Ford Motor Co. reported improved results for the third quarter, but its heavy debt load and an evolving shift away from car ownership remain major hurdles to its future performance.
On Tuesday, the auto maker announced its 14th consecutive quarter of profits and a significant improvement in its debt equity ratio. Debt, however, remains a huge issue for the company after a massive $24-billion (U.S.) bond issue in 2006 that is proving to be a double-edged sword.
The funds raised with debt in 2006 allowed Ford to avoid bankruptcy during the financial crisis, but have left management with little short-term flexibility. Despite its progress in reducing its loans, Ford still has nearly six times as much debt as equity. (Compare that to the restructured General Motors, where debt to equity is a mere 48 per cent.) As a result, its financial health is vulnerable if the economy or the auto industry hits a bump.
That matters because two major factors will likely limit growth for all car makers, not just Ford.
The first factor is increased competition. Not only are auto makers such as Hyundai proving newly capable of producing attractive vehicles, but the rise of Chinese car makers is restricting the growth of foreign auto sales in the world's fastest growing automotive market.
A second limiting factor is declining demand from younger buyers, especially in North America. The Atlantic's Jordan Weissman writes that a struggling economy and high levels of student debt mean that "today's teens and twentysomethings don't seem all that interested in buying a set of wheels. They're not even particularly keen on driving."
Mr. Weissman notes that only half of Americans aged 16 to 19 had a drivers licence in 2008, down 15 percentage points from a decade earlier. The Millennial generation appears to have opted for socializing online rather than in person. Transportation is not required.
In the short term, Ford can pray for a rebound in U.S. construction activity to increase sales of its popular F series of trucks. Morgan Stanley analyst Adam Jones was quoted Tuesday estimating that 90 per cent of Ford pretax profits were derived from F series vehicles and describing the company as a "one-trick pony."
Longer term, the picture remains murky at best. The disinterest of American youth may prove the single biggest problem to the once dominant North American auto industry.
Scott Barlow