Marketing costs sting Ford

Low sales volume, 0 percent plan culprits in third-quarter loss

Steeply rising marketing costs are hitting Ford Motor Co. just as the automaker is crafting a painful turnaround strategy in North America.

Ford spent an additional $500 million, a 21 percent increase, to sell its vehicles in the United States in the third quarter of 2001, compared with the same three months a year ago.

The timing is difficult for Ford. As the economy falters and General Motors gains momentum, Ford is forced to keep pace on sales spending.

In the third quarter, Ford already slashed production, halved its dividend and announced it will furlough up to 5,000 workers. The company's cash is low, and strategists are reviewing which assets it might sell.

In December, Ford plans to unveil its complete plan to revive North American operations.

"I do not think these levels of marketing costs are sustainable," Ford CFO Martin Inglis said last week.

Ford's U.S. marketing costs totaled an estimated $2.9 billion in the third quarter this year, compared with $2.4 billion in the year-ago period, according to calculations based on Ford financial statements.

The 0 percent financing deals fueling industry sales are undercutting Ford's earnings. Last week, Ford said a 23 percent decline in North American sales volume and staggering marketing costs led to a net third-quarter loss of $692 million, including one-time charges.

Leaching profits

For the first time, Inglis quantified Ford's marketing formula with a dollar amount. The figure reveals how the financing deals are leaching Ford's pre-tax earnings.

In July, August and September, Ford's U.S. marketing costs as a percent of revenue hit 16.0 percent, an increase of 4.9 percentage points from the same period in 2000, Ford said last week. A five percentage-point increase on an annualized basis would cost Ford $5 billion in pre-tax profit, the company confirmed.

"Each point is $1 billion, that is, $1 billion pre-tax, over a year's time," Inglis said, providing detail Ford has not previously disclosed.

"What is the trade off between incentives, margins and market share," Inglis said. "You have to get a balance.''

Asset review

Along with the marketing outlays, Ford's third-quarter balance sheet revealed a company in financial pain on several fronts.

The automaker's automotive cash horde is shrinking and capital spending is being reduced. Possible asset sales are on the table. Ford has promised Wall Street a turnaround plan will be in place by year-end.

Ford is conducting a portfolio review and considering asset sales as part of its restructuring, said Kathleen Ligocki, Ford vice president of strategy, business development and Canada and Mexico. Neither Ligocki nor the company provided details.

Less cash

Here is what Ford faces as it shapes a turnaround strategy.

  • At the end of the third quarter, net automotive cash stood at $3.1 billion, including $2.2 billion dedicated to retiree benefits. That is $3.7 billion less than Ford's net cash position at the end of the second quarter 2001.

    Ford has not detailed every item that is draining cash. But the company did say that the $3.7 billion spent in the third quarter included $300 million for capital expenditures, $500 million in dividend payments, and up to $800 million for the Firestone tire recall.

  • Capital spending will shrink to about $7 billion in 2001, Inglis said. Ford had planned to spend $8 billion this year.

  • Ford expects to lose money again in the fourth quarter, although results should be better than in the third quarter, Inglis said.

  • Last week, Standard and Poor's Rating Group downgraded Ford debt two notches, a move Inglis called "a surprise." The lower rating will raise Ford's borrowing costs for various purposes, including the money it borrows to loan to car shoppers and auto dealers.
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