Only Mustang, Focus crossover to survive Ford car cuts
Dearborn — Ford Motor Co. plans to trim $25.5 billion in operating costs by 2022 and cut its North American passenger car lineup by more than 80 percent, eliminating the Taurus, Fiesta, Fusion, C-Max and Focus sedans within a few years.
CEO Jim Hackett said Wednesday that Ford will not make the next generation of those sedans, confirming months of reports that the automaker was considering cutting some of its unprofitable car models in favor of trucks and SUVs. The Mustang will be soon be Ford’s only car; the new Focus will launch next year in North America as the Chinese-built Focus Active crossover.
That’s a deeper cut to the car lineup than industry analysts expected. That move, coupled with the reduction in operating costs and a plan to reduce capital spending from 2019 to 2022 by $5 billion announced Wednesday, come from the “fitness” initiative Hackett outlined in October.
“We’re going to feed the healthy parts of our business and deal decisively with the areas that destroy value,” Hackett said. “It’s been easy to identify what’s wrong and what we need to do about it. The hand-wringing maybe that has been around in our business is gone. We’re starting to understand what we need to do and making clear decisions there.”
Ford reported Wednesday it made $1.7 billion in the first quarter of 2018. That’s 9 percent more than the same period a year ago, but Bob Shanks, Ford chief financial officer, said the work under Hackett will start to show results next year.
Revenue increased 7 percent to $42 billion compared to a year ago, the company reported. Its earnings before interest and taxes margin slipped 1.2 percentage points to 5.2 percent. Shanks said Wednesday the company would hit an 8 percent margin by 2020 as a result of reduced spending and cost efficiencies. Ford announced in October it would trim $14 billion in operating costs by 2022.
“Everything is on the table,” Shanks said. “We can exit products (and) markets. We will do that. That work (started in October) has really gained traction. We have looked at every single part of the business. It’s a very complex endeavor. We are determined to turn this business around right throughout the whole company. There’s more work that’s underway.”
The company found an additional $11.5 billion to those cuts, Shanks said, emphasizing there could be more. The largest portion of that reduction will come from Ford’s marketing and sales departments, the company said, which includes incentive spending.
While Ford will shrink its car lineup, it also plans to add five all-new SUVs over the next two years, along with the 2019 Ranger midsize pickup that debuted at the Detroit auto show in January. The company plans for nearly 90 percent of its vehicles sold in 2020 to be a truck, SUV or commercial vehicle.
The company has said every new Ford or Lincoln vehicle introduced over the next two years will have either a hybrid or plug-in hybrid engine option, which should buffer against rising gas prices as the vehicles get bigger, according to Hackett and Jim Farley, Ford president of global markets.
Ford said it is exploring new “white space” vehicle silhouettes that combine attributes from cars and utility vehicles. The Detroit News reported in January when the automaker moved to cancel the North American redesign of the Fusion sedan that the company could use that nameplate on a new or different vehicle architecture.
Despite dwindling sales for most of Ford’s car lineup, the move to ax sedans surprised the analyst community.
“Ford is dumping five model lines in less than two years, which has to be a record for nameplate death in the auto industry,” Karl Brauer, analyst with Cox Automotive, said Wednesday. “Given where the American — and even the global — consumer have gone over the past five years, it makes sense.
“Modern technology has removed nearly every advantage a car has over an SUV. With the exception of extreme performance or fuel efficiency, there really is no downside to owning a utility vehicle, and there are many advantages in terms of functionality, flexibility and safety. And I can guarantee, these are far from the last car lines we’ll see slashed over the next two years.”
The automaker is pushing to focus on high-margin parts of the business, improving profitability in segments that are profitable but don’t currently make a lot of money – and either cutting or changing the pieces of the company deemed “low performing.”
Shanks did not detail which parts of Ford fall into which segments. But the automaker made clear that sedans can’t be a part of its future.
“Ford realized it can’t be everything to everyone, and in today’s market that could be OK,” said Jessica Caldwell, analyst with Edmunds. “The key to success is focusing on where your customers are and where your strengths lie, and for Ford doubling down on trucks and SUVs could be just what the brand needs. But this move isn’t without risk: Ford is willingly alienating its car owners and conceding market share in segments that, while declining, are still relevant to some buyers.”
The first quarter of 2018 brought earnings of 43 cents per share, the company reported. Ford’s automotive segment reported earnings before interest and taxes of $1.7 billion. The North American segment reported earnings before interest and taxes of $1.9 billion, a 7.8 percent margin. Ford made $119 million from its European business, and lost money in South America, Middle East and Africa and Asia Pacific. The company also lost $102 million on its mobility segment.
Investors reacted positively to the news in after-hours trading Wednesday. Shares of Ford were up 2.6 percent to $11.40.
Ford is the first U.S. automaker to report first-quarter earnings. General Motors Co and Fiat Chrysler Automobiles NV will report results Thursday morning. Ford’s results follow what executives characterized as disappointing 2017 full-year results. The company earned $7.6 billion last year, including a $7.3-billion pre-tax profit on $145.7 billion in revenue from the company’s automotive segment.
Around the time Ford reported the full-year results, the company changed its guidance for 2018 due to expected rising commodities costs and an increase in spending on mobility service.
Shanks said then that if Ford had been more fit, it would have been able to absorb those hits and grow its 2018 profit. Ford expects adjusted earnings per share to fall between $1.45-$1.70 for 2018. That’s lower than the $1.78 earnings per share posted for 2017. The company updated its revenue and operating cash flow targets to be better than 2017.