Howes: Behind Blue Oval profits, Ford wrestles future
Nobody said this mobility thing would be easy or cheap.
Ford Motor Co. predicted Thursday that its earnings this year will trail those posted last year, in part because the Dearborn automaker is placing big bets on new lines of business in the continually morphing autonomous-vehicle space — bets that have yet to generate revenue or profit.
The Blue Oval said profits will be $1.4 billion lower this year because of “planned investments and emerging opportunities.” But it expects a rebound in 2018, thanks to the strength of its core car and, especially, truck business.
That’s a bracing reminder of a few realities weighing on the industry’s top players in general and Ford in particular. First, those aspiring to next-generation leadership need to play aggressively in both traditional core vehicles and the future mobility spaces at the same time.
Second, for all its talk of “smart mobility” and investment in electrification, Ford is a trucks-first company that is growing more so. According to data presented to investors, Ford is more heavily weighted toward trucks and SUVs than the industry average and more lightly weighted toward cars.
It also boasts lower inventories than the industry average, lower profit-killing incentives and higher average transaction prices. Added together they’re part of a recipe for higher profits that can be used to finance ambitious investments in mobility services, self-driving vehicles and the technology that animates it all.
In theory, anyway. In theory, Ford’s multi-billion spending to develop mobility services and autonomous driving would yield sharply higher margins and returns on capital investments, two critical metrics separating the auto industry from its high-tech rivals.
Behind the Blue Oval facade is a company wrestling at the highest levels with the shape of its future. Former CEO Alan Mulally led a remarkable turnaround of the core business, from the United States to Europe and Asia, that was necessary for Ford’s survival.
But it’s not sufficient to be seen as a truck company when Wall Street expects more. It shows in the earnings multiple investors assign to Blue Oval shares, in the price of the shares themselves, in the dismaying fact that despite the huge profits Ford has booked since the Great Recession, Wall Street keeps yawning.
A simple formula holds that stock price is driven by expectations for growth, assessment of risk-taking and evidence of returns. Ford is demonstrating an ability to deliver steady profits in a truck-heavy market fueled by cheap gas, but it’s not at all clear it has adequately diversified its earnings power — or is willing to take bigger risks.
Put another way: Does the company whose founding Model T put America on wheels need to be all things to all people in the Age of Mobility? Does it need to build small cars for a U.S. market that increasingly doesn’t want them? Are the “One Ford” products built for Europe the right ones for poorer regions of China and India?
Answering no to any of those three questions (and more) takes more courage than Ford’s leadership historically has been willing to muster. But the high capital demands of an industry bifurcated between traditional vehicles and mobility likely will require Ford to decide where it needs to play and how it can win.
Adding to the pressure is cross-town rival General Motors Co. CEO Mary Barra and her leadership team are making the kind of tough (and risky) calls their predecessors mostly wouldn’t even consider, much less do. They’re selling their Opel and Vauxhall business to PSA Groupe SA of France. They’ve exited Russia, ended production in Australia, restructured in Thailand.
Most of all, they’re changing the narrative of what it means to be a Detroit automaker. For generations, this town’s Big Three were synonymous with being all things to almost all people — or, in the words of legendary GM CEO Alfred P. Sloan, “a car for every purse and purpose.”
Not anymore. The new generation leading Detroit’s automakers is showing a willingness to make tough calls in good times, whatever backward-looking pressure may come from the Trump White House in its demands to create more U.S. jobs and investment.
It’s a new automotive world, transformed by technology and pressure from Silicon Valley heavies. If Ford doesn’t grab its share, you can bet someone else will.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.