Ford admit it, you’re a truck builder now
Ford Motor Co. prides itself on thinking big. The 117-year-old icon’s long-standing strategy is focused on preserving its status as a universal nameplate serving all major geographies of the world and offering a wide range of vehicles, from subcompacts to luxury SUVs, in a variety of flavors that will soon largely encompass electric.
But it’s a business that slips: After recording $ 7.4 billion in profits in 2015, Ford’s profits barely broke last year, and that was before COVID-19 and its subsequent blockages are a massive blow to its North American profitability. In the second quarter of this year, the company lost nearly $ 1 billion in the region. Jim Hackett was ousted as CEO shortly thereafter, and a new round of buyouts was announced.
New CEO James Farley, who has been promoted to COO, has a monumental challenge to overcome but also has everything he needs to make Ford a success, if he is willing to make tough product choices. and strategy.
So what should Ford look like in 2021 and beyond? Fortune spoke with analysts and industry experts and studied Ford’s public documents to put together a plausible plan for its revival.
Farley has a rare openness to seize the moment. The onslaught of the pandemic is making investors much more tolerant of tough decisions that cause short-term pain, but lean on what makes the money, sheds losers, and dumps high ambitions. It is a crisis Ford cannot afford to waste.
Junk more unprofitable models in North America
For years, North America was Ford’s only consistently profitable market. “But the margins have fallen there and are well below what they should be,” said Stephen Brown, analyst at Fitch Ratings. The big deal is a cost base that jumped $ 8.3 billion from 2016 to the end of last year, topping sales increases by just $ 5.5 billion; this combination reduced margins from over 10% to just 6.7%. In mid-2018, Ford announced an $ 11 billion global restructuring plan to achieve bigger and better deals with suppliers, automate production by adding fleets of robots, resizing its workforce implementation and phasing out almost all traditional passenger cars in North America.
But the company will get bigger gains by allocating the portfolio to three high-margin franchises, two of which are growing rapidly.
The first, and by far the largest, is the F-Series pickup. Last year, Ford sold an astounding 897,000 F-Series trucks, driven by the F-150, the vehicle the best-selling in the United States. The high-profile electric F-series, which could be unveiled as early as next year, will be a decisive addition to a lineup that makes up 40% of Ford’s total domestic sales.
The second category includes “commercial vehicles” or CVs, its Transit brand vans used by businesses, from couriers to carpenters, as well as the square passenger versions which succeed the older Econoline models. Like Series F, they show double-digit margins according to Wall Street analysts.
New CEO James Farley has a rare openness to seize the moment. It is a crisis Ford cannot afford to waste.
The third category, SUVs, is a more difficult call. Ford last year sold 831,000 in the category including the Escape and Explorer in the United States, but its sales and market share are declining, the latter dropping from 12% in 2015 to just under. by 10% in 2019.
Still, SUVs are a promising business in the United States. These are generally expensive and lucrative products, and even if they don’t grow much, they can still be. That’s because the key models share the “body-on-frame” architecture and are produced on the same platforms as the trucks that Ford manufactures in gigantic volumes, reducing unit costs. The new Bronco SUV shares the same chassis, and many other parts, with Ford’s second pickup brand, the Ranger, and is manufactured alongside its cousin in Wayne, Michigan. The Expedition, its largest SUV, and Lincoln Navigator’s high-end use the same basics as the F-150. In contrast, two of the smaller models, the EcoSport and the Escape, use a different system called a “unibody”, and therefore do not offer the same savings. “Ford should phase out the EcoSport and Escape, which are low-margin anyway,” said Jon Gabrielsen, an industry consultant. Simply put, Ford can thrive if it accelerates faster on the same route by getting rid of fringe SUVs and keeping costs down.
In Europe, get out of sedans and bet on vans
Ford’s biggest problems lie abroad. If the automaker could simply sell its overseas business to a rival for no gain, its road to success would be much shorter and straighter. Ford should leave South America as soon as possible. Its operation there, serving mainly Brazil and Argentina, has not earned its cost of capital for decades.
In Europe, where DG wisely withdrew via a sale to Peugeot in 2017, Ford commits to reducing its low-margin, high-volume passenger vehicle lineup and investing heavily in the growth of its star cars, commercial and passenger vans. It does not go far enough.
Ford should focus on dominating the van market. The company is the market share leader for commercial vehicles in Europe with 15.1%. Sales are growing, reaching more than 264,000 vehicles last year, and according to industry experts, its Transits are generating double-digit margins.
Large-scale production is crucial to maintain its lead in vans. A new joint venture with Volkswagen should help a lot. VW is committed to purchasing commercial vans in Europe and a Ranger-based pickup truck for all markets designed and manufactured by Ford.
But by reducing its range of passenger vehicles, Ford will no longer benefit from scale in engineering and purchasing, and therefore will not be able to keep costs competitive. He must come out of this segment completely.
The image for SUVs is cloudier. Last year Ford sold just under 300,000 SUVs in the UK and the Continent, many of which were made in the region. Unlike the sedan situation, Ford designs and manufactures large volumes of the same SUVs in the United States, with some sharing platforms with its F-150s. Ford would therefore save money by continuing to manufacture and sell the most popular models in Europe.
Reduce China’s ambitions and build on your strengths
Just five years ago, Ford was on a roll in China, holding an almost 5% market share and generating $ 765 million in pre-tax profits on $ 10.7 billion in sales. (The previous figures are for the Asia-Pacific region, which is heavily dominated by China.) A mind-boggling free fall ensued, wiping out all profits by 2019 and dropping revenue by 35%, to $ 7.0 billion. of dollars. Fortunes improved in the first half of 2020 with the introduction of new versions of the Ford Escape and Lincoln Corsair SUVs. But its market share is still only 2.5%, and it faces obstacles similar to those in Europe: a strong dependence on low-margin passenger cars, and the challenge of ” reach volumes large enough to compete with sedans and SUVs.
Although Ford is not disclosing the exact breakdown, Fortune estimates that of the 159,000 vehicles Ford sold in China in the second quarter, about half were sedans, led by the Focus midsize and compact Escort, and SUVs. As in Europe, China is rapidly moving towards electric vehicles. Intrepid, Ford is committed to introducing 30 new models over the next three years, 10 in all-electric versions. But China has more than 400 domestic producers vying for this market. And EVs are currently much less profitable than conventional vehicles, as battery costs remain high, while volumes remain too low.
That doesn’t mean Ford has to abandon China. On the contrary, he should once again play on his strengths. Its light commercial vehicles are very successful in China and in Europe. Ford is expected to transform into a specialist manufacturer focusing on vans and small pickups. Its growing production in the United States and Europe, including in new electric vehicles, will help provide the scale essential to win in the world’s largest auto market. It also starts with big margins in these vans and pickup trucks, which should make the transition to electric vehicles easier.
As sales decline, costs must keep pace
A new, resized, profitable Ford could be two-thirds the size of the current model, meaning sales would drop from $ 156 billion last year to around $ 100 billion. But this model can only work if Ford crushes overhead. Since it would switch to a much higher margin product mix, the automaker wouldn’t need to cut costs as quickly as sales to become much more profitable. But the transition would still be brutal. Entire engineering and sales teams behind scale models are expected to come in droves.
Ford has a core of great products that are watered down by trying to overdo it in too many places. A bold downsizing plan would spell the end of the erstwhile global empire, but it could ensure the Blue Oval survives on what Ford does best.
The new Bronco is an example of everything Ford does well
The engineering platform, chassis and several parts of the Bronco are shared with Ford’s new Ranger pickup, which has already proven to be a success.
Ford isn’t afraid to look to the past and bet on nostalgia – take the Ford GT and its entire Mustang lineup as proof. But with the Bronco, that nostalgia is paired with a practical vehicle that will appeal to young drivers.
The Bronco clashes with the proven off-road credentials of the Jeep Wrangler, and only beating the Wrangler will it succeed in the market. The published specifications show that Ford is taking this fight very seriously.
A version of this article appears in the October 2020 issue of Fortune.
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