Ford submits restructuring plan to Congress

Ford was the first of the three American automakers to submit their restructuring plan (PDF) to Congress. Because they are in a much stronger cash position than either Chrysler or GM, they are asking for a $9 billion line of credit for future use rather than an immediate infusion of cash:

We note that Ford is in a different situation from our competitors, in that we believe our Company has the necessary liquidity to weather this current economic downturn – assuming that it is of limited duration. If the downturn is longer and deeper than we now anticipate, however, access to government financing would be important to help us be able to continue to implement our Plan and benefit when the economic recovery inevitably arrives. While we hope we do not have to access the loans, we believe it is critically important that loans are available to us and the domestic auto industry.

In addition, the credit markets currently remain frozen and are not available to finance the industry’s cyclical needs. This means that our liquidity through 2009 could come under increasing pressure if a significant industry event, such as a bankruptcy of one of our competitors, causes a disruption to our supply base, dealers and creditors.

In December 2006, Ford took out what was in essence a home equity loan using their major assets as collateral. That gave them $23 billion in cash that can help them pay their expenses during the current downturn. But the plan also notes that if GM and Chrysler, which are in much worse cash flow positions, are forced into bankruptcy and begin to default on payments to suppliers, that would harm Ford’s ability to operate as well:

We are acutely aware that our domestic competitors are, by their own reporting, at risk of running out of cash in a matter of weeks or months. Our industry is an interdependent one. We have 80 percent overlap in supplier networks. Nearly 25 percent of Ford’s top dealers also own GM and Chrysler franchises. That is why the collapse of one or both of our domestic competitors would also threaten Ford.

Ford is asking for a $9 billion line of credit that they could tap into should the industry’s sales problems continue longer than expected and force them to use up their current cash reserves. The plan describes that line of credit as “a back-stop to be used only if conditions worsen further and only to the extent needed.”

The plan includes several elements that the company hopes will allow it to return to profitability by 2011. Among them is a plan to convert plants that build larger, less fuel efficient vehicles like trucks and SUVs to build more fuel efficient vehicles. They’ve already converted three truck plans to small car production and are aiming to have 50% of their manufacturing capacity in the U.S. devoted to building small and medium cars.

They also say that they are reducing the number of suppliers. The plan notes that the company has already reduced the number of eligible suppliers they use “from 3,300 in 2004 to approximately 1,600 suppliers today, with a further reduction to 750 suppliers planned.” Those consolidation efforts, they say, “have resulted, and will result, in more business for our major suppliers which will increase their financial strength.”

Ford also plans to reduce the number of dealers they have in major cities, which they say will help the remaining dealerships to be more profitable and survive these kinds of downturns. They are working to merge competing companies in major markets to take advantage of economies of scale.

The plan also promises to reduce management and executive pay. The company says they have recently made changes to their salary and benefit structure for management, including “eliminating merit increases and bonuses due to be paid in 2009.” In addition, Ford CEO Alan Mulally has agreed to take a $1 yearly salary if the company has to dip into the $9 billion credit line it is asking for. They are also selling their five private jets.

GM and Chrysler are expected to submit restructuring plans in the next few days, as requested by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid after the last round of hearings at which the Big Three CEOs asked for a $25 billion rescue package. The release of those plans pave the way for another round of questioning by legislators this week.