Detroit: How Ford Might Overtake GM and Chrysler

As Detroit circles the drain, it appears all is lost for the American auto industry if taxpayers don't ride to the rescue with a $34 billion bailout. Or is it? Sure, General Motors and Chrysler says they'll be broke by New Year's, but the same is not true of Ford. In fact, after parking the plane and arriving at the Capitol in a hybrid, Ford CEO Alan Mulally told lawmakers Thursday he didn't expect to use the bailout billions he was seeking. Instead, he just wanted a "safeguard" from Uncle Sam. Should Congress not come through, analysts say Ford could still keep on rolling, even as its cross-town rivals crash. "Ford could end up being the sole survivor," says bond analyst Shelly Lombard of Gimme Credit research.

So why did Mulally go begging with his brethren on Capitol Hill? He's worried that if GM goes down, all of Detroit could take a dive. And that is a risk since the Big Three share 80 percent of their auto-parts suppliers. But not all suppliers buy the conventional wisdom that a GM failure will wipe them out. And for now, Ford is actually benefiting from the stink of bankruptcy hovering over GM and Chrysler. As auto sales cratered this fall, Ford's U.S. market share actually grew—to 16.1 percent in November from 14.7 percent in November 2007. The reason: Domestic car buyers are steering clear of GM and Chrysler and turning to Ford. A recent study by CNW Marketing Research showed that 32 percent of would-be GM buyers were scared off by the fear of bankruptcy. They defected to Ford more than any other automaker, the study found. "Ford is getting a boost in sales because people think they're in much better health," says IHS Global Insight analyst John Wolkonowicz.

The fact is, though, Ford is sick, too. It's lost $8.7 billion so far this year and struggles with the same high labor costs and SUV dependence as GM and Chrysler. But the company is in better shape because of what Mulally calls "the biggest home-equity loan in history." As soon as he arrived in Detroit from Boeing two years ago, Mulally mortgaged every asset Ford had—even old Henry's family name—to secure $23 billion in loans. Today, even after burning through billions, Ford still has a formidable stash of cash and credit worth almost $30 billion. That's nearly twice the size of GM's cash cushion and 12 times more than Chrysler has. Mulally's bet-the-house loan looked risky back in 2006, but now with credit frozen "it turned out to be a brilliant deal," says Lombard.

The bond market, which long ago wrote off Detroit, is starting to notice a difference between Ford and GM. Ford's long-term bonds are selling for 25 cents on the dollar. That's horrible, unless you consider that GM's long-term bonds are going for 18 cents on the dollar. "Ford's bonds are starting to diverge as GM looks closer to bankruptcy," says Lombard.

Ford also has more financial flexibility because it still controls its financing arm, Ford Motor Credit, which provides loans to dealers and car buyers. Last year, GM sold controlling interest in its finance business, GMAC, to Cerberus Capital Management, the private-equity player that also owns Chrysler. As Cerberus's auto investments have stalled, it's become tight with its money, virtually ceasing car leasing and refusing to issue loans to buyers with credit scores below 700, which accounts for nearly half of American consumers. That has only added to the woes of GM and Chrysler. Ford, meanwhile, continues to offer leases and loans to its buyers, which is boosting business. Some say Ford's financial advantage could eventually nudge America's also-ran automaker into first place. "The possibility of Ford overtaking GM is not extreme at all," says CNW researcher Art Spinella.

That, of course, is if GM stays in the race. United Auto Workers president Ron Gettelfinger testified Thursday that if government help doesn't come soon, "we could lose General Motors by the end of the month."

Mulally didn't sound any death knells for his company. On the contrary, he suggested Ford just wants a federal backstop—"$9 billion in bridge financing, something we hope we will not need to use." After all, he notes, Ford is not running out of cash and was actually making money earlier this year before gas prices spiked and credit collapsed. He figures Ford has the wherewithal to make it to 2010, when new small cars and electric vehicles arrive and labor savings kick in. By 2011, he predicts the red ink will stop flowing and Ford will be breaking even or back in the black.

Global Insight's Wolkonowicz isn't so sure Mulally won't need the government's money to help finance Ford's turnaround. He says Ford will be forced to dip into its federal loan because car sales won't rev up as much in 2009 as Mulally expects. "They're going to need to tap into that money by the middle of next year," predicts Wolkonowicz.

Economist Mark Zandi of Moody's told the Senate panel Thursday that all three automakers are being overly optimistic with their $34 billion request, which is up from $25 billion two weeks ago. (GM is asking for $18 billion, Ford $9 billion and Chrysler $7 billion). Zandi figures the cost to save all three could run from $75 billion to $125 billion and predicted they will be back asking for more by next fall.

Mulally, though, has a powerful incentive to live up to his pledge not to touch Ford's federal line of credit. He promised to work for $1 a year—but only if Ford is forced to tap into that $9 billion loan. Otherwise, he can continue to be handsomely compensated (2007 take-home: $21.7 million). And as we learned from his testimony two weeks ago, Mulally is not eager to become a buck-a-year man. "I think I'm OK where I am," he said then. Now, he's willing to sacrifice, but only if Ford falters further. Lately, though, Ford is gaining on its rivals' misfortune.