The article below may be one of the most foreboding I’ve ever posted on this site. A ripple of “the worst is over” has been rumored and wished for in recent weeks. I’m not at all convinced we’re out of the woods. The US auto industry is undergoing profound change and will undergo further pain. Ford’s announcement today about the dramatic drop in truck and SUV sales confirms that a massive pendulum swing is underway. Ford has made some smart moves. GM ‘bet on the come’ and may well have lost. Truck and SUV sales will not be re-bounding in the second half of the year as GM had counted on. Factories will be shuttered. Inventory will be sitting on lots. Jobs will be lost. Spending cut as oil careens toward what Goldman Sach analyst Arjun Murti says will be $200 per barrel. “At $200 per barrel, crude alone would cost $4.76 a gallon. Add on the cost of refining and distributing as well as taxes, and the pump prices could rise to a range of $6 to $7 a gallon” reads a Commodity column in today’s Journal. The price of oil futures has increased by 33% this year while gas futures thus far only increased 22%. If businesses are trying to save cash by converting from pickups and light weight trucks to Prius-like vehicles, what are they going to do when gas is another 50% higher potentially in the months ahead. The airlines are squeezing even its best customers, business travelers, harder and harder with new fees being announced weekly. Now American Airlines has announced a $15 per bag surcharge for checked luggage and route cancellations.
So, what impact does all this doom-and-gloom have on Torvec? And if Ford is a serious partner, what impact does all this have on them? The current dilemma has many drivers: labor costs, raw material costs, certainly oil costs and consumer confidence. None seem to me to be going in the right direction for the US auto industry and this list of drivers is certainly not exhaustive or complete. The article below notes that “….automakers book revenue only when they ship cars (trucks or SUVS) to dealers. Each of them (Ford, GM and Chrysler) needs all the revenue it can get to keep operations going and fund development of new, more fuel-efficient vehicles.”
This would once again seem to be the continuation of the “Perfect Storm”. Here sits little ole Torvec with an apparently plan to convert some growing number of unsold inventory of light trucks into FTVs. Who’s going to buy this new class of vehicle? Not questioning the utility or possible need but is there still a market if the economy really begins to hit the skids? The fuel economy of these vehicles won’t be vastly improved as far as we are aware. (A telling post earlier this week by Nzed asked what the fuel economy of a FTV is? Prossibly not dramatically better than the Ford truck making up its frame. So is there a market given the stormy weather we may be sailing into? Ford will certainly be asking themselves that same question. They may have already answered it themselves! If the need short term revenues, does FTV conversions help them or only burn more cash?
And what of the IVT? If the technology delivers what the company has claimed and demonstrated, how much longer can the IVT be ignored as a solution? In a Letter to Shareholders published in the WSJ today, Ford ‘s Board of Directors announced a neutral position on the Tracinda tender offer. Within the letter, the Board reiterated four key priorities of Ford’s business plan. The second of those priorities is to “accelerate the development of new products that customers want and value” and that Ford “may from time to time consider various transactions, arrangements and opportunities in support of these priorities.” Now it may be a far stretch to consider a transaction with Torvec as one of those opportunities but it would seem to fit in as at least one piece of the puzzle Ford faces.
“All boats rise and fall with the tide” is an old Wall Street truism. “Oil prices have risen faster than companies could pass along those increases”, reads yet another column today, squeezing corporate margins and profits. The Dow has got to take a hit. Thinly traded Tovec shares have held up well in past market downturns. Time will tell if it will be different this time around. With housing markets still falling, a tough quarter for earning in the making, job losses pending and a seemingly endless surge in oil prices, one wonders how consumers are going to adapt. As yet another article stated, “…it is unclear at what price it becomes unprofitable for Americans to go about their usual day-to-day activities.” “Maybe at $6 or $7 a gallon, it becomes less attractive to go to work” said a VP of Fuel Merchants Association of New Jersey.
Sure seems like we may have some tough sledding ahead. A Ford deal announcement would be timely for both parties. Let’s hope some news breaks soon. I’d love to be sitting on a pile of cash by the time the (pending) recession hits bottom.
Ford Stumble Signals Rising Risks
Pickup, SUV Sales Take Surprisingly Steep Fall;
Return to Profit in '09 Now 'Unlikely'
By MATTHEW DOLAN, JOHN D. STOLL and NEAL E. BOUDETTE
WSJ, May 23, 2008; Page A1
DETROIT -- Ford Motor Co.'s plan to return to profitability got run over by a truck.
The rise of gasoline prices toward $4 a gallon is causing a major shift in the U.S. auto industry that threatens to push the Big Three auto makers and some of their rivals to a new level of peril. In recent weeks, sales of pickup trucks and sport-utility vehicles -- already falling in recent years -- took an unexpectedly sharp tumble.
Those declines triggered a surprise announcement by Ford on Thursday that it's now "extremely unlikely" the company will return to profitability in 2009, as it previously predicted. Just last month, Ford was hailed by the market after it reported an unexpected $100 million in first-quarter net income.
In a Thursday conference call, Chief Executive Alan Mulally said the industry has "reached a tipping point" and that the falling truck sales represent a long-term shift in the U.S. auto market, not a short-term dip.
"We saw real change in the industry demand for pickup trucks and SUVs in the first two weeks of May," Mr. Mulally said.
On Thursday, Ford said it will cut truck and SUV production by as much as 40% in the second half of this year, compared with the year-earlier period. Previously, Ford had hoped to get a second-half lift from the launch of a redesigned F-150 pickup truck. The F-150 is the top-selling vehicle in the U.S.
Ford's woes are a measure of the toll that fuel prices are taking on the Big Three and rivals like Toyota Motor Corp. and Nissan Motor Co. that have also tied their fortunes in the U.S. to full-size trucks. In the first four months of the year, light trucks accounted for 50% of the U.S. market, down from 54% a year earlier.
Ford's stock fell 8.2% to $7.16 on Thursday, dragging down other auto makers. General Motors Corp. fell 3.6% to $18.43.
General Motors also recently outlined production cuts at four truck plants in the second half. GM spokesman Tom Pyden said the company is "looking at the situation, and seeing where it is right now and where it is going."
CONFERENCE CALL
"We are really trying to understand what the real demand is going to be going forward. But as we pointed out, it seemed like this started to really move when we moved through around $3.50 gas." -- Alan Mulally, Ford president, CEO
GM had been counting on strong truck sales to power its turnaround. Indeed, GM has been one of the only auto makers offering an upbeat industry outlook. Earlier this month, officials reaffirmed GM's view that the industry would see a rebound in the second half.
A long-term decline in truck sales raises the chances the Big Three -- all of which are losing money -- are headed for more losses, job cuts and plant closings.
Full-size pickups accounted for 11% of the U.S. market in April, a figure that tumbled to 9% in the first two weeks of May, Ford officials said. Truck-based SUVs made up 8.4% of the market in 2007, and were down to 4.4% in May. Sales of full-size pickups fell 15% in the first quarter; full-size SUVs were down 28%. (Certain other vehicles, including luxury SUVs, minivans and crossovers, also are considered "trucks.")
Ford's troubles come amid a tender offer by investor Kirk Kerkorian to buy up to 20 million shares for $8.50 apiece. That offer, if completed, would increase his stake in Ford to 5.5% from a current 4.7%.
Mr. Kerkorian started buying because he believes Mr. Mulally is turning Ford around, said Jerome B. York, a close adviser of Mr. Kerkorian's. Ford's board on Thursday said it is "neutral" on Mr. Kerkorian's offer.
Ford's new outlook represents a sharp reversal. Just a month ago, Mr. Mulally said the company was confident it could make money in 2009.
It's unclear how the company fell so hard so fast. In the Thursday conference call, Mr. Mulally declined to comment when asked how this would affect his credibility with investors. Earlier this month, at Ford's annual meeting, he had expressed an upbeat outlook.
At any rate, Ford is in somewhat better shape than its rivals. It moved more aggressively the past several years to cut truck production and sell troubled brands like Jaguar. In contrast, GM closed several plants in 2005 but kept open all of the ones making big pickups and SUVs, betting truck sales would stay strong.
Ford's predicament suggests that higher oil prices now may be hurting the U.S. economy more than previously thought. The airline industry, for one, is feeling the pinch. Yesterday, in response to high fuel prices, American Airlines said it would slash its service and start making some passengers pay $15 to check a bag.
Big pickups and full-size SUVs share many of the same underlying parts, such as heavy steel frames that give them their strength but also leave them guzzling a gallon of gas every 10 or 12 miles. Sales of SUVs like the Chevrolet Suburban and Ford Expedition have been falling for five years as families who flocked to SUVs in the 1990s began switching to cars and "crossovers," roomy wagons made from the lighter components used in cars.
Pickup-truck sales have also been trending down, but have fared better because they are favorites of commercial users like construction companies. Now, however, high fuel prices seem to be pushing even these traditional buyers into smaller vehicles.
Jeff Ogden, 52 years old, who runs a plumbing company in Neenah, Wis., owns a fleet of 18 pickups. But he just bought a Prius hybrid two months ago for his business, and a second one last week. He estimates each one will save him about $160 a week in gas -- a total yearly savings of around $16,000.
If his workers don't need to haul equipment, he'll send them in a Prius, he said. "I bought them strictly for savings."
In Bend, Ore., deep in timber country, Jeff Robberson of Robberson Ford Lincoln Mercury used to sell seven trucks for every passenger car. Now it's about 50-50, and truck owners are streaming in looking to switch to cars. "It's almost hysteria right now," he said.
The defection of hard-core truck buyers has left dealers holding bloated inventories. That was a big topic of discussion at a Thursday board meeting at Group One Automotive Inc., a big dealership chain, Chief Executive Earl Hesterberg said. "One of our top priorities is to get our truck inventories down," he said.
That's bad news for the Big Three, which dominate pickup-truck sales. It's also hurting Toyota, which opened a huge plant in Texas in 2006 as part of a push into the business with its Tundra pickup.
At Sterling McCall Toyota in Houston, which is owned by Group One, about 80 Tundras are on the lot, enough to last about 75 days. Some Group One dealerships have stopped ordering trucks altogether. Another chain of dealers, Asbury Automotive Group, is likewise cutting truck orders, said Allen Levenson, Asbury's vice president of sales and marketing.
The slowdown in ordering is likely to squeeze GM, Ford and Chrysler LLC because auto makers book revenue only when they ship cars to dealers. Each of them needs all the revenue it can get to keep operations going and fund development of new, more fuel-efficient vehicles.
At the same time, they are being pressured by rising raw-materials prices. Steel, for example, has doubled in price so far this year. Overall, on Thursday, Ford said it will spend $2 billion more cash in 2008 and 2009 than it had previously thought.
Ford now expects to produce 120,000 to 150,000 fewer trucks and SUVs in the third quarter than last year, and 60,000 to 100,000 fewer in the fourth quarter than a year ago.
The decline in sales leaves Ford, GM and Chrysler with more production capacity than they need. Chrysler has three North American plants making full-size pickups, but last year sold only 358,000 -- which is less than two plants' worth. GM has four pickup plants that last year produced about 826,000 vehicles, about the right amount. But a drop this year will leave GM with excess capacity.
In the second half of the year GM is planning to run three of its pickup plants on one shift instead of two, and do the same with one of its two SUV plants.
At an SUV plant in Janesville, Wis., workers fear GM will have to close the doors. "People are scared. They think this is just the beginning," said Kurtis Klumpf, a 49-year-old electric tradesman in Janesville who is considering taking a buyout offer from GM.
"We're still building more of these vehicles than people want to buy."
--Josée Valcourt contributed to this article.
Write to Neal E. Boudette at neal.boudette@wsj.com
