How do GM, Ford strategies stack up?
In Detroit, we desperately want to believe the rhetoric when Ford Motor Co.
executives vow that they are "on plan" to turn around the company after a
horrendous $12.7-billion loss last year.
Or when General Motors Corp. CEO Rick Wagoner tells us, as he did last fall,
that GM has made "significant progress in our fast-paced initiatives to turn
around our business and create a company that is leaner, faster and
positioned for long-term sustainable growth."
But can Michigan's two corporate icons survive and prosper again?
Are they really closing the critical cost, quality and perception gaps with
key Asian rivals?
And which is a better bet for recovery? GM, with its strategy of raising
cash by selling key assets like 51% of its GMAC finance unit? Or Ford, with
its all-in strategy of pledging everything the company owns as collateral
for debt to keep it afloat during its cash-burning turnaround effort?
Ford is aiming to reduce costs this year by $2,000 per vehicle, matching
GM's achievement in 2006, says David Cole, chairman of the Center for
Automotive Research in Ann Arbor.
"We'll see by end of this year how fast Ford gets there," Cole says, adding,
"It's going to be very tough for Ford, but it is survivable. Ron
Gettelfinger and Bob King" (UAW president and vice president) "are scared to
death. This can be terminal unless everybody chips in."
Let's compare the progress of GM and Ford by looking at key numbers that the
companies say are critical measurements of success:
. Residual value, a measure of how much value a vehicle retains after three
years of ownership. Mark Fields, Ford's president of the Americas, calls it
"the ultimate arbiter of the health of the brand."
. Credit default swaps, or contracts used by investors to protect against
default on future debts. Price movement on CD swaps is watched closely as a
barometer of a company's improving, or deteriorating, creditworthiness. GM
Vice Chairman Fritz Henderson cited GM's falling CD swap prices as a
positive sign during a recent conference call with Wall Street analysts.
. Profits, of course, or lack of same, are the ultimate numbers for judging
the revival efforts.
Both Ford and GM talk often about their desire to improve residual values on
vehicles because a higher residual is associated with better quality and
durability and translates into a lower lease payment over time for the
driver. A residual over 50%, indicating a vehicle is likely to retain half
its value after three years, is very good. Residuals below 40% are weak.
Automotive Lease Guide, of Santa Barbara, Calif., provided a comparison for
the Free Press of residual value performance on 2006 and 2007 GM and Ford
. Five GM brand groups -- Chevrolet cars, Chevy trucks, GMC, Pontiac and
Saturn -- showed year-to-year improvement. But Buick, Cadillac and Hummer
. New models such as the Saturn Aura and Sky debuted with strong residual
values at or near 50%, and major redesigns such as those for GM's large
pickup trucks and the GMC Yukon and Chevy Tahoe SUVs typically added about 6
percentage points of value to those products.
. For Ford, the Lincoln brand showed a strong year-to-year gain, from an
average of 40.5% in 2006 to 44.6% this year, on the strength of new
products, the MKX and MKZ, along with a makeover of the Navigator.
. Ford trucks posted a modest overall gain, with a surge in value for the
redesigned SUV Expedition and a strong debut value of nearly 50% for the new
Edge crossover, offsetting weaker values for the Escape, which gets a
makeover later this year.
Both Ford cars and the Mercury brand showed slight year-to-year declines.
Across all brands, GM has a modest lead over Ford in residual values, with
the Saturn, Pontiac, Cadillac and GMC brands, along with Lincoln, having the
best overall scores.
But all the GM brands still trail the leading Asian brands, Toyota and
Honda. Indeed, only Saturn and GMC among U.S. brands boasted overall
residuals above the industry average last year, according to ALG.
On the financial health scale, credit default swaps became a carefully
watched indicator early in 2006 when Wall Street was buzzing about a
possible GM bankruptcy.
At the end of 2005, a CD swap contract to protect for five years against
default on $10 million of GM bonds cost $1.35 million, or 13.5% of the
bonds' total value. For a CD swap on Ford bonds, the cost was then about
$960,000, or 9.6%. Both companies were seen as lousy credit risks, with GM
being the riskier at that point.
Six months later, in early July, cost of a Ford CD swap was still at 9.6%,
but GM's had shrunk to the same level, as Wall Street fears of an imminent
GM bankruptcy began to recede after GM announced its plan in April to sell
51% of GMAC.
By last week, the cost a CD swap on GM bonds was down to 3.4%, signifying
that GM's cost-cutting moves, improving profit picture and good buzz on some
new products had reduced the cost of insurance against a GM collapse by
about 75% from the previous year.
Ford's CD swap numbers have also dropped, to about 4.7% or half the year-ago
level. That shows that the company's move to accelerate cost-cutting and
boost liquidity by pledging all its assets in return for borrowing $18
billion was reassuring to Wall Street. But the markets now perceive Ford as
a riskier bet than GM.
Ford's decision to pledge all its assets, industry analysts say, was a
matter of the company needing to use all its financial leverage because it
had to. GM didn't have to take that step, because it was able to raise
enough cash to weather the worst of its problems by selling part of GMAC and
CD swap rates also show that faith in GMAC's soundness on Wall Street has
rebounded since the sale of 51% to a group led by Cerberus. A CD swap to
protect against a GMAC default now costs only about 1%; for Ford Motor
Credit, it's running at about 2.5%. The swaps were costing more than 5% for
both finance units in early 2006.
Moving from complicated swaps to straightforward operating profit, GM is
again further down the road to recovery than Ford -- but both have a long
way to go.
In the 12 months ending last October, GM reported two quarterly operating
profits and two losses, with an overall operating profit of $2 billion,
excluding big special charges for buyouts and other restructuring costs.
During the same 12 months, Ford also had two quarterly losses and two
operating profits, but reported a combined operating loss of $2.6 billion.
Toyota Motor Corp., meanwhile, posted annual profits of more than $11
billion in 2004 and 2005, $12 billion last year and is forecasting $13
billion for its fiscal year ending in March. Neither GM nor Ford is within
shouting distance of those kinds of numbers.
GM and Ford have yet to prove that they can stabilize their U.S. car and
"The reality for both companies," says John Hoffecker, managing director and
automotive expert at Detroit-based AlixPartners, it that they have to get a
sales turnaround before they can stabilize their cash situations. They can't
continue to lose market share."
"Your best, last and only line of defense-a cohort of Roman Heavy Infantry"