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Where Is the Love?

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Ford is looking for a little love.

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With all the media attention and flood of government cash supporting G.M. and Chrysler in their hour of need, Ford is feeling neglected.

Ford has been become the red-headed step-child of the auto industry.  

To its immense credit, Ford has shunned the kind of U.S. government bailout given to its bankrupt rivals General Motors Corp and Chrysler LLC. The company has repeatedly said it doesn't have any plans to seek a U.S. government bailout or participate in the government's auto-parts supplier aid program even as car and trucks sales have plummeted.

But Ford is telling anyone who will listen that federal government support for GMAC, General Motors’ financing arm, is giving its bankrupt competitor an unfair advantage by artificially making its borrowing costs cheaper.
Even though it has turned down federal aid, Ford has been lobbying lawmakers for a level playing field. 

Why They Say It’s Unfair

Officials at Ford are complaining that G.M. and Chrysler have gained an edge by being able to dramatically slash their debt and operating costs through their government-sponsored bankruptcies. For example, in recent competing bond offerings, Ford paid $107.5 million more than GMAC for every $1 billion it borrowed.

Currently, Ford is the healthiest American car company in the automotive intensive care unit. Its supporters are concerned that it will take very little to push the carmaker over the edge. It would be ironic if the government actions to support G.M. and Chrysler forced Ford to reconsider its position and seek the protection of the bankruptcy courts.

Ford lost a record $14.7 billion last year.  Most analysts believe that the only reason the automaker was able to avoid emergency aid from the federal government was its fortuitous decision to borrow nearly $23 billion in 2006 before the credit markets froze.

General Motors was formed in 1908, the same year Henry Ford brought out the first Model-T, a car that launched the U.S. industry and revolutionized millions of Americans' lives. Riding the wave of the Model-T's success, Ford Motor Co. became the undisputed leader of this young market.  By the early 1920s, it was producing 60 percent of all the motor vehicles manufactured in the United States and half of those made worldwide.

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By the mid-1930s, however, G.M. had turned the tables on Ford.  G.M.’s market share rose to 42 percent while Ford’s dropped to 21 percent.  G.M.’s strategy had been bold; offer a car for every “purse and purpose.”  This once innovative approach to the automotive marketplace was G.M.’s guiding strategy for the next 70 years. And now it has been their undoing. 

While Ford had Lincoln and Mercury, it still held its core identity under one brand.  Frequently for G.M. dealers, their greatest competition was not Ford, Toyota or Volkswagen, but other G.M. dealerships in the same market.  Now to survive, G.M. is being forced to eliminate redundant and non-competitive brands like Buick, Pontiac and even the Saturn.  Oldsmobile became a defunct brand in 2004, and Hummer has been sold to a Chinese company.

Ford Is Not the Only Critic

Along with eliminating brands, G.M. is betting heavily on its ability to provide consumers with better financing. 

Late last year, in order to give it access to federal bailout monies, GMAC was allowed to become a regulated bank-holding company. With this conversion, GMAC was also able to take advantage of loan guarantees supplied by the FDIC. With this added level of governmental security, GMAC has been able to best its rival because it can attract bond purchasers without having to paying a higher risk premium.

The intense government support for G.M. and GMAC has also drawn fire from the banking industry. Beyond the FDIC-guaranteed loans, GMAC has been using the infusion of federal support to lure depositors through its partnership with Ally Bank, a strictly online banker. 

In a May 27 letter to FDIC Chairwoman Sheila C. Bair, American Banking Assn. President Edward Yingling said GMAC’s Ally Bank is attempting to entice customers with interest rates on certificates of deposit “well above the market.”  Yingling went on to say, “This aggressive deposit strategy is particularly egregious when it is used by a troubled bank in which the government holds a controlling interest.”

At the present time, Ford has no plans to convert Ford Credit into a bank-holding company because it would force the automaker to divest control of its wholly-owned finance company. 

Ford has applied to create an industrial bank subsidiary of Ford Credit, which would give it new sources of funding through access to FDIC-insured deposits. That application, filed in February 2008, has yet to be acted upon by the FDIC.

In the short run, financing will remain an issue for Ford. But unless Ford, along with the other domestic automakers, starts manufacturing cars that Americans really want, it won’t matter whether Ford can offer consumers a better financing deal than G.M. or Chrysler.

Crap is still crap.

John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com