Ford is likely to follow Chrysler’s retreat

Ford will likely trim 2008 budgets and spending by up to 15% in some departments.


Ford Motor Co. and Chrysler LLC are signaling a new, more aggressive approach by the auto industry to address slowing sales and cost issues, as Detroit's Big Three face the prospect of a tough U.S. market dragging on well into next year.

For Ford, the moves include an effort to trim 2008 budgets and spending by up to 15% in some departments, people familiar with the matter said, though it was unclear how the cuts would be implemented.

Chrysler yesterday said it will eliminate shifts at five plants in the U.S. and one in Canada, resulting in the loss of 8,500 to 10,000 jobs.

Chrysler's cuts mark new flexibility under new labor contracts that allow it and General Motors Corp. to cut jobs and trim production to adjust to market shifts. Previous labor agreements made cuts difficult, leaving Detroit at a disadvantage to Asian rivals like Toyota Motor Corp.

Ford could soon earn the same flexibility, said people familiar with the matter. The Dearborn, Mich., company is close to agreeing to a framework of a new labor agreement with similar terms with the United Auto Workers union, according to people familiar with the matter, though last-minute issues could stop a deal.

Ford could get UAW concessions such as the ability to put less up-front cash into a union-run fund for retiree health care, in return for keeping open one or two plants it had intended to close, said these people.

A Ford spokesman declined to comment.

The domestic auto makers' need to scale back operations was highlighted yesterday in October's auto sales, which overall rose 1.2% but again demonstrated the strength of Asian rivals. Ford's sales for the month fell 9.3% and Chrysler's declined 8.9%, according to Autodata Corp. GM's sales rose 3.4%, boosted by sales to rental fleets and incentives on big sport-utility vehicles.
By contrast, Toyota and Honda Motor Co. posted record months, and Toyota leapfrogged Ford once again in October to post the second-biggest sales results behind GM.

Ford's sales difficulties are being compounded by major shortfalls in efforts to cut materials costs, people familiar with the matter said. Its expected budget move represents a midcourse correction in Ford's restructuring plan, which calls for a return to profitability by 2009.

In early 2006, Ford projected $6 billion in net material cost reductions by 2010. Two years into the plan, the savings are just two-thirds of that, a shortfall equal to about $400 million annually, said several Ford officials and others familiar with auto maker's internal plans.

Chrysler's jobs and production cuts are designed to position it to become profitable in 2008 while avoiding Detroit's past mistakes of artificially inflating sales through heavy incentives and low-profit sales to rental fleets, Chief Executive Robert Nardelli said.

“The market dynamics -- especially in the United States -- have changed dramatically," he wrote in a memo to employees. "To succeed, we must align our costs with the market realities."

Chrysler now expects overall U.S. auto sales for 2007 "to be significantly lower" and believes the downturn will "carry over into 2008," he wrote. Mr. Nardelli was brought on after private-equity firm Cerberus Capital Management LP acquired a majority stake in Chrysler in August.

As part of its plan, Chrysler intends to cut 1,000 salaried jobs and reduce its inventory by 100,000 vehicles compared with the end of last year. Chrysler had 538,438 vehicles in stock at that time, according to Autodata. The company is also killing several slow-selling models next year: the Dodge Magnum, the convertible version of the PT Cruiser, the Chrysler Pacifica and the Chrysler Crossfire.

Production cuts in Detroit aren't without risk. Cutting production saps the companies of revenue amid continued concerns over economic growth. Many analysts now predict the auto industry will sell fewer than 16 million cars and light-duty trucks next year for the first time in a decade, possibly as few as 15.5 million.

October's sales came in at an annual run rate of 16.05 million vehicles. Auto makers sold nearly 17.5 million vehicles in 2000.

And even with these new cuts, the Big Three still have other downsizing challenges.

In the past, the Big Three tried to keep production levels high because their previous union contracts made it difficult to cut costs quickly. Laid-off workers were placed in a "jobs bank" and didn't have to work but were still paid nearly full wages.

The auto makers were also obligated to cover the cost of health care for hundreds of thousands of union retirees, so they often chose to build as many cars and trucks as they could produce even though they usually ended up using deep discounts and rental sales to push them into the market.
Ford's declining sales have been compounded by a combination of sick parts suppliers and rising costs for commodities such as steel, which have hindered cost-cutting efforts by Ford's purchasing departments.

In an effort to stay on track to hit a target of $5 billion in operating cost reductions by the end of 2008, Ford is cutting budgets in areas such as sales, marketing and perhaps engineering, Ford officials familiar with the matter said. Also, employee benefit plans will be modified and unfilled jobs eliminated to further cut spending, said the people.

Ford, which has already cut about 40,000 hourly and salaried jobs since the start of 2006, doesn't have a specific headcount-reduction goal as part of this added cost-cutting, said these people.

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