Friday, 29 January 2010

Bravo Ford

Much of the press on the calamitous state of the US auto industry centered around General Motors. Spare a thought for Ford, which has quietly done some amazing things.

Ford was the only one among the Big Three that did not take the US government bailout. They also were the only one that did not go into Chapter 11 bankruptcy. And yesterday, they announced pretty good 2009 results. They made a profit of $ 2.7 billion in 2009. Yes, t-h-e-y m-a-d-e a p-r-o-f-i-t- i-n 2-0-0-9 ; one of the most brutal years for the auto industry. They gained market share in the US. Their fourth quarter volumes were up 26%. By any standards, an impressive performance.

Sure the numbers hide some real worries (as they always do). Their main business of selling cars actually lost $1.4 bn in 2009. That loss was offset by their finance arm – Ford Motor Credit which made a profit of $1.9 bn. (just goes to show that taking a loan to buy a car is for suckers). But in Ford’s favour, in the fourth quarter, the car business too made a tidy profit. But by not going into bankruptcy, they are left with a huge debt on their balance sheet - GM and Chrysler have much lesser debt now as they “restructured their debt” (read shafted creditors). Such are the advantages of not choosing to go into bankruptcy.

And their endemic problem with the massive pension obligations of retired workers remains an intractable problem. Its an irony of sorts that companies can be ground to dust in paying large sums to keep the retired folks in comfort. Whoever invented the concept of a defined benefit for retired employees based on their last drawn salary for the rest of their retired life ought to be shot. As should the accountants who decided not to create a fund for it, but leave it unfunded for future generations to pay “somehow”.

But suddenly Ford is looking good. GM is still debating the merits of hiring an “outsider” as a CEO (the last refuge of a company bankrupt of ideas of how do run a business well). It decided to shelve this idea at least for now. Toyota’s woes in the US are making the headlines daily. Chrysler has virtually gone absent. The other Japanese giants are also wobbling a bit. Ford is gaining market share.

Detroit and the automakers have had nothing but bad news and abuse for many years now. Every bit of good news ought to be celebrated there.

Bravo Ford. Take a bow.


gils said...

:) i guess this is a "not negative is seen positive" kinda situation. whether its a good decision or bad depends on how long Ford can stand. It might be its last leg..but so far looks the strongest :D detroit name sarila vaasthu sounds like "debt" and "riot"..maybe they shd change it to something more profit sounding

Srivats said...

Thats very interesting about the profit made by Ford, more interesting is the way you have writtern it to emphasis the point :) Thats funny thing about pension, that there are no fund for it, Honestly I know about it just now :) At one point its good to make the last years of the ex emp lives comfortable but on the flip side, it might take a toll on companie's current revenue and its employees!

zeno said...

First timer to your blog via ur comments @ Rammm blog.
A blog true to its name :) covering several aspects of business. Well written, truly insightful :)

RamMmm said...

Good one. Ford has been doing a pretty consistent job in the new products department as well chipping slowly at the other biggies.

Pensions-The lesser said about in the US/Canada, the better. :)

I just can't understand the current Toyota madness and their silence (no updates from them, holdoff on selling, rap from NHTSA). At least from what I perceive (all gyaan from comments in various articles and the stories of abnormal behavior), it could also be a problem in their ignition control software and not just the brake pedal. Bigger woes???

Deepa said...

Did I hear someone yelling at an accountant here? Well lemme explain... :):):)

Actually, its not like there is no provision. We encourage the company to invest in a retirement fund/trust. And we provide for it in the books, only if Pensions are underfunded, i.e. if the investments are not adequate.

Some accountant came with a logic that pensions are actually because of the services rendered currently by the employee. So the pension expenses should be predicted (by an actuary) and spread over service period of these employees. So by the time a person retires, ideally even his pension expense is expensed out. The screw up happens when some people live longer.

But this time the screw-up happened because the markets came down crashing and the investments turned into peanuts, and suddenly adequate funding became not so adequate, and therefore the extra provisions.

Its too complicated to understand, and it took me half of my accounting life to get here, so I don't know if have been able to explain it well; but see... I have an explanation.

(Now that I have massaged my Accountant ego). Indeed kudos to Ford for the results, especially so because its not based on bail-outs from tax-payers money.

Sandhya Sriram said...

Taking Deepa's argument forward, i worked all my life to retire in peace and at the end of the deal, whatever money i saved is invested in different forms, real estate, investments and all sorts. it is a situation where all my investments sinked. atleast the law makes it necessary for the person for whom i sacrificed the prime of my life to take care of me, otherwise, just imagine, what would happen. i somehow agree to this policy of taking care of retired. its in a way a csr also according to me.

coming to the core of the subject, yaa, kudos to ford for the achievement. but i really could not find much reading stuff on what did they differently since 2006 to make this happen. maybe you can post something on this as well, it could probably be a good learning to us.

Ramesh said...

@gils - trust you to come with a brilliant one - I completely agree that Detroit's vaasthu is bad ! Your analysis of its name is simply top class gils stuff !!

@Sri - No, I didn't mean that there's no fund for pension at all - see Deepa and Sandhya's jut remonstrance. Writing a more detailed comment just a bit later

@zeno - Thanks very much for coming and for your kind comment.

@RamMmm - I think the Toyota problem is because they aren't sure what the problem with the accelerator pedal is. If they were sure, they would have simply recalled and replace ; but I think they are struggling with the problem itself. Their brand is taking a huge huge beating - I don't think they'll recover easily for a long long time.

Ramesh said...

@Deepa & Sandhya – Aa ha; very dignified objections from the two top class members of the accounting profession. Just for a change, I’ll take you on !!

The practice of completely funding a pension obligation is a fairly recent phenomenon. For a long time companies carried unfunded pension obligations as a creditor in their balance sheet. This assumed that companies will have the cash to fund this at a future point in time – a dangerous assumption. Secondly accountants allowed companies to underfund pensions when there were movements in the markets that reduced the fund’s value. Thirdly, for a long time (not now), companies funded pension funds based on an employee’s current pay rather than the last future pay which was the commitment for the pension payment. Fourthly actuarial science is not an exact science and accountants have regularly twisted the arms of the actuary (the practice is called changing the assumptions) to value an obligation “favourably”. No no, accountants are culpable ! Not Deepa – she never did any of this, but her predecessors !!

Now to Sandhya’s defence of pensions as a CSR – No way; certainly not the concept of a defined benefit of a pension based on last drawn salary, no matter what. Retirement benefits should rightly be an employer’s obligation. India’s Provident Fund is a very good example. Force an employee to set aside some money and the employer to match his contribution. On top of it, contributory pension schemes are great. Again force the employer to contribute a certain percentage ever year into a fund that invests prudently into less risky investments and the returns from that become the pension. But taking on an obligation that no longer how long you live, and no matter what happens to the investments, you are guaranteed a life long pay based on your highest drawn salary during employment is just way off the mark. Who pays for this? Current employees pay for it in terms of reduced salaries or outright layoffs. Consumers pay for it in terms of higher prices. Companies pay for it by going bankrupt. So for the privilege of keeping a few in cushy comfort, many suffer. That’s not on in my book.

Hey Deepa & Sandhya – thanks a lot for such a considered comment that can lead to a debate. I am very touched that you take my ramblings seriously.

Deepa said...

I think everyone who is a regular at BM, takes it quite seriously. But I did put, not 1 but 3 smileys! And mine was just a light (self venerating) banter to defend the poor accountant. :P

See all of the above are mere ways of accounting. But the basic idea of any set of financials is to depict 'true and fair' picture. If its not doing so, its usually not the accountant to be blamed alone.

And my opinion on Defined Benefits - completely echoing your sentiments. (This is not an appeasement though!:D:D )

Ravi Rajagopalan said...

Ramesh, Deepa and Sandhya: I am not an accountant and did not distinguish myself in MANAC1. Mea Culpa out of the way....

My key objection to the final salary scheme is that this guarantee places the onus of thrift on stochastic elements like the market, the economy etc and not on the individual. It encourages the individual employee to think only of the present, and takes thrift out of the calculus of personal financial planning. Decades of this has fuelled behaviours that are hurting Europe. Productive people retire at the age of 55 and live another 30 years assuming that either the company or the State (as is the case in France) will keep them in comfort.

I have always been a fan of contributory schemes, such as Singapore CPF, India's PF, or the new schemes in the UK.

Fundamentally, I am all in favour of individual responsibility.

Sandhya Sriram said...

accountants like rejoinders to management comments. but promise this is not one!!

i agree with Ramesh and Ravi that benefit schemes have to be individual responsibility. And complacency during the working days is unacceptable and rewarding the complacency @ the cost of the employer at the end of it is not right either.

But then, maybe, that is one extreme. In a context like India, it is the other extreme. whatever money comes in PF always finds a way to get spent and then many parents are left @ the mercy of the children. while many do take care (which is the strength of our value systems), but there are many who dont as well. I have seen many such painful cases in very close circles

I feel what is needed is something in between. There has to be some part which is set aside which comes on a recurring basis after retirement. Pension schemes should also be mandatory and not voluntary. It need not be the last drawn pay but atleast an amount which is enough to sustain a decent standard of living.

the other part is - i agree that my predecessors have not done justice to this subject in accountancy, but we are changing and changing for the good. so please give us the benefit of doubt :-)

and i sincerely apologise to Ramesh for having derailed the subject of the blog - the good performance of Ford. it wasnt intentional though:-)

so the accountant me surrenders to you but the writer still awaits your feedback

Ramesh said...

@Deepa - :):):):) let me start with four smileys !! Love your standing up for accountants. Bravo Deepa. Argue just a little more - its nice to have a pleasant debate :)

@Dada - Can't agree more.

@Sandhya - Hey you haven't derailed anything. The whole idea of a comment thread is to have a dicussions. And you can't have a discussions without some disagreement. Like your perspective on pensions - for someone so young, you have a wise and long term view. I think I'll post a separate post on pensions to continue the discussion.

Exkalibur666 said...

Guess bringing in the new CEO from Airbus (It was surely from an aircraft manufacturer) and Fords policy of concentrating only on fuel efficient models like the fiesta is paying off. I read some where that ford is now concentrating only on 7 models. All the gas guzzling SUVs to cool their heels for a while.

And I also agree with Ramesh on Defined benefit plans.. no company should take up the responsibility of hedging inherent market risk. No one should enjoy in perpetuity, I think defined benefit plans are unfarely skewed towards employees.

Vishal (VA) said...

It is very heartening to see Ford making profits and growing its volumes. I am hopeful that other big players will take a clue or two from these performaces and help revive the economy slowly but steadily. As there is a general saying doing rounds these days - The worst is over.

Likewise, the worries should subside once there is sustained and gradual growth in terms of volume and profits.

Great analysis of facts as presented by you, Ramesh! And an outstanding discussion at the comment form! Too good and thanks to everyone for making this a "must-visit-forum" (Of course, does not matter if it is 1:17 AM here in Delhi :):)...

My two cents on being an accountant - It's definitely not a prudent way not to fund for retirement benefit plans such as the one in case of Ford. Seems that accountants have missed this a big time here. However, the accountant tends to tilt little more towards a favorable option when he find himself in grey area and there are no pronouncements to add to his woes. This results into what Sandhya says as "we are changing and changing for the good". Please give us the benefit of doubt :-)

Ramesh said...

@Exkalibur - Yes they brought it Alan Mullaly from Boeing and he has done a lot for Ford. They have cut costs with a vengeance, and fpcused on a smaller portfolio ; they shrunk to become stronger.

@VA - OMG; you must have been fast fast asleep at that time Vishal ! My taking pot shots at accountants was mischievous. Actually pension accounting has come a long way. The real culprits are the HR folks who designed such a scheme in the first place.

Vishal said...

Thank God, Today is Sunday. :-) True, accounting is evolving. At the same time, we (accountants) really need to evolve continuously so as to minimize the risks associated in such situations.

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