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Wednesday, May 28, 2008
Ford to slash up to 12% of salaried jobs
Involuntary layoffs planned as sales slump; Rising gas, steel prices stall turnaround

Bryce G. Hoffman / The Detroit News

Ford Motor Co. will cut its U.S. salaried work force by between 10 percent and 12 percent in an effort to jump-start a turnaround plan stalling in the face of rising gasoline and raw materials prices.
And this time, it won't be voluntary.
That was the sobering message delivered to senior employees in Ford's sales, marketing and service division during a "town hall" meeting with Vice President Jim Farley on Friday morning. He told his team that Ford is struggling to cope with "a structural change to our economy," and said "we need to act fast" to keep the company's restructuring effort from failing.
Farley said the company also is taking a hard look at the merit increases it usually gives salaried employees in July.
Other departments are being told to develop similar plans.
Madeline Eason, head of human resources for Farley's division, told employees that cuts in the neighborhood of 10 percent -- but possibly as high as 12 percent -- of its salaried work force in the United States are needed to cope with its mounting financial challenges.
"These are estimates," she said. "We're still in the process of finalizing some of the details."
Ford has 24,300 white-collar workers in the United States, Canada and Mexico. That could mean more than 2,000 U.S. workers could be getting pink slips by the end of July. It was not clear whether Ford Credit will be included in the cuts.
One detail that has been decided is that, unlike the last round of voluntary buyouts and early retirement offers, these will be involuntary layoffs. She acknowledged this was a bitter pill to swallow for a staff that has "been through a lot already," but said Ford cannot wait six months for people to make up their minds about whether to stay or go.
"We just can't afford it," Eason said. "We're looking to be as humane ... as we possibly can."
A manager in another department also told The Detroit News that he had been instructed to cut contract employees and identify between 10 percent and 15 percent of his staff to cut.
Ford spokesman Mark Truby would only say that details of the coming white-collar cuts are still being finalized.
"We're still working through the details," he said. "Once final decisions are made, our commitment is to communicate first to our employees."
CEO Alan Mulally warned that more cuts were coming a week ago when he announced that Ford was abandoning its public commitment to return to profitability in 2009. At that time, Mulally also announced further production cuts that he said were necessary to align Ford's factory output with changing consumer demand.
"Gas prices and changing consumer preferences have killed demand for trucks and SUVs, two high volume and high margin products," said analyst Shelly Lombard of Gimme Credit. "For Ford, the good news is that it's selling lots of its popular cars and crossovers and therefore will be increasing production of models like the Fusion and Lincoln MKX. But it's cutting production of trucks and SUVs so total production for the second quarter will be down 15 percent year-over-year; the third quarter will be down 15 percent to 20 percent, and the fourth quarter will be down 2 percent to 8 percent."
On Friday, Farley told employees they "need to work even faster" to bring new products to market that meet changing consumer demands.
That means smaller, more fuel-efficient vehicles like the new Ford Fiesta the automaker plans to debut in North America in 2010.
Farley praised the progress Ford employees have made on meeting the goals of the turnaround plan first outlined by Ford Americas President Mark Fields in 2006. But he said "external forces" have undermined the progress the company has made, forcing executives to abandon their stated goal of returning Ford to profitability in 2009.
In an interview Thursday evening, Mulally told reporters that consumers began fleeing big trucks and SUVs in droves once gasoline hit $3.50 a gallon. In April, full-sized pickups accounted for 11 percent of all retail automobile sales in the United States. By the second week of May, that number had fallen to 9 percent.
"I don't think we've ever seen a decline week over week like this," Mulally said. "It was clear to us it was time to act."
At the same time, prices for hot-rolled steel rose from $830 per metric ton to $1,035 per metric ton.
Farley, who came to Ford from Toyota Motor Corp. in November, said Ford will not be alone in making such cuts.
"I would expect other car companies to make similar announcements," Farley told his employees Friday. "They have the same issues that we do -- even Toyota."
Despite a surprising first-quarter profit of $100 million, Ford is grappling with a financial scenario that is deteriorating rapidly.
Ford has already eliminated 11,000 salaried positions in North America since the end of 2005 -- mostly through voluntary buyout and early retirement incentives.
"While the managerial actions Ford is taking are showing operational traction, Ford's financial turnaround continues to be hindered by the intensifying headwinds," said analyst Brian Johnson of Lehman Brothers.

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Well it looks like Ford is not the only one

It's not much of a consolation, but European car manufacturers are having a seriously hard time in the U.S. It's not just Ford, GM and Chrysler fighting off the red ink.

According to Adam Jonas, London-based auto analyst with investment banker Morgan Stanley, European automakers earned 31 per cent of their profits in the U.S. in 2001. This had fallen to 4 per cent in 2007, while the Europeans will be losing money in the U.S. by 2010.

The most important European importers are BMW, Mercedes, VW and its premium subsidiary Audi. Porsche's sales are slowing, but it's not likely to be losing money in the U.S.

Jonas, who is head of Morgan Stanley's global automotive practice, has just published reports on BMW and Volkswagen-Audi's operations in the U.S.

Jonas estimates that VW lost $840 million in the U.S. in 2007, and that this will be shaved to a loss of $680 million by 2010. In 2010, U.S. losses will cut VW's global profits by 5 per cent, down from a negative contribution of 9 per cent in 2007. In 2001, the U.S. operation contributed 18 per cent of VW's profits.

"In North America, we expect (VW) operating losses to improve, but only marginally. This region can be a significant source of profit, we believe, but at current exchange rates requires far more time, local production investment and successful new products relevant for the U.S. consumer," said Jonas.

(The dollar has fallen by about 60 per cent against the euro since 2001. This forces importers to raise their prices a similar amount to account for the difference, or take a profit margin hit. VW may locate a new U.S. factory in Alabama, Tennessee or Michigan).

BMW, which has a factory in Spartanburg, South Carolina, earned about $400 million before tax in the U.S. last year compared with profits of about $3 billion in 2001. This will slip into the red by 2010 to the tune of about $880 million, according to Jonas. Jonas calculates that the falling dollar against the euro has wiped $6 billion from BMW's global pre-tax profits since 2002.

The Europeans are in the U.S. market for the long haul, and all expect to eventually make serious profits. They are all praying for the dollar to rally against the euro to shore up their balance sheets, but this doesn't seem likely in the short or medium term. Niche producers like Ferrari, Bentley, Maserati and Rolls Royce sell only to the super-rich, and can probably raise their prices without denting sales or profits.
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