Oct 4, 2017

Ford's Plan For More Smart Vehicles And Services Won't Work If It Doesn't Fix Its Business Today

Ford Motor's Chief Executive Jim Hackett insists the 114-year-old car company has a bright future, despite sweeping technological changes and new competitors Henry Ford never imagined, offering a blueprint for a new portfolio of smart vehicles and transportation services that will help it thrive in a new $11 trillion "transportation operating system."

"But we can't compete if we don't get fit today," the former University of Michigan football player told investors and analysts in New York on Tuesday, outlining a plan to slash $14 billion in costs over the next five years.

In his first strategic update since becoming CEO four months ago, Hackett tried to balance enthusiasm for the future with a sober assessment of the daunting challenges Ford faces today.

Though its revenues have grown since the Great Recession (mostly due to the success of its F-series pickup trucks) so have its costs, causing the Dearborn, Mich.-based automaker to miss its target of an 8 percent automotive operating margin.

"Over the past seven years, we've averaged a 6.1 percent margin and that's simply not good enough," Hackett said. "That performance gap of two points is worth billions in value." Indeed, Ford stock is up just 1.7 percent this year, trailing rivals General Motors and FiatChrysler as well as the benchmark Standard & Poor's 500 Index.

Now, with the automotive industry undergoing the most dramatic changes in more than 100 years, Ford must simultaneously improve its financial health while pivoting toward a new business model.

"Companies never choose to die and yet many, by not evolving, are enabling that kind of fate," Hackett said. "It's clear that as a company we must then raise our gaze just high enough to ensure we're not disrupted as the world changes."

Hackett's predecessor, Mark Fields, also understood the need to straddle today's reality with tomorrow's promise, but ultimately he was unable to move quickly enough to put Ford in a position to win. That challenge is no less dicey for Hackett, the former head of furniture maker Steelcase.

"When you're a long-lived company that has had success over multiple decades the decision to change is not easy – culturally or operationally," Hackett said. "Ultimately, though, we must accept the virtues that brought us success over the past century are really no guarantee of future success."

Barely 100 days into the job, Hackett and his new management team are beginning to paint a clearer picture of where Ford is going with its current product portfolio – more utilities, fewer cars – while preparing for the future with more investment in electric vehicles, connectivity and autonomous vehicles, said Michelle Krebs executive analyst for AutoTrade. "Straddling the now and the future will be tricky especially in terms of profitability," she said.

Ford's plan is to shift $7 billion in capital investment away from sedans toward crossovers, utilities and trucks instead, like the Ranger and EcoSport in North America and the all-new Bronco globally. It also plans to cut spending on internal combustion engines by 32 percent, or about $500 million, over the next five years, putting that money instead into electric vehicles and hybrids.

Ford is behind companies like GM and Tesla when it comes to getting electric, autonomous vehicles on the road. In 2016, for instance, GM introduced the Chevrolet Bolt EV, the first affordable, long-range electric car. On Monday GM announced it plans to add two more battery-powered vehicles in the next 18 months and will have 20 electric cars on the road by 2023.

Ford is also investing in electrified vehicles, with previously announced plans to spend $4.5 billion to introduce 13 new electric or hybrid vehicles within the next five years, including an F-150 Hybrid, Mustang Hybrid and a fully electric small SUV. But on Tuesday, Hackett made clear Ford will favor more profitable hybrids until battery-powered vehicles make better economic sense. "I don't think we should walk off a ledge where we destroy the earnings power of the company," Hackett said.

Ford also plans to be more active pursuing partnerships with other companies to reduce costs and minimize risks. Since Hackett took over in May, for instance, Ford has partnered with companies on electric vehicles in China and India and with Lyft on self-driving car development.

Hackett also outlined plans to equip all of its U.S. models with mobile internet connections by 2019, and 90 percent of its global lineup by 2020. Such connections are critical to enable the services and software applications that it hopes will generate new revenue streams in the future. GM already has built-in 4G LTE mobile broadband connections in 7 million vehicles worldwide, but it, too, has yet to reap significant benefits from that opportunity.

The cost cuts Ford is planning to enable its strategy shift aren't likely to show up on Ford's bottom line until 2019 or 2020, said Ford's chief financial officer, Robert Shanks, citing the industry's long product development cycles. Of the $14 billion in promised cost reductions, $10 billion will come from material costs and $4 billion will come from reduced engineering costs, Hackett said.

That lag could hurt profits in the next few years. While reiterating its long-term goal of 8 percent operating margins, Ford said it will update its 2018 financial forecast in January.

"I get up every day feeling like time can be wasted here if we don't get moving," Hackett told investors. "I feel a real sense of urgency."


Forbes

by Joann Muller