Global Insight Perspective | |
Significance | A report in the Detroit News has indicated that Ford is dramatically retooling its truck plants in North America in order to make smaller, more fuel-efficient European-style models for the North American market. |
Implications | The importation of Ford's European vehicles to North America is not feasible as a result of highly unfavourable exchange rates, but the expensive retooling of its North American truck plants implies that the company is carrying out a major revision of its turnaround plan. |
Outlook | Careful use of cash and time will be critical if Ford is to successfully retool the plants and bring much-needed passenger cars to the North American market. With a return to profitability slipping ever further away, Ford can afford to waste neither. |
A report by the Detroit News yesterday revealed a radical and ambitious plan by Ford Motor Company to dramatically retool its North American truck plants in order to begin making European-style small cars there. Manufacturing executives and plant management are reportedly being summoned to the company's Dearborn (Michigan) headquarters tomorrow to receive details of the plan, which is being billed as a remarkable revision of the company's North American manufacturing footprint. Sources also indicate that the company is examining its product development pipeline in an effort to speed new fuel-efficient smaller vehicles to market as the company's trucks and sport utility vehicles (SUVs) languish on dealer lots and plants slow down operations in line with falling demand.
Already Ford has announced that its Mexican F-Series truck facility will be the site for production of the North American version of the Fiesta B-segment subcompact, but additional announcements are expected regarding the replacement of other truck production throughout the continent with additional models based on Ford's European line-up. The company is a leader in small-car sales abroad, but it is limited to the Focus compact in North America, and will remain so until the Fiesta arrives in 2010. In its report, the Detroit News cites sources familiar with the plan as saying that the details will become public over the next few months, but that people should expect similar changes to those made at the Mexican F-Series facility. One example given is the replacement of the big, V-8-powered E-Series van at Avon Lake (Ohio) with the V-6-powered European Transit van. The upcoming F100 smaller pick-up is expected to be manufactured at the Michigan Truck facility, which currently is barely running one shift for production of Ford's Expedition and Navigator SUVs. The newspaper also reports that Ford's Louisville (Kentucky) assembly plant, which currently makes the body-on-frame Explorer and Mountaineer SUVs, will be converted into a facility capable of making uni-body vehicles, which could include crossover utility vehicles (CUVs), cars, or a combination of the two.
According to Automotive News, Ford spokesperson Angie Kozleski declined to comment on the report. "It's a private meeting to discuss the state of the business", she said. "What we're going to do is to keep everyone up to date on the changing business situation", she added.
Outlook and Implications
This is the first sign that the turnaround plans as previously envisioned by the “Detroit Three” automakers are about to undergo a major revision. Nearly all of the turnaround plans under way at the “Detroit Three” had counted on three very specific conditions: that truck sales would pick up towards the second half of 2008; that fuel prices would remain in the neighbourhood of US$2.75 per gallon; and that the U.S. economy would begin to pick up in the second half of the year. It is becoming increasingly clear that these three conditions are not going to be met. Fuel prices have skyrocketed and are now hovering north of US$4.00 per gallon, well past Ford CEO Alan Mulally's stated threshold point of US$3.50 per gallon at which he says American consumers will begin to make dramatic consumption changes. Truck sales have plummeted further than anyone had anticipated, erasing expected income and profits for the “Detroit Three”, which typically earn over twice the profit on a truck as they do on a passenger car. Furthermore, the U.S. economy continues to founder, with the spectre of high inflation now becoming an increasing worry as fuel costs have begun to affect prices for everything from food to home goods.
This perfect storm of negative events is finally forcing Ford back to the drawing board to develop a new strategy, and it frankly cannot come soon enough. Ford has been criticised by many organisations for not bringing new products to market quickly enough, missing out on the changing consumer preferences as customers move from trucks to cars and CUVs. The products it has brought out have met with a mixed reaction. The Edge and MKX CUVs have been very well regarded, as have the refreshed versions of the Escape and Mariner CUVs; but the rebadged, massaged versions of the Taurus and Taurus X have been less successful, and Ford's mainstream mid-size sedans still lag well behind the market leaders from Toyota, Honda, and Nissan. As evidence of the strong demand for small cars in North America, Ford's Focus is doing extremely well, much better than anyone had predicted, based largely on its size, efficiency, price, and unique telematics features. The vehicle reportedly fared poorly in styling clinics, leading to a belief that it is not the car's appearance that is behind its double-digit percentage year-on-year (y/y) sales increases.
Two big questions arise in response to Ford's plan: does it have the money to carry it out, and does it have the time? Free, unassigned cash is something that is in short supply at Ford, and it remains to be seen how Wall Street will take the news that the automaker is likely to spend billions of dollars retooling plants and accelerating the development of new vehicles when it is losing billions of dollars from daily operations. The decision to change plants over to much more flexible systems is frankly a good long-term move, as Toyota has proven by announcing plans to make Camrys using idle production capacity at its Princeton (Indiana) truck plant. But the other question is time. The earliest Ford will have a new small car on the market in the United States is 2010, when the B-segment Fiesta arrives from Mexico. The importation of models from Europe is not viable given the highly unfavourable exchange rates (exporting to Europe after the new plants are set up in the United States, however, may be another story altogether). Ford is haemorrhaging cash right now, and it has a limited amount of time before it must start turning profits again. With truck profits likely to be severely curtailed and passenger car profits not only much smaller but unlikely to see any sort of significant increase until 2011, the question of timing becomes highly important to Ford.