Ford breaks quickly

Do you get the feeling we’ve been had?

Just months after Prime Minister Julia Gillard was telling us how $103 million in taxpayer handouts – $34 million from the Federal Government and the rest from state governments – was going to help create another 300 jobs at Ford Australia, the struggling car maker announced that it will offer 440 voluntary redundancies and slash its production from 209 to 148 cars a day.

Maybe we shouldn’t blame Ford’s local boss Bob Graziano for taking the government cash – after all, Australian car makers have become addicted to taxpayer subsidies over the years.

And you certainly can’t blame him for announcing this restructure. While Ford’s US parent company is on the up after almost going bankrupt during the GFC, global manufacturing is an extraordinarily tough game. When a business is underperforming, the axe must be swung – and hard.

But after making Gillard look silly, there must surely be questions as to whether we can believe Graziano when he says he thinks this will be the end of the cuts.

The president of Ford Australia said that reducing production to 33,000 units a year (across Ford’s flagship Falcon model and its Territory SUV) would ensure supply and demand remain in balance.

“Our assumption going forward is that we will need the 33,300 units a year,” Graziano told The Australian Financial Review.

That assumption looks difficult to back up with sales of the Falcon tanking. Ford sold 6,846 Falcon sedans in the first six months of 2012, compared with 9,083 in the first half of 2011. It’s a continuation of a big fall that has been building for 20 years, something Graziano admitted yesterday.

“That segment has been declining for over a decade now and while we thought that it would start to moderate this year, it actually hasn’t.”

He says customers now want more fuel efficient vehicles, which is why Ford – backed by handouts from the Federal and NSW governments – is investing $103 million into putting its greener four-cylinder EcoBoost engine into the Falcon.

The only problem with that is that buyers aren’t biting. A report in The Sydney Morning Herald today says Ford employees have bought three times more four-cylinder Falcons than private buyers (159 versus 53) and the vehicle doesn’t actually meet the “green” car buying criteria for the NSW Government.

Ford will also build more units of its Territory SUV, which has experienced a healthy jump in sales this year on the back of a new diesel model.

But how far can Falcon’s sales decline before Ford’s manufacturing operations are in real jeopardy?

Daily production has now been cut by 43% in the last two years, from 260 units to 148 units, with a 680 jobs lost.

The last company to keep cutting production like this was Mitsubishi, which cut production from 290 a day in the late 1990s to 120 a day by 2004 and then to 90 cars a day in early 2006. A few months later, production was down to 75 cars a day and by the time the plant was closed in March 2008, less than 50 cars a day were being built.

In Mitsubishi’s case, continued production cuts only delayed a painful death and weighed heavily on sales, as confidence around the brand was damaged.

Ford will do well to avoid the same fate. It’s committed to building the Falcon and Territory in Australia until 2016, and all indications are that the Falcon will be replaced after that date with perhaps a medium-sized model better suited to changing Australian tastes.

But if Ford can’t stabilise Falcon sales and keep boosting Territory sales, the argument for continuing production in Australia will get harder to make with head office. Particularly as Industry Minister Greg Combet says there is no more money for Ford at this stage.

It looks a long, hard road back for Ford. It simply cannot afford a further slump in sales and more production cuts.