How Ford Avoided the Meltdown that Hit GM, Chrysler

On Nov. 29, 2006, Ford Motor made a surprising pitch to the nation’s biggest banks. In a packed ballroom at a New York hotel, Ford’s chief executive, Alan R. Mulally, said he would mortgage all the company’s assets for billions of dollars in loans to finance an overhaul of the troubled automaker. Although the economy was healthy then, Mr. Mulally said the money would give Ford “a cushion to protect for a recession or other unexpected event.”

At the time, the request was considered an act of desperation. But the $23.6 billion in loans it received turned out to be Ford’s salvation.

Alan Mulally
Alan Mulally

Plunging car sales have driven its two American rivals, General Motors and Chrysler, to the brink of bankruptcy, forcing them to borrow $17.4 billion from the federal government to stay in business. The future of both companies will be decided in the weeks to come by President Obama and his special auto task force.

But because of the money it borrowed nearly three years ago, Ford is in far better shape than its two crosstown rivals. The loans have kept it independent and on a course to survive the worst new-vehicle market in nearly 30 years.

“It was a defining moment for us,” Mr. Mulally said in an interview. “But they never would have been willing to lend us the money if we weren’t on a different path.”

Mr. Mulally had been on the job as Ford’s chief executive less than 90 days when he asked for the loans. But as he told the bankers, he was prepared to make tough decisions, including selling off brands, shedding jobs and focusing Ford’s efforts on small cars rather than trucks and sport utility vehicles.

Since then, he has accelerated Ford along that path, pursuing a top-to-bottom transformation that extends from its global product lineup to its renewed focus on the Blue Oval trademark.

As a result, for the first time in decades, Ford’s fortunes no longer seem so closely tied to the broader fate of Detroit.

Mr. Mulally, 63, is doing all he can to separate Ford in the public’s mind from its hometown competitors.

To emphasize his point, he pulled out a recent newspaper cartoon that compared college basketball’s Final Four to Toyota , Honda , Volkswagen—and Ford .

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“We are competing against the best in the world,” Mr. Mulally said. “It’s not just with the companies in the U.S.”

While GM and Chrysler wait for more federal aid, Ford is capitalizing on its status as the only one of the Big Three in Detroit to make it, so far, on its own.

Some surveys are showing consumers migrating away from GM and Chrysler to Ford showrooms. Inside Ford headquarters here in Dearborn, management sees a unique opportunity to expand its market share and further separate Ford from the competition.

“I don’t take any joy in watching GM and Chrysler struggle,” said William C. Ford Jr., the company’s executive chairman. “I wish them well, but I wish us better. I want us to win.”

Ford is hardly out of the woods. The company lost $14.6 billion last year, when its vehicle sales in the United States slumped 20 percent, compared with 22 percent at GM and 30 percent at Chrysler.

Its once-bulging bank account is dwindling as well. Industry analysts estimate that Ford has about a year’s worth of cash left to carry it through a still-depressed car market.

Still, Ford’s decision to borrow billions in 2006 when the capital markets were thriving will go down as one of the most significant moves in the company’s 105-year history.

“We believe this foresight to strengthen the company’s balance sheet is what has separated Ford from its crosstown rivals during the economic downturn,” a Merrill Lynch analyst, John Murphy, said in a report to investors this week.

The Obama administration is forcing GM and Chrysler to obtain big concessions from union workers and lenders to qualify for more federal aid.

Ford, however, is having better success on both fronts without a government mandate.

Unlike GM and Chrysler, the company has reached agreement with the United Automobile Workers to finance half of its new retiree health care trust with company stock.

Earlier this week, Ford also completed a deal with its creditors to retire $9.9 billion in corporate debt—some of which was part of the big borrowing in 2006.

Investors have welcomed the moves. Ford’s stock climbed 13 percent to close at $3.95 on Wednesday, the highest it has been since October.

That was when the car market crashed and the auto companies began burning through huge amounts of cash. A month later, Mr. Mulally was in the spotlight—along with GM’s chairman, Rick Wagoner, and Chrysler’s chairman, Robert L. Nardelli—during Congressional hearings on Detroit’s financial woes.

Mr. Mulally said Ford never intended to ask for federal help but needed to support the industry during its crisis.

“From Day 1, we had no desire to access the government money,” he said.

Ford parted ways with GM and Chrysler in December, when its two rivals effectively came under government supervision as part of their loan agreements.

Last month, the presidential task force forced Mr. Wagoner to resign at GM and began an effort to replace the company’s board.

Meanwhile, Mr. Ford, whose great-grandfather founded the auto company, and Mr. Mulally continue to pursue their long-range turnaround plans.

When Mr. Mulally came to Ford after 37 years with Boeing, one of his first tasks was to borrow the money needed to streamline the company and hasten its shift to smaller, more fuel-efficient vehicles.

He made his presentation to more than 400 bankers in the ballroom of the Marriott Marquis in New York, and he knew he was facing a skeptical audience.

“The No. 1 thing we need to do is deal with our reality and tackle those issues head on,” he said.

Paul Sancya

At the time, the consensus among analysts was that GM was in better shape than Ford.

“It was not seen as a positive that Ford needed to leverage itself so dramatically,” said John A. Casesa, a former Merrill Lynch analyst and consultant to auto companies. “It was more of an act of desperation.”

But Ford benefited from the easy credit of the times. The company originally sought to raise $18 billion and ended up with $23.6 billion.

It has needed every bit of it. Mr. Mulally acknowledged that he did not foresee that annual auto sales in the United States would drop to 13.2 million vehicles last year, from 16 million in 2006, and possibly as low as 10 million this year.

He also knows that a continued slump in sales will put even more pressure on Ford’s balance sheet.

“We have sufficient liquidity to handle what the situation is now,” he said.

Ford is betting that its newest products can stabilize its falling revenue. It has high hopes, for example, for the new Taurus midsize sedan that Mr. Mulally pushed for in his early days at the company.

But it is still an uphill climb. Ford’s sales are down 43 percent in the first three months of this year compared with the same period a year earlier. The overall United States market is down 38 percent.

Ford’s market share has been holding steady at about 15 percent. But that could move up, particularly if either GM or Chrysler is forced into bankruptcy.

A recent national study by the firm AutoPacific found that 72 percent of those surveyed would be more likely to buy a Ford product because the company is not taking government loans.

“This is America, and this is about making products people want and being self-sufficient,” Mr. Mulally said. “Clearly, the reputation of Ford is on the rise in the consumer’s mind.”