Is Ford just junk ? Ford resorts to desperate

[andy82471]

Motley Fool

Is Ford Just Junk?

Thursday August 24, 3:51 pm ET

By Rich Smith

Oh, how the mighty have fallen.

Last year, one of the major headlines in the automaking world was that No. 2 U.S. seller Ford (NYSE: F - News) had its credit rating cut to "junk." This July, the firm lost its second-place slot in U.S. auto sales to Toyota (NYSE: TM - News). Earlier this month, with car buyers apparently agreeing that its cars are as junky as its credit, Ford again took the headlines when it announced dramatic production cuts.

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And today, the company detailed another plan designed to clear out unsold inventory and boost market share in one fell swoop -- a plan that, sadly, is also based on junk.

Management intends to clear out its bloated inventories of 2006 model-year cars and trucks by targeting buyers with lousy credit histories. Ford intends to offer everyone, including so-called "subprime" borrowers, 0% financing for up to six years.

For those of you keeping score, automakers Ford and GM (NYSE: GM - News) first introduced the concept of large-scale 0% financing in response to flagging sales trends in the wake of the twin disasters of the 2000 bubble burst and Sept. 11. But back then, the deal was much more limited in scope, being extended only to buyers with strong credit histories, and for no more than three or four years' duration. Ford's latest gambit breaks the rules in both respects, targeting buyers who are huge credit risks, and enticing them with longer interest amnesties.

Let me risk understatement and point out that Ford's latest junk plan raises serious risks. We've already seen in the housing market what happens when generous loan terms are extended to subprime borrowers: They default at higher rates. In a May column from The Wall Street Journal, analysts from Bear Stearns (NYSE: BSC - News), First American (NYSE: FAF - News), Lehman Brothers (NYSE: LEH - News), and Credit Suisse (NYSE: CSR - News) were unanimous in blaming the "relaxed" lending standards and "aggressive" extending of loans to subprime buyers for the rise in residential mortgage delinquencies to 4.7% in Q4 2005. (That may not sound like much, but it's a significant rise from 4.38% in Q4 2004; what's more, the Bear Stearns analyst noted that certain categories of high-risk loans were showing year-over-year increases in delinquency of as much as 208%.)

What happens if Ford's buyers track this trend? Many will default on their car loans, and the company will wind up repossessing their cars. Which would: (1) defeat the purpose of the initiative, by putting repossessed inventory right back on Ford lots; and (2) exacerbate the damage, as American cars are (often wrongly) judged to be worse in quality than foreign makes, and therefore lose resale value more quickly. Ford may well boost its sales, and its stock price, with this new initiative. But as pretty as the numbers may appear over next few months, beware: They could be headed for the compactor down the road.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.

[Flybrian]

Ask Mitsubishi how well these schemes work.

[andy82471]

All this time most analysts were taking about the gloom and doom facing GM when it seems like FORD is in much worse shape. I really admire FORD's contribution to the automotive world and really would be a sad day if the day comes when they have to declare bankruptcy or go out of business for good.

[Flybrian]

Ditto. Such a storied history and such potential, yet no one at the helm seems to know where to go from here. I have a feeling Mazda and Volvo are only successful because Ford proper spent so much time and money with Jaguar that they had to leave those two unmolested.

Its akin to watching a train heading towards a half-completed bridge, only the bridge is a mile and a half away and the train is going 1mph. Painfully, agonizingly slow.

[bearrunner44]

As a newly-graduated college student with barely any credit history, I wouldn't mind paying 0% on financing for a Ford Mustang GT. It's sad what's happening to the company, though. I'd much rather pay a higher rate and have a healthy American auto industry, rather than benefit from Ford's poor management.

[ehaase]

As a newly-graduated college student with barely any credit history, I wouldn't mind paying 0% on financing for a Ford Mustang GT. 

184974[/snapback]

As a newly graduated college student, unless you are making over $100,000 straight out of college or are from a wealthy family, please purchase something much more frugal than a Mustang GT. Middle class people can't get ahead buying expensive cars and trading them in every few years.

[bearrunner44]

As a newly graduated college student, unless you are making over $100,000 straight out of college or are from a wealthy family, please purchase something much more frugal than a Mustang GT.  Middle class people can't get ahead buying expensive cars and trading them in every few years.

185005[/snapback]

I was mostly kidding, but point taken.

[XM DUDE]

Friends don't let friends drive fords.

[Ravenfreak13]

Ford will eventually crash if they can't get thier act together....

Their line up is so dated

Focus-basically the same for the past 6 years

Fusion-only ok looking thing at ford/new product

500-it was a flop

Crown Vic-no comment

Escape-ok looking but slightly dated..new one is even uglier.

Explorer-For how many years can one look at the same thing...it barely changes. The current 2-doors are late 90's explorers with a different face.

Expedition-nothing spectacular...kind of dull and overpriced

Mercury

Milan-nice car/but still a fusion clone

Montego-was a flop along with its cousin

grand marquis-yet again no comment

Mariner-Front end seems disproportioned/escape clone

Mountaineer-Boring looking...snoozefest

Lincoln is the only one that I see a small bright spot in...

Mazda is doing fine

Volvo....is just there

Jag is in a coma

Land Rover doesnt seem to sell high volume

Good luck to FORD

[ehaase]

Ford will eventually crash if they can't get thier act together....

192761[/snapback]

I think it's too late. Too many people angry about problems with head gaskets, transmissions, the early Focus models, the first generation Taurus quality problems, etc. Toyota and Honda are too strong now. Ford's executives seem to be out of ideas. It wouldn't surprise me (although not a likely scenario) to see Ford go through bankruptcy and have its U.S. operations pared back to nothing more than a manufacturer of commerical trucks and Ford operations in Mexico, Europe, and Australia. Volvo and Mazda could be come independent again.

[ohsnap]

wow, extending 0% to sub-prime is definitely a high risk and desperate move. I wouldn't be suprised if the naysayers are right, just look at what's been happening to people with interest only mortgages, they're losing homes left and right because they can't afford their adjusted rate increases.

my very first car ever was an 88 ford taurus wagon and even though the tranny fell out at 80k, it was still a fun car for high school (i could haul around all my friends!)

[Innotech]

WTF? Ford cars are the best theyve EVER been. Even the oldest models are dated but certainly not junk.

the fusion and 500 are NOT junk at all whatsoever.

[Intrepidation]

Wowo...you'd think Ford would be smart enough to use such a "strategy" after what happened to Mitsubishi.