How do GM, Ford strategies stack up?

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 models.
Notable results:
. Five GM brand groups -- Chevrolet cars, Chevy trucks, GMC, Pontiac and Saturn -- showed year-to-year improvement. But Buick, Cadillac and Hummer showed declines.
. 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 other assets.
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 truck sales.
"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"
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