Team Red in the red

Ford and Holden have spent big on the new generation of their most popular models, but that has hurt the bottom line.

Within weeks of Ford's announcement that the Australian arm was in the red to the tune of $40.3 million for 2006 comes the news that Holden lost $146.5 million last year.

Holden's loss follows a $144.6 million loss for the previous year.

Both companies have developed or are developing new models (VE/WM for Holden and 'Orion' project Falcon for Ford) and these development programs, allied with the cost of new infrastructure and market changes, have left the two companies in the red financially.

Ford, without export markets to paper over the rough edges of domestic sales fluctuations, could still claim 11.9 per cent market share for 2006 -- but that's a fair way short of the 13.1 per cent market share held in 2005.

Therein lies the balance of the loss; Ford's most profitable lines accounted for the major part of that loss of market share.

Holden also saw its market share stumble -- 17.7 per cent in 2005 slumped to 15.2 per cent in 2006. This was commensurate with a drop in the total market of 2.6 per cent.

Trimming of Holden's workforce sees $20 million of the loss attributed to termination payments and a further $69.7 million was allocated against 'revaluation'.

On top of those two items, Holden's revenue slipped by 7.8 per cent for the year. The maker said this was due to slower sales of VZ/WL models prior to the release of the new range and the cessation of GTO production (more here) for the American market.

All was not bleak on the export front, though. Sales to China and South Korea added 7854 units to the tally and Holden sales in the Middle East hit a new record, exceeding 31,000 units for the year.

Holden is looking forward to better times in 2007, with a full year's sales of the VE/WM models, commencement of Pontiac G8 exports and the introduction of the VE/WM light commercial vehicles and wagon.

There are a few gaps in Ford's reporting of their finances for last year; no indication of the spend on Orion development for the year, apart from the three R&D facilities mentioned.

The financial outlook for 2007 might be very poor for Ford if this is the year they account for the lion's share (pardon the expression) of Orion development.

Despite the relative severity of Ford's loss (relative to companies other than Holden), Broadmeadows can point to at least $25 million worth of new investment in R&D, which is likely amortised from the development budget for Orion and presumably won't be an immediately recurring cost in the future.

In fact, compared with Holden's $1.2 billion sum spent on the development of the VE Commodore, Ford really does appear to be working on a shoestring for the next Falcon. Rarely has a $40 million loss looked so…reasonable?

According to Ford spokesman Ed Finn "People want a German quality car at an Australian price…and if you can't do that, you're not in the market."

To give the people that combination of quality at low cost, Ford's strategy has been to spread development costs across two or more model generations, one example being the six-speed ZF automatic transmission (pictured) that was introduced to the Falcon range during the BF model run, rather than waiting for the major change Orion model.

Have the development costs for Orion been spread across 2006 and 2007? Almost certainly. Will 2007 be as bad for Ford, financially? Maybe not.

Ford is said to have committed to selling 3000 units of Falcon a month for the rest of the year. If they can maintain such an average, it sounds like the company is headed for break-even or a small profit.

Ford's loss in 2006 contrasts with a profit of $148.2 million for 2005, so maybe the worst of the Orion development pill has already been swallowed.

On the debit side, maintaining sales of BF II Falcon in anticipation of Orion will be really tough. Sales will almost certainly worsen before they improve.

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