange rates.

Total vehicle wholesales in the third quarter were 1,174,000, compared with 1,487,000 units a year ago.

North America: For the third quarter, Ford North America reported a pre-tax loss of $2.6 billion, compared with a loss of $1 billion a year ago. The decline reflected unfavorable volume and mix, and unfavorable net pricing, partly offset by cost changes. Unfavorable volume and mix primarily reflected a decline in the U.S. industry volumes, changing product mix, lower dealer stocks and lower market share. Third quarter revenue was $10.8 billion, down from $16.7 billion a year ago.

South America: For the third quarter, Ford South America reported a pre-tax profit of $480 million, compared with $386 million a year ago. The increase reflected higher net pricing, favorable volume and mix, and favorable changes in currency exchange rates, partly offset by higher net product costs. Third quarter revenue was $2.7 billion, up from $2.1 billion a year ago.

Europe: For the third quarter, Ford Europe reported a pre-tax profit of $69 million, compared with $293 million a year ago. The decline was primarily due to unfavorable cost changes (unfavorable mark-to-market adjustments for commodity hedges) and currency exchange, partly offset by net pricing. Third quarter revenue was $9.7 billion, up from $8.3 billion a year ago.

Volvo: For the third quarter, Volvo reported a pre-tax loss of $458 million, compared with a loss of $167 million a year ago. The decline was due to unfavorable volume and mix. Third quarter revenue was $2.9 billion, down from $3.8 billion a year ago. As part of its restructuring, Volvo plans a total reduction of 6,000 employees worldwide, including 1,200 agency employees.

Asia Pacific and Africa: For the third quarter, Ford Asia Pacific and Africa’s pre-tax profit of $4 million compares with $30 million a year ago. The decline was due to unfavorable volume and mix, partly offset by favorable net pricing. Third quarter revenue was $1.7 billion, down from $1.8 billion a year ago.

Mazda: Ford lost $1 million from its investment in Mazda and associated operations in the third quarter, compared with a profit of $14 million a year ago.

Other Automotive: Other Automotive, which consists primarily of interest and financing-related costs, reported a third quarter pre-tax loss of $411 million. This included net interest expense of $440 million.


Financial Services Sector* Third Quarter
First Nine Months

(in millions)
O/(U) 2007
O/(U) 2007

Ford Credit Pre-Tax Results
$ 161
$ (385)
$ (100)
$ (1,053)

Other Financial Services
( 2)

Financial Services Pre-Tax Results
$ 159
$ (397)
$ ( 111)
$ (1,066)

*excludes special items

For the third quarter, the Financial Services sector reported a pre-tax profit of $159 million, compared with $556 million a year ago.

Ford Motor Credit Company: Ford Credit reported a pre-tax profit of $161 million in the third quarter, compared with $546 million a year ago. The decline primarily reflected the non-recurrence of net gains related to market valuation adjustments from derivatives, a higher provision for credit losses, and lower volume, partly offset by a higher financing margin.

Ford said it is more focused than ever on implementing its transformation plan to respond to the significant challenges presented by the continued global economic downturn. Ford’s plan includes:

Aggressively restructuring to operate profitably at the current demand and changing model mix
Accelerating the development of new products that customers want and value
Financing the plan and improving the balance sheet
Working together effectively as one team, leveraging Ford’s global assets
“These are challenging and historic times for the global automotive industry, but I am more convinced than ever that Ford has the right plan to see us through,” Mulally said. “Ford remains well positioned to take advantage of our global scale and global product strengths worldwide, and we will continue to take the decisive steps necessary to operate through the current downturn and be in a position to begin to grow profitably again as the global economy rebounds.”

Ford said its plan to deliver more of the safe, affordable, high-quality, fuel-efficient vehicles that consumers want and value remains solidly in place. The plan includes:

Delivering best-in-class or among the best fuel economy with every new vehicle introduced globally.
Introducing industry-leading, fuel-saving EcoBoost engines and doubling the number and volume of hybrid vehicles.
Leveraging Ford’s product strengths to deliver more global vehicles in the B, C, C/D and commercial van segments. By 2010, nearly 40 percent of Ford’s product entries in these segments will be shared between Ford North America and Ford Europe, and 100 percent alignment will be achieved by 2013.
Upgrading the Ford, Lincoln, Mercury lineup in North America almost completely by the end of 2010.
Bringing six European small vehicles to North America from global B-car and C-car platforms.
Retooling three North American truck plants to produce small, fuel efficient vehicles.
Building on vehicle quality that is now on par with Honda and Toyota – and that consistently is being recognized by important third-parties like J.D. Power and Associates’ Initial Quality Study – driven by Ford’s disciplined and standardized processes for every product.
Building on vehicle safety leadership – with the most U.S. government 5-star safety ratings of any auto company and recently moving past Honda for the industry’s most IIHS “Top Safety Picks” – plus new smart safety features, such as the industry-first MyKey technology that limits top speed and audio volume for teens and the first forward crash-avoidance system for mainstream vehicles.
Supporting Ford’s global products with a lean, flexible global manufacturing system.

To support new product investments and offset continued industry weakness, Ford is implementing actions to improve Automotive cash by a total of $14 billion to $17 billion through 2010.

The actions include:

Reducing North American salaried personnel-related costs by an additional 10 percent by the end of January 2009, through personnel reductions, attrition and other actions. The reductions are in addition to personnel-related cost actions already taken in Ford North America and under way in Ford of Europe, Ford Asia Pacific and Africa, and Volvo.
Further reduction of U.S. hourly employees by approximately 2,600 as a result of the most recent round of targeted buyouts – bringing Ford’s total U.S. hourly reductions through buyouts in 2008 to approximately 7,000.
Eliminating merit pay increases for North America salaried employees in 2009.
Eliminating performance bonuses for global salaried employees, including the Annual Incentive Compensation Plan for the 2008 performance year.
Suspending matching funds for U.S. salaried employees participating in Ford’s Savings and Stock Investment Plan, effective Jan. 1, 2009.
Reducing annual capital spending to between $5 billion and $5.5 billion – enabled by efficiencies in Ford’s global product development system and reduced spending in declining product segments.
Reducing engineering, manufacturing, IT and advertising costs through greater global efficiencies.
Reducing inventories globally and achieving other working capital improvements.
Return of capital from Ford Credit to Ford Motor Company consistent with Ford Credit’s plan for a smaller balance sheet and a focus on core Ford brands.
Continuing to develop incremental sources of Automotive funding, including divesting of non-core operations and assets, and implementing equity-for-debt swaps.
Ford’s actions are based on the expectation that the global auto industry downturn will be deeper, broader and longer than was previously assumed. Industry volumes next year are expected to decline compared with 2008 levels. Ford said it will continue to adjust its production in line with the lower demand.

Ford’s 2008 planning assumptions regarding the industry, operating metrics and profit outlook are as follows:

Planning Assumptions
Full-Year Plan

First Nine Months

Full-Year Outlook

Industry Volume (SAAR):

–U.S. (million units)*



–Europe (million units)**



Operational Metrics

Compared with 2007:

. –Quality


On Track

–Automotive Costs***
Improve by about $3 Billion

$3 Billion

About $4 Billion

Absolute Amount:

. –U.S. Market Share (Ford Lincoln Mercury)
Low End of 14% – 15% Range


High 13%

. –Operating-Related Cash Flow

$(12.3) Billion****

Greater Outflow
than Plan

. –Capital Spending
About $6 Billion

$4.7 Billion

On Track

2008 Operating and Overall Results Will be Worse Than 2007

* Includes medium and heavy trucks

** European 19 markets that we track

*** At constant volume, mix and exchange; excludes special items

**** See tables at end for reconciliation to GAAP

Ford’s production volumes are shown below:

2008 Production Volumes Actual

Third Quarter
Fourth Quarter

Ford North America

Ford Europe


GM is also announcing plans to increase liquidity. Some of the steps include reducing expenditures for R+D. This enforces what I’ve told people for years when they ask why GM, Ford and Chrysler products seem not to be as well-built as Japanese and German cars: that when the going gets tough, they cut research, development and engineering, which are at the core of quality. (Unlike in the past where quality was the “worker on the line”, now failure rates are engineered in, or in the case of GM, Ford and Chrysler — not engineered out.

[b]So should they get the money?[/b]
Question number one seems to be “won’t the world end if the entire US auto industry tanks?” The answer is: look at your history books. Class, can anyone cite an example of a country’s entire auto industry tanking?

It was early in the ’80s when British Leyland, which owned every major English marque went down the tubes. Even a government bailout couldn’t really stem the disaster. Did the world end? No. The companies were simply sold off. Decades later, Jaguar, Mini, Land Rover, and MG all still exist (but by new owners). While not in production, BMW retains the rights to Austin, Morris, Triumph, and others.

If allowed to go down the tubes, GM, Ford and Chrysler would all be purchased by healthier companies like Porsche, BMW, Honda, Toyota, and Hyundai. Some jobs would be lost, but maybe not many less than through a prolonged suffering.

This is not about name calling — being a free-market type versus socialist. More, it’s about having consequences for decades of mismanagement and in-the-moment greed by executives, labor unions, investors, and dealers. We have to let the auto industry see if it can work it out on its own, because if we don’t, we’ll still be getting the same shortsighted business practices, products and labor contracts that we have for fifty years.

GM’s Press Release

July 15, 2008

Here’s the announcement cited in yesterday’s posting.

GM Fact Sheet: GM Turnaround: Actions and Accomplishments

Additional Cost and Liquidity Initiatives

GM announced operating actions, potential asset sales, and financing activities totaling approximately $15 billion

Announced plans for internal operating and Board of Director actions to generate approximately $10 billion in cumulative cash improvements by the end of 2009
Further reductions in truck capacity and related component, stamping and powertrain capacity
Reducing sales and marketing spending, and holding engineering spending
Reducing U.S. and Canada salaried headcount in 2008
Beginning in 2009, eliminating health care coverage for U.S. salaried retirees over 65, partially offset by pension increases
No base compensation increases for U.S. and Canada salaried employees and no annual discretionary cash bonuses for the executive group
Revising capital spending plans
Targeting working capital improvements, driven by inventory reduction
Deferring payments into the UAW VEBA trust until 2010
Suspending dividends on common stock

Announced additional plans for potential asset sales and financing initiatives to raise additional liquidity of $4-7 billion
Broad global assessment of assets for potential sale or monetization
Strategic analysis underway for HUMMER
Plan to opportunistically access global markets for capital
Previously Announced Cost Reduction Activities

Announced an additional $4-5 billion in cost savings by 2011 driven by the implementation of the 2007 GM-UAW contract
Includes independent healthcare VEBA scheduled to begin in 2010
19,000 participants in 2008 attrition program
Announced additional structural cost savings of more than $1 billion by 2010
Announced that production will cease at four North American truck plants and shifts would be eliminated at two others
Achieved $9 billion structural cost reduction from 2005-2007 in North America
2005 health care agreement
North American capacity reductions of nearly 1 million units
34,000 participants in 2006 hourly attrition program
Spending for U.S. hourly and salaried legacy pension and health care will decline from annual average of $7B over last 15 years to less than $2B per year in 2010
Structural cost reduced from 35% of revenue in 2005 to 30% in 2007; targeting reduction to 25% by 2010 and 23% by 2012
Product Excellence

Numerous prestigious industry awards
Saturn Aura and Chevrolet Silverado 2007 North American Car and Truck of the Year; Chevrolet Malibu 2008 North American Car of the Year
2008 Cadillac CTS, Chevrolet Malibu and Corvette Car and Driver “10 Best” cars, and Automobile Magazine “All Stars,” Motor Trend Car of the Year
Strong car and crossover sales increases (U.S., June CYTD)
Saturn Aura (up 21%); Buick Enclave (up 291%); Pontiac Vibe (up 28%)
Chevrolet Malibu (up 31%) – average transaction prices up more than $4,000 and residual values up 11 points
Cadillac CTS (up 34%) – average transaction prices up more than $8,000
Upcoming products
18 of the next 19 major launches will also be cars and crossovers, including:
New midsize Buick sedan,
New CTS coupe and sport wagon,
Midsize crossovers for Cadillac and Saab,
Compact crossover for Chevrolet,
New midsize car and wagon for Saab
Chevy Camaro and Pontiac Solstice hardtop; G8 sport truck
Chevy Volt
Revitalized U.S. Sales & Marketing Strategy

Retail share stabilized near 20%
Incentive spending reduced by 24% from 2004-2007
Reduction in daily rental sales of nearly 200,000 units 2005-2007
Exterior styling cited as top reason for purchase
Average transaction price up 3%
Introduced GM channel strategy:
73% of Buick-Pontiac-GMC sales through aligned dealers
Reduction of 635 dealerships from December 2005 to June 2008

Industry’s best 5-yr warranty coverage program – confidence in GM products
89% reduction in recalls 2005-2007
New vehicle launches performing at record warranty levels
Chevrolet Malibu ranked highest in initial quality according to J.D. Power & Associates in the midsize car segment and was the highest-ranked domestic vehicle