Randomly Noted

At our morning news meeting, I mentioned to the assembled editors that about 61% of the operating earnings at Ford this quarter didn’t come from the traditional auto-making business. Instead, it was from its finance arm. To which one editor quipped – that trend again. For a number of years, Ford Motor Credit and GMAC made millions if not billions of dollars from not only selling auto loans and leases, but, in the case of GMAC, from selling mortgages. In turn, the automakers were making big bucks but not from selling cars but instead from financing car sales.

So today, Ford’s shares rallied more than 8% as the company reported much stronger than expected earnings. But it wasn’t even because of how it was in the good old days – selling more loans and leases. Instead, it was because of lower provisions for loan losses, lower operating costs and lower depreciation expenses for leased vehicles. It noted the gains from these was partially offset by lower loan volume. (It certainly wasn’t from selling more cars).

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The Dow is back up again today on some nuggets of good news – pending U.S. home sales, manufacturing activity, Ford Motor earnings. Whoopee!  We last felt this sense of elation on Thursday when third-quarter GDP data came out and it seemed better than we had dared to hope. Friday we were back in the doldrums, questioning everything: were those GDP data really as good as they looked? Weren’t an awful lot of companies continuing to cut jobs? Wasn’t the already awful 10% unemployment rate still rising? So, why are we back up again today? I think it’s a post-Halloween sugar high, and as happened last week, we’ll come down fast on the next nugget of mediocre economic news.

With Ford the sole (relatively) healthy U.S. auto maker, this week’s newsflow is very instructive: The big events include the likely sale of its Volvo unit to China’s Geely, and Ford’s efforts to get UAW locals to approve measures that would reduce its labor costs. Both news events are key to Ford’s survival. Bidding a final adieu to Volvo, should the Geely deal stick, would conclude an odd period in Ford’s history. Ford bought Volvo in 1999 for $6.4 billion;  as WSJ colleague Norihiko Shirouzu writes, after racking up Volvo-related losses Ford finally decided last year to ditchi t. Ford never should have bought another brand – it needed to improve its own vehicles, which it has finally done. The UAW situation speaks to Ford’s disadvantage relative to rivals Chrysler and General Motors; the latter are in worse financial shape but enjoy lower labor costs thanks to deep UAW concessions made in the heat of the crisis that sent the firms into Chapter 11 bankruptcy protection. As I and others have written, Ford is at a competitive disadvantage by virtue of being the only one of the Detroit 3 to have skirted the need for a federal bailout and bankruptcy protection. It would behoove the UAW locals to get with the program and let Ford function at cost levels that are within hailing distance of Chrysler and GM’s.

Ford Motor is complaining about Germany’s scramble to help GM’s Opel unit, according to the FT - and with good reason. Its competitors are getting government help while arguably better-managed auto makers are left to fend for themselves. As the FT reports, Ford’s John Fleming contends government aid will help Opel compete more fiercely against Ford’s own European business. http://www.ft.com/cms/s/0/4ab6cc5a-4639-11de-803f-00144feabdc0.html Fleming, who runs Ford in Europe, is also “very concerned” about France’s state aid to PSA Peugeot Citroen and Renault, the FT quotes him as saying. Fleming calls on the European Union to keep an eye on government bailouts. Good luck with that! The FT story includes this remark from Fleming: “Ford believes it is vital that a level playing field is enforced to ensure a fair and equitable distibution of any assistance being offered, and that competition is not distorted.” The FT goes on to say that in the U.S., Ford has taken a different tack, welcoming bailout loans for rivals GM and Chrysler, and notes Ford itself obtained an emergency credit line. I wonder if in fact Ford is reading the politics differently in the U.S. versus Europe, and feels it has to go along with what’s happening in America.

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If you are one of the people who sees a lack of fairness in foreclosure-prevention aid to all the people who pay their mortgages on time and in full whatever their personal circumstances, you will sympathize with the predicament of Ford Motor Co.

As pointed out by car expert, Pulitzer Prize winner, former Wall Street Journal Detroit bureau chief and our former boss, Paul Ingrassia, Ford could fit into the category of no good deed goes unpunished. Speaking this morning on Fox Business Network, Ingrassia noted Ford hasn’t taken government assistance and has met all its debt obligations. Rival Chrysler is in bankruptcy proceedings and General Motors might follow in a month or so if it can’t sell a major restructuring to all stakeholders.

The two would emerge from the proceedings with much debt erased and release from some burdensome contracts, therefore making them stronger competitors for follow-the-rules Ford.

In news reported today, Ford suffered a 32% decline in sales in April, but still picked up market share.

That’s one way to look at the recently completed tender offer Ford Motor did with certain debtholders. The people doing the running were the holders who tendered their bonds at very distressed prices. Ford and other U.S. automakers are getting pretty seriously clobbered by a depression in their business. They have to restructure across the board – operations, balance sheets, labor contracts. What Ford did is certainly positive from a balance sheet restructuring  point of view – it reduced its debt outstanding by nearly $10 billion and in doing so, is trimming annual interest costs by around $500 million. Despite the 17% rally in Ford’s share price today, this tender offer may indicate how bleak bondholders view the company’s prospects.

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