Ford, Visteon Settle Pricing Dispute

Ford (F Quote - Cramer on F - Stock Picks) and its former auto parts subsidiary Visteon (VC Quote - Cramer on VC - Stock Picks) agreed to settle a $125 million pricing dispute.

Financial details weren't disclosed, and both companies said in a joint announcement that the settlement wouldn't materially affect their financial outlooks or prior earnings statements. But analysts are figuring the agreement favors Visteon, which had claimed that Ford's demands for price cuts would exceed its reserves by $125 million. The companies are still wrangling over another $50 million in price cuts related to their European operations.

An extra $125 million to $175 million on Ford's purchasing bill, which exceeds $81 billion a year, probably won't have a huge impact on the automaker. Nonetheless, with a multibillion dollar restructuring plan in the works and a fierce price war for market share raging among the Big Three automakers, Ford is trying to cut costs wherever it can.

Ford was lately rising 2.6% to $17.24, while Visteon was up 5.7% to $15.88.

Visteon was spun off from Ford in the summer of 2000, but the company still sells more than 80% of its merchandise to Ford, an amount that totaled $14.7 billion in 2001. When the company was spun off, Ford and Visteon determined that Ford would seek price cuts according to a "basket" of Visteon parts, which would then be compared with similar parts from other Ford suppliers. Based on that basket, the companies agreed upon a 3.5% cut in 2000, but this year, Ford may have asked for 4% to 4.5%, speculated Scott Hill, an analyst at Sanford Bernstein.

Hill said the difference this time may have been that Ford's other suppliers, trying to gain pricing advantages against Visteon, slashed the prices on those items in the basket but hiked prices on other goods.

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A much bigger issue than the settlement with Visteon is whether Ford's restructuring plan will deliver on its promise. "The jury is still out, it's too early to tell at this point," said Richard Hilgert, an analyst with Fahnestock.

A lot will depend on the success of the company's new product rollout this fall, which might help it recover some of the market share it has lost to General Motors (GM Quote - Cramer on GM - Stock Picks) in the incentives war, said David Healy, an analyst with Burnham Securities. GM's share of the U.S. light vehicles market grew to 31% in February from 29.8% the previous year, while Ford's portion fell to 19.2% from 21.4% in the year-ago period. Chrysler, the U.S. unit of Germany's DaimlerChrysler (DCX Quote - Cramer on DCX - Stock Picks), saw its share of the U.S. market slip to 13.6% from 14.8%.

"In general, the cost-cutting side is progressing as expected," Healy said of Ford. "It's hard to know how successfully they're rebuilding the product pipeline, which is the more important part of the equation."

In January, Ford announced an extensive restructuring plan that included closing five plants and cutting 35,000 jobs, as well as a series of new product rollouts over the next several years. After several tough quarters financially, William Clay Ford Jr. signed on as CEO last fall and promised to turn the company around. The restructuring program is aimed at generating a profit improvement of $9 billion by the middle of the decade.

Meanwhile, marketing costs have soared. The incentives programs, which were recently extended by both GM and Ford, are currently costing the automakers about $2,200 per vehicle, according to industry data source Autodata. That's down from October, at the peak of the incentives war, when marketing costs per vehicle ran to between $2,800 and $2,900. Early last year, the car companies were spending $1,500 to $1,600 per vehicle.

On the other hand, vehicle sales were stronger than expected in February, and that bodes well for 2002. Sales fell to 17 million on an annualized basis in February from 22 million in October, but some industry observers feared that they would fall as low as 15 million for the month. Because of the continuing momentum in sales, Ford will probably get the sales volume it projected even if the company doesn't restore the market share that has been lost to GM, Healy said.

Ford lost $5.07 billion in the fourth quarter and recently reaffirmed expectations that it will break even in 2002.