When Looks Deceive at Ford

In an unexpected about-face, Ford Motor Company announced a surprise third-quarter profit of nearly $1 billion today. The troubled Dearborn, Michigan-based automaker hasn't posted profits in North America since the first quarter of 2005.

The announcement validates chief executive Alan Mulally's dicey strategy of foregoing government-assisted bankruptcy. Unlike Chrysler and General Motors, Ford managers bet it could weather the downturn and strengthen the company's position without the tarnish of government aid. Instead, the company mortgaged itself to the teeth—from factories to its iconic blue oval logo, borrowing $23.5 billion before credit markets froze.

But Ford's turnaround still faces daunting challenges, including mounting labor issues. Workers overwhelmingly rejected an agreement with the United Auto Workers last week designed to bring Ford's labor costs in line with Detroit rivals. The sentiment among workers that the company's turnaround is gaining traction, fatigue over repeated contract alterations, and a binding arbitration clause some interpreted as the elimination of the right to strike has strained negotiations. Labor will only be bolstered by today's announcement and UAW president Ron Gettelfinger told the Free Press on Friday that the union would not go back to the bargaining table if the measure was defeated. That could extend Ford's labor headaches until 2011, when the current Ford-UAW contract expires.

With brighter prospects, could Ford afford to concede to labor? Probably not. The company's position is not as strong as it appears. Ford must continue cutting costs—including labor—if it hopes to remain competitive. As General Motors emerges from bankruptcy, it is planning a raft of new models which will compete with Ford's. And as Fiat consolidates control over Chrysler, it too plans to give Ford a run for its money, though those products are unlikely to hit dealerships for at least two years. Despite charging higher prices, cutting costs, and improving market share, the company undoubtedly benefited from the government's popular Cash for Clunkers program which attracted droves of customers to dealerships but has since ended. Ford's now $26.9 billion debt, meanwhile, is up $800 million from the second quarter alone.

Union and competitive issues aside, Ford is also trying to pull off the sale of Volvo, its last remaining foreign brand. Though the company unloaded the cash-bleeding Aston Martin, Jaguar, and Land Rover brands relatively easily, Volvo presents a much greater challenge. Ford and Volvo products share technology and platforms, making a transfer of intellectual property potentially risky. Last month, the company said it has chosen China's Geely Holding Group as the "preferred bidder" for Volvo and vowed to structure a deal to protect the Swedish brand's independence.

Still, though qualified by many challenges, Ford's announcement further bolsters management's goals of breaking even or going into the black in 2011. Without revealing expectations about the fourth quarter, the company released a statement saying it “now expects to be solidly profitable in 2011, excluding special items, with positive operating-related cash flow.”