As Ford pushes ahead to achieve its profitability target of 8% by 2020, a level that would once again place it ahead of Chrysler-Fiat in the Detroit automaker profitability depth league tables…
… the company announced Thursday that it’s shuttering the last of its US sedan brands as it shifts its focus to international markets, trucks and SUVs. It is a drastic move, as the company will be phasing out sedan models that have a long history with the company, including models like the recently revamped Ford Taurus.
The closures are expected to save Ford $25.5 billion by 2022, Ford Chief Financial Officer Bob Shanks told reporters on Wednesday during the company’s first-quarter earnings call. When the company is finished with the cutbacks, the only non-SUV, non-truck cars Ford will sell in North America will be the Mustang and the as-yet-unannounced Focus Active, according to TechCrunch, which pointed out that the closures were “a long time coming.”
Currently, Ford sells six sedans and coupes in North America: the Fiesta, Focus, Fusion, C-Max, Mustang and Taurus. This lineup hits multiple segments, from the compact Fiesta to the mid-size Focus, C-Max and Fusion to the full-size Taurus. The Mustang stands alone as the lone coupe.
It’s likely Lincoln’s sedans will also disappear, though this was not explicitly stated in today’s press release. Lincoln currently sells the mid-size MKZ and full-size Continental — both share platforms with Ford counterparts. If Ford is phasing out development of sedan platforms, Lincoln will likely suffer, too.
This reduction in traditional cars was a long time coming. North America consumers have increasingly turned to crossovers, trucks and SUVs over sedans and small cars. A trip to any parking lot will likely produce more evidence to this movement. There are several factors involved, from more fuel-efficient and better-equipped trucks and SUVs to improved safety ratings and ride qualities of these vehicles.
The company also reaffirmed that it will soon install hybrid-electric powertrains on its F-150, Mustang, Explorer, Escape and the upcoming Bronco.
The turnaround comes as domestic sedans have led the dropoff in new car sales that has continued this year; the company will now focus exclusively on higher margin models, as Bloomberg writes:
“We’re going to feed the healthy part of our business and deal decisively with areas that destroy value,” Hackett said on an earnings call Wednesday. “We aren’t just exploring partnerships; we’ve now done them. We aren’t just talking about ideas; we’ve made decisions.”
Ford finds itself on a road similar to the route Fiat Chrysler Automobiles NV followed to pass Ford in North American profitability. Fiat Chrysler CEO Sergio Marchionne now wants to eclipse General Motors Co. before his retirement in 2019.
For Ford, these higher margin vehicles mean not only canning its previous sedan efforts, but also failing to invest in new sedans for the North American market in the future. A similar fate looks like it could be on the way for Lincoln, as well:
Ford said it won’t invest in new generations of sedans for the North American market, eventually reducing its car lineup to the Mustang and an all-new Focus Active crossover coming next year. By 2020, almost 90 percent of its portfolio in the region will be pickups, SUVs and commercial vehicles.
That means the end of the road for slow-selling sedans such as the Taurus, Fusion and Fiesta in the U.S. The automaker conspicuously left the Lincoln Continental and MKZ sedans off its hit list, but since those models share mechanical foundations with Ford siblings, their futures also are in doubt.
“For Ford, doubling down on trucks and SUVs could be just what the brand needs,” Jessica Caldwell, an analyst for Edmunds.com, said in an email. “But this move isn’t without risk: Ford is willingly alienating its car owners and conceding market share.”
New CEO Jim Hackett is pressing ahead with these changes as Fiat Chrysler CEO Sergio Marchionne’s success at turnaround the company’s moribund profitability has him now gunning to surpass General Motors in profitability by the time he retires in 2019. By 2020, almost 90% of Ford’s North American portfolio will consist of pickups, SUVs and commercial vehicles.
Of course, the changes will likely take a few years to produce results.
Ford’s profit margin should “bottom out” this year, Hackett said on the call. The Asia Pacific region will probably lose money in the second quarter before returning to profit in the back half of the year. The company also is reviewing its strategic plans for South America.
“Everything will be on the table” to fix Ford, Shanks told reporters at the company’s headquarters in Dearborn, Michigan. “We can make different investments, we can partner, we can exit products, markets — and we will do that.”
One factor that had been contributing to investor pessimism has been commodity costs, which Ford expects will be a $1.5 billion headwind this year. About $500 million of that came in the first quarter, Shanks said. The automaker began the year flagging to investors that pricier raw materials including steel and aluminum would contribute to profit declining in 2018.
Ford’s first quarter adjusted earnings rose to 43 cents a share, topping analysts’ average estimate of 41 cents. Ford’s automotive revenue increased to $39 billion, higher than the average projection for $37.2 billion from a Bloomberg survey.
And while Shanks, the chief financial officer, warned that certain markets, like the company’s Asia business – where it was slow to break into the Chinese market – could see profitability bottom out during the second quarter, it’s expected to rebound during the second half of the year. For now analysts are optimistic, althought they expect it will take a few years for the turnaround at Ford to bear results.
“For Ford, doubling down on trucks and SUVs could be just what the brand needs,” Jessica Caldwell, an analyst for Edmunds.com, said in an email. “But this move isn’t without risk: Ford is willingly alienating its car owners and conceding market share.”
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“It’s not that the market has permanently given up on good news ever happening at Ford,” said David Whiston, an analyst with Morningstar Inc. who recently lowered his rating on the stock to the equivalent of a hold. “But most people aren’t expecting it until late 2019 or 2020 and that brings up the wild card of, ‘Will we be in a recession by then?’”
Still, even once Ford fixes its problems in the North American market, it still needs to play catch up in China if it ever hopes to outmaneuver its Big Three rivals.
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