Ford Motor Company is expected to announce plans to cut 25,000 jobs and several plants yesterday but analysts are warning the move will not be sufficient to allow the automaker to return its struggling North American unit to profitability.
"The near-term savings are not going to be as much as it needs to be," Brian Ropp, an auto analyst with T. Rowe Price in Baltimore, Maryland, told AFP in a recent interview.
"What it does is keep them from producing cars they don't need and they won't have to discount the cars as much."
The savings from job cuts are limited by the peculiarity of the automaker's contract with its main union.
Hourly employees who don't take early retirement packages enter the jobs bank retraining program in which they collect full pay and benefits while waiting for a spot to open up on the assembly line.
Cutting production levels also won't help Ford stabilize its steadily declining market share. In the past ten years, Ford has seen its share of the massive U.S. market drop from 26.4 to 17.4 percent, the lowest level since the 1920's.
While Ford has managed to overcome the quality problem which dogged sales in the 1990s, it has still not been able to come up with small cars that excite consumers.
The world's third largest automaker did manage to boost overall sales in the 1990s with the introduction of sports utility vehicles but its market share in that highly profitable segment soon began to wane as Japanese rivals introduced smaller, car-based crossover sports utility vehicles.
The real trouble hit in 2005 when gas prices topped US$3 a gallon and Ford's light truck sales - which include the highly profitable SUVs - fell 8.7 percent.
Ford's North American unit posted a US$1.4 billion loss in the first nine months of 2005 and Standards and Poor's has warned the unit's pre-tax losses could reach US$2 billion for the year.
While the company as a whole is expected to announce it posted a profit in 2005 on Monday, that is largely due to the money it earned from its loan operations at Ford Credit, said Burnham Securities analyst David Healey.
Healey expects Ford's financial results to deteriorate in 2006 and forecasts losses in the North American automotive unit to rise to US$2.9 billion.
"Production in North America will probably be modestly lower, the product mix thinner and discount rates on pension and health care liabilities will be lower," he wrote in a recent report.
"These headwinds will, in our view, more than offset the initial health care savings negotiated with the United Auto Workers and initial overhead and personnel savings from Ford's restructuring program."
The key to Ford's turnaround will be to come out with vehicles that are attractive enough to be sold without resorting to costly incentive programs.
But the new products Ford introduced earlier this month at the Detroit auto show met with a lukewarm reception from analysts. Goldman Sachs recently forecast that Ford would see its market share continue to deteriorate with sales down 4.7 percent in 2006.
"Ford's presentation at the auto show clearly evidenced its strategy to focus on cars and crossovers," wrote Goldman Sachs analyst Robert Barry.
"This is logical giving waning interest in large SUVs and growing competition in the pickup truck segment," he wrote. "But the car market is highly competitive, has lower margins and has long been the stronghold of the Japanese transplants."
Even if the plant closures won't lead to immediate savings, they are a necessary step to reduce excess capacity, said Rebecca Lindland, an analyst with Global Insight in Lexington, Massachusetts.
"They've got the capacity to build about 4.4 million vehicles a year but they actually only produce 3.3 million," she told AFP. "They are running at about 74 percent of their capacity utilization, we want to see them at 95 percent or in the nineties."
Lindland said she expects Ford to close as many as five assembly plants and some smaller facilities like engine plants in order to consolidate production.
The plants that are most vulnerable to closure are: the Twin Cities plant in Minneapolis, Minnesota which produces the Ford Ranger and Mazda B-series; the St. Thomas plant in Canada which produces the Crown Victoria and Grand Marquis; the St. Louis, Missouri plant which produces the Ford Explorer and Mercury Mountaineer; the Cuautitlan, Mexico plant which builds the F-Series trucks.
Other vulnerable plants include the Wixom, Michigan facility which produces the Lincoln LS and the Atlanta, Georgia plant which produces the Taurus, Lindland said.