Ford Motor Company

2012 Earnings: Third Quarter

In October 2012, Ford Motor Company reported a flat profit in the third quarter, as heavy losses in Europe continued to undercut its strong performance in the North American market.

Ford, the second-largest American automaker, stated that it earned $1.63 billion in the quarter compared with $1.64 billion in the same period the previous year. Its global revenue dropped slightly, to $32.1 billion, down from $33.1 billion in the third quarter of 2011.

The results underscored both Ford’s success in its home market and its festering problems in Europe, where the auto market has fallen to its lowest sales levels in nearly 20 years.

Ford said its pretax profit in North America increased to $2.32 billion in the quarter from $1.55 billion in 2011. The results were driven by the introduction of new vehicles, like the Escape S.U.V., and higher transaction prices.

But its European operations floundered because of lower sales and higher incentives. Ford reported a pretax loss of $468 million in the region, compared to a pretax loss of $306 million in the third quarter of 2011.

Ford has lost more than $1 billion in Europe so far in 2012 and has said it expects its full-year loss to top $1.5 billion.

Earlier in October, Ford broke from the pack of troubled European automakers in October 2012, announcing deep cuts that include shutting three factories in the region and eliminating 5,700 jobs.

Background

The Ford Motor Company, founded in 1903 by Henry Ford, is one of the largest auto makers in the world.

During a time of crisis throughout the auto industry in recent years, Ford emerged as the sole American automaker in a position to survive the steepest sales downturn in decades without a government bailout. That helped the company improve its reputation and win new customers.

Ford passed Toyota as the No. 2 seller in the United States in 2010. Sales by Ford grew 15.2 percent that year, even though it sold Volvo and closed the Mercury brand.

The company had outsold G.M. in February 2010, something that had not happened in more than 50 years, aside from several months in 1998 when G.M. workers were on strike.

In 2006, Ford made a bet-the-company decision to borrow $23.6 billion, putting even the company’s fabled blue logo up as collateral. That money helped Ford move more quickly than General Motors or Chrysler to bring out new lines of more fuel-efficient vehicles, and, more crucially, provided a cash cushion when the car market tanked along with the economy in late 2008.

Ford also shifted its strategy to focus on its core brands and sold off luxury brands, including Jaguar and Land Rover to the Tata Group of India for $2.3 billion in 2009. In March 2010, Ford reached an agreement to sell its Volvo subsidiary to a Chinese conglomerate.

In September 2012, Ford announced several new products to bolster its struggling European division, including introducing its iconic Mustang sports car to the Continent.

The initiative was unveiled by Ford’s chief executive, Alan R. Mulally, at a lavish event attended by 2,500 of Ford’s European dealers in Amsterdam.

The product blitz included a series of new passenger cars, sport utility vehicles and commercial vehicles designed to help Ford expand its sales in the weakening European market.

Ford, like several other automakers, has tried to stabilize its business in Europe during the worst downturn in sales in more than 15 years. The aggressive product strategy is intended to lift sagging sales and demonstrate Ford’s commitment to the region.

Over all, the company is expected to have 15 of its global vehicles on sale within five years and will also introduce its fuel-efficient EcoBoost engines to the market.

History: The Good Years as No. 2

For decades, Henry Ford’s company was the world’s No. 2 automaker, a strong runner-up to General Motors and a pillar of American corporate stability. In early 2009, it emerged as the sole American automaker in a position to survive the steepest sales downturn in decades without a government bailout.

The company had been through rough patches before, recovering in the 1950s from the neglect of its founder’s later years, and fighting in the 1970s and early ’80s to fend off waves of Japanese imports.

The 1990s were, at first glance, a good time for Ford, as its Taurus was the dominant passenger car of the decade’s early years and sales of its high-margin sport-utility vehicles, minivans and trucks rose and rose.

The Troubles Begin

In 1999, Ford was hit by exploding Firestone tires on its Ford Explorer, which had been the most popular sport utility in the country. For more than a year, Ford traded angry accusations with Firestone over who was at fault for the problem. The situation helped oust Jacques A. Nasser, the company’s chief executive. Mr. Nasser angered Ford employees with aggressive steps he argued were needed to change the company, and a downturn began from which Ford was slow to recover.

In 2006, Toyota passed Ford in United States sales. Lower sales and declining margins combined with rising spending on health care and retirees drove all American carmakers into a corner, but perhaps Ford most of all. It reported losing a staggering $12.6 billion. At the start of the year, Ford had announced a restructuring plan involving shedding 30,000 hourly jobs and 14,000 salaried workers, about one-third of its labor force.

Later that year, it raised $23.6 billion in loans by putting many of its most cherished North American assets up as collateral, including the Ford logo. Although the economy was healthy then, Mr. Mulally, its new chief executive, said the money would give Ford “a cushion to protect from a recession or other unexpected event.” At the time, the request was considered an act of desperation. But the $23.6 billion turned out to be Ford’s salvation. Because of that money, Ford is in far better shape than General Motors and Chrysler. The loans kept it independent and on a course to survive the worst new-vehicle market in nearly 30 years.

The Losses Mount

As a result of the biggest sales slump in decades, Ford lost $14.6 billion in 2008, making it the worst year in its history. It finished 2008 with $24 billion in cash on hand but $25.8 billion in debt and said it did not need federal aid unless the economy worsened significantly.

Ford and leaders of the United Automobile Workers announced an agreement in February 2009 under which the company could substitute its stock for as much as half of its payments into a retiree health care trust. The U.A.W.’s Ford members accepted the agreement, which also required court approval.

Revamping Its Balance Sheet

Ford said it hoped to eliminate as much as $10.4 billion in debt by giving cash and stock to debt holders as part of a revamping of its balance sheet. The moves, announced in March 2009, were similar to what General Motors and Chrysler were required to do under their multibillion-dollar loans from the federal government. As a result, Ford reduced its overall borrowing by 40 percent.

In a reflection of the financial stress on the auto industry, Ford offered its bondholders far less than the debt was originally worth. But under the terms it proposed, holders of its debt would still fare better than they would if they sold their debt for its current market value.

Analysts said that Ford’s debt initiatives, and the earlier agreement it secured with the United Automobile Workers union, reinforced its status as the healthiest of Detroit’s automakers. Ford said it would put up $2.2 billion in cash, including $1.8 billion from its lending arm, Ford Motor Credit and 500 million shares of stock to persuade bondholders and other creditors to accept its restructuring offer.

Mercury Models Discontinued

Ford announced in June 2010 that it would discontinue selling Mercury models, ending a 71-year-old brand that once stood for innovation and speed but that later became a “me, too” division.

Mercury came to life during the Depression, when Ford was striving to keep pace with General Motors, which had passed Ford to become the country’s top-selling automaker. At its cultural height in the 1950s, Mercury became known for innovative cars like the Turnpike Cruiser, whose features included a power rear window, the “seat-o-matic” adjusting seat, and the “Merc-o-matic” automatic transmission.

Mercury sales peaked at 580,000 in 1978, also a year of record hourly employment for the Detroit auto companies. In 2009, Ford sold fewer than 93,000 Mercury models.

Challenges in Europe

Through nimble production methods and well-regarded products, Ford has been able to avoid many of the woes that have beset its archrival General Motors and its Opel unit in Europe. Such woes include years of eye-popping losses, plunging market share and noisy labor discord.

Nevertheless, Ford presents a vivid example of how difficult it is to manage a car company in Europe these days. The European debt crisis and widespread regional recession have sapped the buying power of middle-class Europeans who should be Ford’s best customers.

The European economic crisis has been particularly harsh on the middle-class drivers who make up the core market for Ford, as well as for other midrange European carmakers like Fiat, Renault or PSA Peugeot Citroën.

Some categories of buyers have been practically wiped out. In Spain, for example, every second young person is unemployed, depressing the supply of first-time buyers for models like the Ford Ka, a small four-seater, or the Fiesta compact, which is by far Ford’s best-selling model in Europe.

Europe’s overall car market has shrunk significantly since 2007. Then, West Europeans purchased 18 million cars. In 2011, they bought 15.3 million. Those declines are inevitably hurting profits.

A crucial question is whether sales of midrange autos will recover in Europe or whether there is a permanent change in the market’s structure that could trouble Ford and its rivals for years.

Sales of premium brands like BMW or Audi have held up better than lower-priced cars, because affluent buyers have not suffered as much from the poor economy. Meanwhile, carmakers like Hyundai of Korea are gaining share in the lower end of the market. The Hyundai i30 compares well with the Ford Focus but starts at about €15,500, or $20,500, which is about €1,500 less than the least expensive Focus.