Global Insight Perspective | |
Significance | Ford Motor Company has announced additional production cuts for the third and fourth quarters of this year and a delay in the introduction of the 2009 F-150, while it has also issued as statement suggesting that it might post a bigger loss in 2008 than in 2007. |
Implications | The fall in truck sales (and the lack of any foreseeable recovery) will seriously affect the company's bottom line despite any increase in sales of smaller vehicles, as the profit margins on trucks are much greater than those on cars. |
Outlook | Ford is revamping its turnaround plan, announcing massive changes to retool its truck plants to make cars and an acceleration of the programme to bring European small-car designs over for North American manufacturing. How Ford will make up the profits lost as a result of the plunge in truck volumes, however, remains to be seen. |
Ford Motor Company issued a lengthy statement on Friday (20 June), in which it declared that it was delaying the introduction of its redesigned 2009 F-150 pick-up by around two months until late in the third quarter of this year, instead of early in the quarter. The company cited the high inventory of 2008 models that dealerships need to sell first before the 2009 model can be released as the reason for the delay. Production is still scheduled to begin in early August, but the actual release of the pick-up is unlikely to take place until October 2008. The company also confirmed that the new B-segment Fiesta and global C-segment Focus would go on sale in North America in 2010, the latter finally sharing the same platform and design of the European model of the popular compact.
The company also issued several profitability warnings, stating that unless the economy improves, it "will be difficult to break even" in 2009. Previously, Ford had said that it would turn a profit in 2009; then it said that it was looking to break even; and finally it is now stating that even this breakeven status is rather unlikely. In addition, the company announced that Ford Credit would likely lose money this year, as it takes a beating on auction values of used trucks and sport utility vehicles (SUVs) that are coming off lease. Lehman Brothers estimates that Ford Credit may lose as much as US$1 billion in bad lease deals—F-Series trucks and Explorer SUVs whose residual values have fallen well below their contractual ending lease prices. With Ford Credit unable to sell the vehicles at the levels it had anticipated, the company will be making a loss on them at auction. Ford Credit will not be contributing a payment to Ford's bottom line this year, according to the company.
Ford is also dramatically cutting production of all its trucks, reducing third-quarter total vehicle output by 50,000 units to an expected total of 475,000 units, or a full 25% below production in the third quarter of 2007. The company also announced a reduction to fourth-quarter output, of 40,000 units to an anticipated 550,000-590,000 units. This comes as the company increases production of its hot-selling smaller, more fuel-efficient models. The company's Kansas City (Missouri) plant will add a third shift for its Escape/Mariner crossover utility vehicle (CUV) just as it switches to one for the F-150, while it will also add a third shift for its Focus compact and Edge/MKX/Flex CUVs.
Outlook and Implications
Ford's announcement follows hot on the heels of General Motors' (GM) revelation last week that it was delaying the redesign of its next-generation big trucks. But Ford's announcement was accompanied by more information about the company's financial problems, and that has given the entire financial and automotive community pause for thought. Ford is facing a serious challenge to its turnaround plan, the same one that General Motors and Chrysler are facing: market conditions have changed so drastically that nothing short of a completely new plan is needed. Ford is attempting to enact that plan as quickly as possible, but it will be extremely difficult to match prior levels of profitability during the height of the truck boom when truck volumes are being replaced with small cars. The profit margins on Ford's trucks are massive, over US$10,000 per full-size Super Duty pick-up, at a minimum. The profit margins on the company's small cars are a fraction of this amount, nearly 1% of the typical truck profit in some cases. As a result, Ford is scrambling to reinvent how it makes money. It would have to sell a huge number of more small cars in order to make up the lost profits from the dramatically reduced truck volumes; given the market conditions and competitive pressures of the North American industry, that is simply not going to happen.
The loss of income from Ford Credit is another particularly damaging blow. Ford steadfastly refused to divest itself of any part of Ford Credit, electing not to copy GM’s strategy of selling half of GMAC to private equity fund Cerberus Capital Management, as the finance arm of Ford was consistently providing solid income for the parent company. Ford Credit is also not a player in the home mortgage market like GMAC is, and so did not take a hit when the sub-prime mortgage market imploded in early 2007. But the market forces at work in the United States have conspired to deal Ford Credit a bad hand, as the rise in fuel prices has knocked sales of big trucks significantly, and has reduced the demand for used models as well. Thus, Ford Credit, which had been leasing trucks in droves, finds itself with thousands of trucks being turned in at the end of their lease, and now worth less than the amount Ford Credit thought they would be when the leases were made. These vehicles are being sold at auction for thousands of dollars less than the anticipated "blue book" value, meaning that Ford Credit is taking a loss on the sale of each one. This has effectively sapped the profits at the credit arm, which will not help the parent company's bottom line this year.
As a result, Ford has dramatically changed its course. It says that it has accelerated the introduction of more of its European small cars in the U.S. market, but it is questionable how much the timelines can actually be moved forward for the Fiesta and Focus. The Fiesta will be built at the company's Cuautitlan (Mexico) plant, which is scheduled to start retooling for that vehicle after truck production currently at the plant winds down at the end of 2008. Where the Focus will be made has not yet been identified, but it is reasonable to assume that it will replace the existing North American Focus at the company's Wayne (Michigan) plant, also scheduled for introduction in 2010. How Ford will speed up these introductions is unclear, unless there is an infusion of cash or a sudden decision to end truck production at Cuautitlan early. More information on that timing is expected to come from Ford at the company's second-quarter financial results meeting in July. But even if the company can accelerate the introduction of smaller, more fuel-efficient models onto the North American market, it is still unclear how it plans to replace the profit potential lost from the decline in big truck sales.