Ford Should Have Taken The Bailout Moneyby Tim Manni
On this blog we have long touted Ford’s resilience during the automotive crisis, citing their ability to remain viable without government assistance. Unlike its domestic counterparts GM and Chrysler, Ford opted against taking billions in federal loans, deciding that their business would be better off with out it — but is it?
Ford, the only American automaker many thought would emerge from the auto slump in better shape than its competitors, could wind up facing tougher domestic competition once bankruptcy proceeding are finalized. There are several factors that suggest Ford made the wrong decision by not taking a Federal loan.
What do you think? Did Ford make the right decision when they decided to operate independently?
Much of the discussion surrounding the struggles of American automakers centers around their monumental debt. The same type of debt that bankrupted GM and Chrysler is currently weighing down Ford’s books. Ford, which has lost $30 billion since 2006 and is currently $33 billion in the red, has had to rejuvenate and restructure their business model on their own dime. The government’s intervention in GM and Chrysler’s bankruptcy proceedings will most notably serve to speed the entire process for cheaper than if they went about it alone. American automakers’ common goal of a more slimmed-down operation will happen a lot sooner for GM and Chrysler than it will for Ford.
While restructuring will be both costly and time consuming for Ford, the process will be a lot less so for GM and Chrysler. In one fell swoop Ford’s competitors eliminated over 2,000 dealerships while trimming several brands from their product line. Ford would love to consolidate their 3,723 dealerships at the same pace as GM and Chrysler, yet has stalled because of state franchise laws that protect the dealers.
Somehow Chrysler was seemingly able to avoid state franchise laws altogether when they announced the immediate closing of 789 dealerships.
Here are some other examples of why we think Ford isn’t being treated the same as their Detroit brethren:
GMAC on Wednesday began issuing $3.5 billion in three-year debt backed by the federal government. This should cost GMAC about 2.2% a year.
Ford Motor Credit Co., meanwhile, recently priced a five-year bond and is paying 8%.
GM’s debt load is likely to fall postbankruptcy to about $17 billion, plus its obligation for retiree health care, from more than $70 billion.
While Ford has been able to reduce its debt burden with some equity swaps, which analysts expect to continue, the auto maker still is carrying more than $30 billion in long-term debt. Coming payments include $5 billion for Ford Credit due in October and $10 billion due in 2011 on a revolving credit line the auto maker drew from in January.
There’s an obvious counter-argument to the point we’re trying to make here: Ford will always be better off because the Federal government can’t directly interfere in how they run their business. If GM and Chrysler’s gamble with government money pays off, and they’re far better off after Chapter 11, Ford may soon realize that doing the “right thing” in business these days isn’t always the smartest thing.