Ford Revises Profitability Outlook, Lowers 2008 Truck Production Forecast

Ford Motor Company has announced that it no longer believes that it will be profitable in 2009, as a result of several economic, social, and consumer-related factors in the United States. This marks a change from its previous rhetoric, having promised a return to full-year profitability in 2009 as part of the company's ongoing turnaround programme. However, skyrocketing fuel costs, higher commodity prices, a depressed U.S. economy, and an acceleration in the shift in consumer preferences away from trucks to passenger cars have all conspired to push back the company's timetable by at least a year. “We are continuing to make great progress on our plan”, Ford President and Chief Executive Officer (CEO) Alan Mulally said in a statement. “We are profitable and growing outside of North America, and our transformation plan in North America is working. The challenge affecting the entire industry is the accelerating shift in consumer demand away from large trucks and SUVs [sport utility vehicles] to smaller cars and crossovers—combined with a steep rise in commodity prices and the weak U.S. economy”, he added.

As a result of this consumer shift, Ford has announced that it will reduce production of its big trucks and SUVs in the second half of 2008, while increasing production of its Focus compact, Fusion/Milan/MKZ mid-size sedans, and Edge/MKX and Escape/Mariner crossover utility vehicles (CUVs). The company has reduced its overall production forecast for the second quarter of the year by 15%, or 20,000 units, to 690,000 units. This will be followed by a 15-20% drop in the third quarter to between 510,000 and 540,000 units, and a 2-8% drop in fourth-quarter production to between 590,000 and 630,000 units. Ford plans to increase its car and CUV production through additional shifts and overtime, while the cut in truck production will come via increased downtime, shift reductions, and line-speed actions. No mention of lay-offs was made in the company's statements, but in a conference call with the media, Mulally stated that Ford will increase the number of plants that it includes in the latest round of buyout offers. Mulally has said in the past that if the personnel reduction targets were not met through buyouts, Ford would likely resort to lay-offs.

The combination of lower volumes of high-profit trucks and higher sales of lower-margin cars has forced the company to revise its earnings outlook for its turnaround plan. “Unless there is a fairly rapid turnaround in U.S. business conditions, which we are not anticipating, it now looks like it will take longer than expected to achieve our North American Automotive profitability goal”, Mulally said. “Overall, we expect to be about break-even companywide in 2009—with continued strong results in Europe and South America”, he added.

Outlook and Implications

Simply put, Ford is not moving fast enough in its home market to address the dramatic consumer shift currently under way. Americans are abandoning trucks and SUVs for smaller, more fuel-efficient alternatives as gasoline (petrol) climbs above US$4.00 per gallon. Ford's new Focus is seeing double-digit percentage sales increases, and the company's CUVs are doing exceptionally well in their segments. But the inadequate pace of new arrivals, an area in which Ford has been criticised in the recent past, becomes glaringly obvious as the economy worsens and Americans change their buying behaviour. The upcoming Ford Flex CUV was needed a year ago to compete with General Motors’ (GM) offerings, which have in the intervening months sold tens of thousands of units. The perfect example is the new Ford Fiesta, based on the Verve show car and introduced in production form in Europe recently, and which will go on sale in Europe by the end of this year—North America must wait until 2010 to receive its version of the model. Ford’s statements yesterday on its profitability and production outlook clearly show the need for it to have this car in the United States right now, not two years from now.

The expected drop in profitability, although disappointing, is not terribly surprising when the company's production forecast is examined. The margins on the company's big trucks are significantly higher than those on its passenger cars, simply because of the cost differential between the two. Selling fewer US$40,000 pick-ups and full-size SUVs and more US$20,000 compact sedans will mean commensurately less revenue and income on overall sales that may not adjust downwards terribly much. The company has made great progress with its cost-reduction programmes (a major reason why it managed a US$100-million profit in the first quarter of 2008), but further attrition is likely as capacity is adjusted.

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