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Ford announces cost-reduction targets and shift from sedans

26 April 2018 Stephanie Brinley, MBA

IHS Markit perspective

  • Implications: During the presentation of Ford's first-quarter 2018 financial results, CEO Jim Hackett and his executive team provided an update on the automaker's targets for financial results and operational fitness between 2018 and 2022.
  • Outlook: Among the new targets announced, Ford has doubled its expectations for cost cutting and indicated it will shift away from offering traditional sedans in future - although the company will have products that backfill the positions of traditional sedans.

A substantial portion of Ford's presentation of its first-quarter 2018 earnings was spent on delivering an update on the company's future plans and targets for what CEO Jim Hackett calls "operational fitness". Hackett provided an update, with more aggressive targets but still minimal detail. However, Hackett said the company was "not just talking about ideas" but had made decisions that will be announced over the next several months and at the next scheduled investor overview, on 26 September. Throughout the fourth quarter of 2017 and in early 2018, the latest Ford senior executive team has been communicating a new forward strategy; with the first-quarter 2018 results, the Ford executive team added further detail.

CEO Jim Hackett took the earnings call as an opportunity to confirm that North American investment in traditional sedans will end, with only the Ford Mustang and an upcoming Ford Focus Active continuing as traditional passenger cars for the North American market. Although the Fusion, which received a minor change for the 2019 model year, will not be renewed, it is not expected to see production end ahead of its natural lifecycle. The product's space in the Ford line-up will be filled with something new, carrying a different silhouette and efficient powertrain. During the call, Ford's head of global manufacturing and product development, Joe Hinrichs, also confirmed that the Hermosillo (Mexico) plant, which builds the Fusion, would receive a subsequent product, while global vice-president Jim Farley also noted that Ford would be introducing new nameplates, even as some traditional products may be retired. Ford is focused on delivering primarily utility vehicles, trucks, and commercial vehicles, but with new electrified and alternative powertrains that eliminate any fuel-economy penalty traditionally associated with such products. The company referred to developing vehicles with a new "silhouette" several times - reinforcing that Ford is looking to reshape its passenger car line-up to align it better with consumer behaviour, rather than on a mission to reduce offerings.

Progress in the first quarter towards autonomous business models has included the pilot programmes in Miami leveraging autonomous delivery vehicles, and Ford reconfirmed that it is on track (with Argo AI) for a self-driving vehicle ready for scale production by 2021.

In October 2017, Ford had targeted USD4 billion in material cost reductions over five years. With the reporting of the company's first-quarter results, Hackett raised this target to savings of USD11.5 billion between 2019 and 2022, and said that one-third of that figure would be realised by 2020. The savings are coming from all areas, including initiatives for optimising digital activities, improving media return on investment (ROI), and optimising incentives in the marketing and sales area; five new flexible, modular architectures on the engineering and product development side; and a redesigned freight network to improve manufacturing costs. Hinrichs also noted that the shift to modular architectures will enable Ford to develop and update products at a much faster pace, both saving time and improving market offerings through a faster product cadence. Ford targets an earnings before interest and taxation (EBIT) margin of 8% by 2020, better than the 2022 target noted earlier; a return on invested capital (ROIC) in the high teens by 2020; and capital spending of USD7 billion in 2020. For 2018, Ford says that its EBIT margin will be at its lowest level, along with ROIC, as the company invests in the processes that will enable stronger future performance. It adds that capital spending will peak in 2018, at USD7.8 billion.

Among the most important points made is that Ford will focus on the high-performing areas of its business - those areas delivering, based on 2017 EBIT, more than 10% margin and high ROIC. Discussing this area, Hackett said that Ford would "feed the healthy and deal decisively with the low performers".

While the company is also seeing expense on vehicles and projects that will provide future growth, it will drop some profitable projects that are not contributing their share on ROIC targets; the Ford GT seems to be in this category. For vehicles that are low performers, not delivering margin, profitability, or ROIC, Ford will "disposition" them. The company expects that this shift to devoting resources where they are most likely to pay off will help it reach its near- and long-term targets.

During the question-and-answer period, Hackett declined to identify a specific geographic market that may be on the list to be chopped, but he did not rule out such an action either. CFO Bob Shanks was quoted as saying, "Our intention is to raise the level of performance on all parts of the business through fitness. But frankly, that is not going to address completely the underperforming part of the business. We will have to make choices around how we disposition those businesses going forward. We can make different investments; we can partner; we can exit products, markets. And we will do that."

Outlook and implications

Among the new targets announced, Ford has doubled its expectations for cost cutting and indicated it will shift away from offering traditional sedans in future - although the company will have products that backfill the positions of traditional sedans. The company has also indicated that it is considering exiting markets as well as possible vehicle segments.

Regarding the comments on priorities for future business and "operational fitness", Hackett stressed that the company was moving forward with urgency and that decisions had been made that will be revealed in the coming months. Ford is also looking to overhaul its vehicle line-up in some fundamental ways over the next several years; while described as opting not to continue to invest in traditional sedans, the company referred to developing vehicles with a new "silhouette" several times, reinforcing that Ford is looking to reshape its passenger car line-up to better align it with consumer behaviour, rather than to reduce its offerings.

The shift to modular architecture promises to help speed up product development as well as reducing cost and complexity. Head of Ford's mobility efforts, Marcy Klevorn, also said that the company was looking to deploy its cloud-based connected car platform in China as well as the US, in the near term. China is, in many ways, Ford's primary focus at the moment, and it recently announced plans for a massive new-product offensive in the country.

Indeed, several moves have been made in recent months, including the Miami trial, the Mahindra joint venture, the creation of the national Chinese distribution network, the refining of product development decisions, and the decision to get out of the traditional sedan business, particularly in the US. However, Ford is not alone in moving quickly. The move to step away from sedans is being carefully balanced with the promise of highly efficient powertrains as well, which not only has the potential to keep the company compliant with global standards, but can also serve to protect demand for these vehicle types in the event of a sharp uptick in gasoline (petrol) prices or another recession.

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