Global Insight Perspective | |
Significance | Ford is predicting three more quarters of increasingly poor year-on-year performances as production cuts and plant closures begin to affect the bottom line. Production is not expected to pick up until the second half of 2007, and profits not until 2008. |
Implications | CEO Alan Mulally and CFO Don Leclair face a difficult task in keeping investors calm over the next year as poor quarterly reports continue to arrive. |
Outlook | Mulally's recent comments that the "Way Forward" restructuring plan will require some incremental modifications in order to increase manufacturing flexibility and improve product plans provide encouragement that the new CEO knows in which direction the company must be steered. The bigger challenge will be to ensure the rapid implementation of the improvements, and the launch of products that are right for the market. |
Ford Chief Financial Officer (CFO) Don Leclair has announced that the automaker expects North American production in the first half of 2007 to be cut by as much as 12% from the same period in 2006, according to Automotive News. Reductions will be made in a number of areas, but primarily stem from a shift away from trucks and sports-utility vehicles (SUVs) and the end of production of the Ford Taurus. Taurus production totalled nearly 100,000 vehicles in the first half of 2006, and its absence will leave a significant gap in Ford's output, although some of that volume will be made up with the production of the new Ford Edge and Lincoln MKX cross-utility vehicles (CUVs).
The shift away from trucks will be particularly pronounced, coming after a 21% decline in total production in the third quarter of 2006. Currently, Ford's product mix consists of 61% trucks and 39% cars, as the company slows production of F-Series pick-ups and large SUVs. Inventory levels remain a concern as well, as Ford is reporting just over 652,000 vehicles on-hand, but is expecting that number to fall by the end of 2006.
"Way Forward III"
Nevertheless, Chief Executive Officer (CEO) Alan Mulally is confident that the company can be guided through the painful months, and has stated that there will be continual improvements made to the "Way Forward" restructuring plan as he becomes more familiar with the company. The two areas he intends to address are product plans and manufacturing productivity improvements. According to Automotive News, Mulally expressed reservations about Ford's current product offerings: "It is what it is today. But with the shifts in customer demand, we know we're going to end up with changes to that plan across the entire portfolio." Further changes may be made to manufacturing plans as well, as Mulally expressed a desire to see better flexibility at its plants. He also did not rule out the possibility of shutting down more than just the 16 plants already slated for closure by the end of 2008, but hinted that the ability to make several vehicles on a common assembly line would be crucial going forward.
Outlook and Implications
Ford is announcing well in advance that it does not expect to be profitable again until 2008, but its biggest challenge concerns the speed at which improvements can be made. Year-on-year financial comparisons will continue to be poor as Ford readjusts its production mix and reduces its product portfolio to reflect its 15% market-share target. After production had been at very high levels in early 2006, the drastic reductions in truck output and the attrition of workers through buyouts will continue to have a serious impact on Ford's North American operations. This will likely overshadow any kind of performance gains elsewhere in the world, should Ford make progress in South America or Asia.
Manufacturing is Mulally's strong suit, having made significant improvements in this area during his previous role at aircraft manufacturer Boeing. The need to restructure Ford's overcapacity, reduce personnel, and boost flexible manufacturing with a smaller workforce should enable Mulally to show off his knowledge and strengths. The closure of 16 plants and employee buyouts over the next several quarters will be painful, but some sort of gain from these downsizing and cost-cutting efforts should be realised by the second half of 2007.
Ford's public emphasis on improvements to the product portfolio is welcome news, but with new and significant models still at least 12-24 months away from showrooms, and barring any drastic push to revamp the product development cycle, Ford is going to have to attempt a turnaround based on the products that are currently in the pipeline. While promising products are appearing at Ford of Europe and a "muscle car" war seems to be brewing between Ford of Australia and GM Holden, North American product proposals remain vague, with simple "freshenings" of current products and mild restyles planned to differentiate Ford and Mercury products. The new Edge and MKX CUVs are promising vehicles, but Ford faces an uphill marketing challenge to tempt potential buyers away from Asian manufacturers. Ford will be without a family minivan soon, instead choosing to target a new category by replacing the Freestar minivan with the Fairlane large CUV. There are still no details as to what new and exciting products will be launched by Ford beyond those already announced, with further models generally believed to be necessary in order to successfully resuscitate the troubled automaker. Mulally's biggest challenge is likely to be keeping Ford afloat and Wall Street calm until the effects of the "Way Forward" strategy start to be seen.