Ford Announces Production Cuts; Plant Closings and Layoffs Could Follow

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Researched by Industrial Info Resources (Sugar Land, Texas)--After announcing its first profit in almost a year during the first quarter of 2008, Ford Motor Company (NYSE:F) (Dearborn, Michigan) has announced significant production cuts as a result of rising gas prices and a re-examination of its production strategy. With gas prices hovering around $4 per gallon nationwide, executives at the struggling automaker feel that lower gas prices will not be in the works for well over a year, forcing a change in production strategy. Traditionally, Ford has made the bulk of its profits off of the best-selling F-150 pickup truck and its SUVs; however, with gas prices expected to remain high, those type of vehicles are no longer as attractive to the consumer, meaning, obviously, a significant reduction in purchases.

To address these issues, Ford has announced it will reduce production by 15% in the second quarter, 15%-20% in the third quarter and 2%-8% in the fourth quarter of 2008. These production cuts will primarily be in the realm of pickups and SUVs, whose sales have been slumping in recent months. At the same time, the automaker expects to increase production of cars and crossovers in hopes of taking some of the sting out of the necessary cuts in the more profitable vehicles.

To implement these necessary production reductions, Ford will shut its Wayne, Michigan, truck plant for five weeks in July and is considering a similar idling of its Louisville, Kentucky, truck plant. Traditionally, the automaker shuts its plants down in July and December each year for routine maintenance; however, these shutdowns rarely last more than two weeks. During that time, they would also do retools necessary for the new model year's vehicles.

Ford is in the process of developing a smaller, more fuel-efficient version of its F-150 pickup, but that vehicle will not be hitting the market until 2011, well after the current problems with gas prices and a faltering economy are expected to be over. The vehicle would be manufactured out of lighter-weight materials, such as aluminum, and possibly thinner, high-strength steel. The vehicle would be about the size of the Ford Ranger, a smaller truck that Ford will cease to produce after it closes its St. Paul, Minnesota, assembly plant in early 2009.

Ford executives expect to announce a more comprehensive plan for handling the economic and gas problems in July. This plan is expected to include possible additional plant closures and will certainly include proposed staffing reductions, meaning additional layoffs or at least another round of attractive buyout or early retirement offers for hourly employees.

The effect these announcements will have on Ford's capital plans in the coming months is yet to be determined. The automaker had already scaled back its capital investments over the last several years, as it focused on reorganization in its attempt to maintain its market share. The majority of its capital focus had shifted to Mexico in the form of a pair of proposed projects worth in excess of $3 billion. It will certainly be interesting to see whether Ford will continue with these investments if the company has to reduce production and possibly close additional plants and lay off workers.

As of this point, Ford is making the most dramatic cutbacks of any of the automakers in the United States. Toyota Motor Company North America (NYSE:TM) (Torrance, California) has announced modest production reductions and projected a lower profit for the year, but other automakers have not announced any production cuts of significance as of yet. Those cuts are sure to come, however, as the economy is not expected to recover quickly and gas prices will continue to rise. The third quarter will be very telling for the industry as a whole, as all the automakers will be scrambling to make production reductions and will refocus their production efforts on vehicles that fit the times.

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