Sat | Dec 14, 2019

Ford made bold decision to stop making sedans: How it’s working out one year later

Published:Sunday | May 26, 2019 | 12:05 AM

No one can be certain of the future, but Ford Motor Company is pretty confident that it made the right call.

One year ago, as the company reported its earnings for the first quarter of 2018, Ford shocked consumers, investors, and dealers with what seemed like an abrupt announcement: The iconic company famous for making affordable cars available to the masses actually planned to stop making sedans.

Now, Ford officials are looking at sales trends with joy and relief.

“The migration out of passenger cars into SUVs has accelerated,” Mark LaNeve, vice-president, US marketing, sales, and service at Ford, told the Free Press. “It’s breathtaking. It’s a generational shift. At Ford, we believe it’s structural or otherwise permanent. It won’t bounce back with an oil shock.”

He added: “I don’t know what the bottom is. Because they’re so important to the Asian brands, you will get some sustaining level.”

Passenger car sales – “anything with a trunk,” LaNeve says – have steadily declined since 2012 from 49 per cent of US sales to just 30 per cent in 2018. The first three months of 2019 show that the free fall continues.

Ford reported its earnings for the first quarter of 2019 last week, with its profitability driven by F-Series pickup trucks and SUV sales in North America

The company said its first-quarter earnings before interest and taxes – adjusted EBIT – was US$2.4 billion, up from US$2.2 billion in the first quarter of 2018. Net income, after taxes and other charges, was US$1.1 billion, down from US$1.7 billion in the same quarter last year.

Overall, the automaker exceeded expectations set by Wall Street.

CFO Bob Shanks reiterated that the company would absorb billions of dollars in costs over the next three years as the company restructures globally, but the US market and Ford Credit continue to provide consistent profitability.

“It’s a very, very encouraging start for us,” Shanks said during his final earnings report before retirement.

Ford slightly increased its US market share and lost share in the rest of the world. The company’s revenue was US$40.3 billion, which is down four per cent – related to discontinuing the Ford Focus in North America, ramping up all-new Explorer production and industry decline in Turkey.

The company saw a pre-tax loss of US$196 million outside of North America, mostly in South America and China – an improvement since fourth-quarter 2018 of US$632 million. Ford spent US$592 million related to leaving the heavy-truck business in South America and plant closures in Russia. Shanks projects that the total 2019 costs related to worldwide restructuring will be up to US$3.5 billion.

“We have been very thoughtful around how we’re allocating capital,” Shanks said. “F-Series in North America is doing very, very well. The transaction prices are holding up. Our market share actually grew. When you think of the bottom line, F-Series actually contributed positively to the bottom line. So did Ranger and (the) Transit (van).”

Shanks emphasised, “We’re happy, but our enthusiasm is well under control.”

Ford ends the quarter with US$24 billion in cash on hand and US$35 million in liquidity.

Ford Credit saw its best quarterly results since 2010, Shanks noted. It saw a 25 per cent spike over a year ago, earning US$801 million.

SUVs continue rolling

Sport utility vehicle sales jumped from 36 per cent to 52 per cent of all US vehicle sales from 2012-18, while truck sales have grown steadily from 14 per cent to 19 per cent. The trends continue unabated.

“Years ago, when you shifted from a car into an SUV, you had to make trade-offs on fuel economy, ride quality, technology,” LaNeve said. “Now, with the SUVs we currently build, you don’t have to make the trade-offs. We’ve invented a better mousetrap. My wife, the No. 1 thing with her is visibility. She wants to be able to see. And a heated steering wheel. She likes the command seating position.

“Are there some die-hard sedan customers we may lose? We’re hoping to minimise it,” LaNeve said. “We’ll play to our strengths. We’ll take every opportunity to introduce them to Ecosport and Escape (compact SUVs) and we’ll use capital we’ve allocated to sedans. That’s the trade-off we’re making. We’ll put money where the growth is occurring rather than declining.”

What about drivers of the Ford Fiesta, Ford Focus, Ford Fusion? They’ll switch to other Ford products, LaNeve predicted.

Fiat Chrysler “made the decision a long time ago”, he noted, adding that Chevrolet and Buick have dramatically reduced their sedan offerings, too.

The only passenger car Ford will retain is the globally popular Ford Mustang.

Small cars offer ‘sanctuary’

Still, industry observers watch with caution.

“The shift to SUVs makes sense given their market demand and profitability. They are simply a better investment right now,” said Karl Brauer, executive publisher of Kelley Blue Book. “What’s less clear is the long-term impact of this decision. The domestic automakers have walked away from sedans in favour of large trucks and SUVs before.

“It happened in the early 2000s, and it looked like the smart way to go back then, too. Then fuel prices spiked in the late 2000s, followed by a recession, driving consumers out of SUVs and into small cars to counter their fuel-bill concerns. The import brands cashed in on this trend while the domestics lost sales and market share.”

History repeating itself is unlikely because of strides made in fuel economy, he said.

“Of course, that assumes a purely rational approach,” Brauer said. “If fuel prices hit US$5-plus a gallon, rational thought will likely go out the window as history repeats itself. In that scenario, the domestic automakers will once again be caught flat-footed as shoppers rush to the sanctuary of small, fuel-efficient cars – offered by import brands.”

Toyota, Honda ‘rock solid’

Challenges facing Ford can’t be underestimated, analysts said.

Consumers don’t see Ford as a strong player outside trucks and SUVs, according to Kelley Blue Book’s Brandwatch report, noted Michelle Krebs, executive analyst at Autotrader. “Toyota and Honda are sticking with cars because their reputation for cars is rock solid.”

Ford must convince car owners to stick with the brand but move to utility vehicles.

“Ford has not had much success in that realm so far,” Krebs said, despite LaNeve’s confidence. “Ford car owners’ next choice tends to be a Honda CRV or Toyota RAV4, not a Ford Escape.”

Ford CEO Jim Hackett has been talking about the company’s “fitness” since he took the job in May 2017. He promised to restructure the 116-year-old company in a way that eliminates waste and enhances strengths, and he praised the shift away from sedans when talking to investors.

“We don’t intend to lose any of these customers long term. In hindsight, it was absolutely the right call,” Hackett said. “We will deliver better company results in 2019 than last year.” Industry watchers have been critical of the slow pace and lack of specifics in Hackett’s plan, but by last week’s earnings report, these changes have been made public:

n An estimated 2,000 job cuts and restructuring in China.

n Voluntary separation offers of more than 5,000 in Germany and the UK.

n Exiting the heavy-truck business in South America.

n Closing three manufacturing plants in Russia, exiting the passenger vehicle market there.

n Plans to invest US$850 million in Flat Rock Assembly Plant for autonomous vehicles.

n An agreement with Volkswagen to build light trucks and vans in Europe.

n Partnering with Mahindra to jointly develop a mid-size SUV in India.

n Hiring a former Amazon executive to become CFO on June 1.

n Signing a multiyear agreement with Amazon Web Services to expand the availability of cloud connectivity services and connected car application development use.

n And on the eve of releasing its quarterly earnings report, Ford announced a US$500 million investment in the Michigan-based electric truckmaker Rivian.

Ford had a smaller sales drop in the first three months of the year, at 1.6 per cent, compared with three per cent for Fiat Chrysler and seven per cent for General Motors.

Ford notes that its truck and van sales climbed foue per cent while Ford-brand SUVs grew 3.5 per cent and Lincoln grew 11 per cent for its best start to a year in more than a decade.

The company also announced that its new Ranger mid-size pickup and upcoming Bronco SUV will generate US$1 billion in earnings than a year before for the Michigan Assembly Plant in Wayne.

‘Wait, what?’ dealers ask.

Chaz Gilmore, managing partner at Grapevine Ford in suburban Dallas, is one of Ford’s biggest dealers in the country. A year ago, he was stunned.

“I think, like many of the dealers and the public in general, when we initially heard that we were getting out of the car business, we heard it as ‘the vehicle business.’ We immediately all jumped, I think, to reach out to our friends at Ford to get clarification about what they meant, to see if we’d still need these facilities,” he told the Free Press last week. “It’s true. So when they clarified they really meant a couple vehicle lines, none of us was making much money with the vehicles that they eliminated. And it’s important to note that they added as many products as they eliminated.”

But what about affordability? Are dealers worried?

“Price point has been a concern even before those cars got eliminated” Gilmore said. “That’s a conversation dealers and manufacturers are having.”

Buyers can get into an Ecosport subcompact SUV for less than US$20,000 he said. “But new vehicles have become more expensive. Affordability is made possible by financing and low interest rates. It’s an issue everyone is facing.”

But no one can be good at everything, especially a full line of products, the car dealer said. “Imports struggle with trucks. Domestics struggled with sedan passenger cars. I’d rather have products that play to our strength.”

Ford has changed direction on future vehicle development, cutting investments in passenger cars from 33 per cent to six per cent, and reallocating those dollars to more trucks and SUVs to 94 per cent of its future vehicles.

In 2015, the company spent 35 per cent of its product development money on SUVs, 32 per cent on trucks and 33 per cent on traditional passenger cars for products from 2016-2020. In 2018, the company plans to spend 52 per cent on SUVs, 42 per cent on trucks, and six per cent on cars for 2019-2023.

Worries remain

Overall, industry observers are cautiously optimistic but worried.

While Ford seems intent on declaring victory in its product strategy and restructuring initiatives, it is both too soon for any measurable benefits to have accrued, and it is far from certain that they ever will, said market analyst Jon Gabrielsen, who tracks industry trends to advise automotive clients.

“Ford faces a series of headwinds, including a likely beginning of auto cycle downturns in North America and Europe, tariffs, Mexican border slowdowns and threatened border closings, a China that very well may not turn back up in the second half, continual random saber-rattling from Washington, DC, an environment of general business uncertainty and anxiety, and UAW and Unifor contract negotiations later this year,” noted market economist Jon Gabrielsen, who tracks the industry for automotive clients.

No question, Ford is likely to benefit in the near term, observers say.

“History shows that the full impact of dumping a set of products takes about three years to fully reach a new balance. So any suggestion that one can already know the impact after a few months is illusionary,” he said. “Three years from now we will look back and find that Ford permanently lost at least half the 2018 market share it had in cars as a result of no longer having cars for those who only want cars and those who cannot afford the lowest-priced crossovers/SUVs.”

He pointed to when General Motors dumped Pontiac, Saturn, Hummer, and Saab and when Ford dumped Mercury, saying that the automakers lost market share even though similar vehicles were still available.

“With Ford and GM, they are eliminating entire types of vehicles with no nearly identical alternative,” Gabrielsen said. “They could lose most of that share if most of who were going to switch to SUVs already have and those still on cars would rather defect than switch.”

He added, “The loss of total North American vehicle volume will hurt profits more than the higher profits on crossovers/SUVs and pickups will benefit, it. In addition, it will eliminate the potential for young cash-strapped customers to even begin their lifetime climb up the Ford product and price spectrum so that they will instead begin that climb in a Hyundai, Kia, Honda, Toyota, and Nissan. Unless those entry-level customers hate their alternative foreign-brand choice, they will never later switch to Ford.”

Ford will permanently lose 12-14 per cent of its total North American unit volume and about 8-10 per cent of its sales dollars, he predicted.

Taking a less pessimistic view is David Kudla, CEO and chief investment strategist at Mainstay Capital Management, who manages US$2.5 billion in assets.

“It’s too soon to say whether Ford’s restructuring strategy will pan out long term,” he said.

For now, money is flowing to Ford.

F-Series average transaction prices have steadily grown since the 2014 debut of the new F-150 with a high-strength, military-grade, aluminum-alloy body, climbing an average of US$7,400 per truck in 2019, said Mike Levine, Ford North America product communications manager.

In the first year after the all-new Expedition was launched, it saw an increase in average transaction price of more than US$11,000 per truck.

Shanks, who joked that he would soon be watching Ford activity from Florida, said the company is “reimagining” itself.

“This is going to be a different business,” he said. “The overall trajectory, putting aside recession, will be an improvement.”