Floundering Ford says it will focus on high-margin vehicles
Southfield — Ford, the more than century-old company that was the first to make cars for the masses, is calling off its pursuit of everyman sedan buyers.
The company responsible for putting the world on wheels with Henry Ford’s innovative assembly line will pivot away from being a full-line vehicle maker, shrinking its passenger-car line-up and shifting only to low-volume, high-margin models.
The reason? Years of coming up short on a longheld profit-margin target. Earnings disappointments cost former CEO Mark Fields his job in May, and his replacement, Jim Hackett, has since laid out plans to reorient the company around lucrative sport utility vehicles (SUVs) and pick-ups, plus play catch-up on trends that are sweeping the vehicle industry: the rise of electric, autonomous, connected and shared vehicles.
"Let’s be clear: we are not satisfied with our performance," chief financial officer Bob Shanks said during an analyst conference Tuesday evening. "For the past seven months, we have undergone a rigorous assessment to ensure we are fit as a business and are making the choices that will create the Ford of tomorrow."
Before delivering the presentation at the Deutsche Bank Auto Industry Conference, Shanks warned that adjusted profit would fall in 2018 to between $1.45 and $1.70 a share, down from about $1.78 in 2017. While Wall Street had been expecting a drop from 2017, the low end of the company’s guidance is worse than what analysts were anticipating.
Ford’s automotive business earned just a 5% profit margin last year, less than its average since 2010 of about 6%, according to Shanks. The company hasn’t achieved its 8% goal in any year since the global recession, he said.
The vehicle maker flagged its expectation for weaker earnings two days after executive chairperson Bill Ford said the company founded by his grandfather is going "all in" on electric cars. Ford began this week’s Detroit vehicle show by pledging to invest $11bn to bring 40 electrified vehicles to market by 2022.
In 2017, Hackett took over a vehicle maker that lacks a model to compete with cars such as General Motors’ Chevrolet Bolt or Tesla’s Model S.
In remarks on Tuesday at the Automotive News World Congress in Detroit, Hackett rejected suggestions that Ford was behind.
"Ford is going to aim ahead to where it has to be," Hackett said. "Because it has to be ahead in order for people to believe our strategy isn’t about catching up to somebody else."
The vehicle maker has acknowledged it must change to evolve, including cutting car lines that no longer sell well.
"We know we must evolve to be even more competitive and narrow our full line of nameplates in all markets, to a more focused lineup that delivers stronger, more profitable growth, with better returns," Jim Farley, Ford’s president of global markets, said in a statement.
Ford shares fell 2% to $12.84 after the close of regular trading in New York. The stock rose just 3% in 2017, trailing Tesla’s 46% surge and GM’s 18% jump.
The biggest factors contributing to Ford’s expectation of lower profit this year are the rising price of commodities, including steel and aluminium, and adverse effects from currency exchange rates, in part due to Brexit. Those costs represent a $1.6bn headwind to earnings in 2018, Shanks said.
The profit forecast prolongs the payback from spending on autonomous vehicles and other technology that Hackett’s predecessor, Mark Fields, had been promising to investors before his ousting in May. Profit will rebound over time, Shanks said in a phone interview.
"We certainly see us on a path toward the margins that we have been targeting for a long time," Shanks said, referring to the 8% target. "Not this year or next year, but within the next several years."
In addition to electrifying its line-up, Ford is reallocating investment toward crossovers and rugged off-roaders amid slumping demand for passenger cars in its home market. The Lincoln luxury brand, already highly reliant on models such as the Navigator, will turn towards SUVs in the future.
Ford projects that it will boost the share of its sales from SUVs by 10 percentage points — all at cars’ expense — over the next couple years to cash in on more lucrative models that American consumers want.
"We’ll have more utilities," Shanks said. "We will be simplifying, if you will, our participation in the car segments to move into subsegments that have more margin and are more attractive."
GM surprised Wall Street earlier on Tuesday by predicting steady profit this year to be followed by another earnings jump in 2019. A redesigned Chevrolet Silverado pick-up and fresh crop of crossovers are helping fund CEO Mary Barra’s ambitious plans to put robo-taxis on the road in a ride-sharing fleet next year and roll out 20 all-electric models by 2023.
Ford also announced it will start being more transparent about its own bets on mobility. Within the slides Shanks presented, the company disclosed it lost about $300m in this business in 2017.