Ford’s 'Surprise' Announcement

by: Markham Lee May 29, 2008 | about stocks: F    
Markham Lee

Markham Lee

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Ford’s (F) sudden announcement of not being able to meet its profitability goal for ’09 due to a sharp decrease in truck sales tells me that the company was ignoring the obvious with respect to energy prices and hoping to depend on truck sales to save the company. In other words: despite making some changes Ford is still trying to improve upon the old ways and depend on what worked in the past, instead of trying to forge a new path to profitability. 

From the WSJ:

DETROIT -- Ford Motor Co.'s plan to return to profitability got run over by a truck.

The rise of gasoline prices toward $4 a gallon is causing a major shift in the U.S. auto industry that threatens to push the Big Three auto makers and some of their rivals to a new level of peril. In recent weeks, sales of pickup trucks and sport-utility vehicles -- already falling in recent years -- took an unexpectedly sharp tumble.

Those declines triggered a surprise announcement by Ford on Thursday that it's now "extremely unlikely" the company will return to profitability in 2009, as it previously predicted. Just last month, Ford was hailed by the market after it reported an unexpected $100 million in first-quarter net income.

In a Thursday conference call, Chief Executive Alan Mulally said the industry has "reached a tipping point" and that the falling truck sales represent a long-term shift in the U.S. auto market, not a short-term dip.

"We saw real change in the industry demand for pickup trucks and SUVs in the first two weeks of May," Mr. Mulally said.

Overall I think this isn’t just about the negative impact rising energy prices are having on U.S. automakers as it is about their continued over-dependency on a product type whose popularity is waning.

If you think about it, the popularity of the SUV more or less temporarily saved the U.S. auto industry in the 1990s, as it provided them with a popular high-margin product that generated enough profit to hide many of their looming financial issues. After all Detroit’s problems didn’t just “suddenly” happen they’ve been in the works for decades, and present day problems could’ve easily have happened in the 1990s if it weren’t for the SUV.

Ford’s announcement basically amounts to the company saying: “Despite all the changes we’re making, we figured we could ignore the obvious signs around energy prices and demand for trucks and continue to sell the same product line that worked for us in the 1990s. However as truck and SUV sales continue now we realize that we can’t depend on truck sales to save us, our bad.”

If the U.S. auto industry doesn’t feel a way to adapt and significantly reduce its dependence on selling trucks (in addition to fixing its other problems), I just don’t see how the U.S. auto industry survives long-term.

If something doesn’t change soon, we could very well see a day when there aren’t any major U.S. auto manufacturers anymore, just like how American TV manufacturers died out in the 80s. It’s a scary reality that I’m sure many people reading this will scoff at, but when you look at the facts it’s pretty obvious that there is a fairly significant chance of it happening.

But this story isn’t just about Detroit’s over-dependence on trucks, it’s also about how struggling companies often try to execute improved versions of the allegedly “tried and true” rather than implement a wide-scale and significant change in the way they do business. However, this isn’t something that is native to Ford or the U.S. auto industry overall as most struggling companies behave in this way. I suppose it’s easier to try and improve on the familiar than attempt something that is truly new and different.

This situation is also an example of the continued denial around the medium to long-trends around energy prices, and how many businesses (and individuals) are either refusing to or dragging their feet to adapt accordingly. It’s rather reminiscent of the time when many analysts refused to accept the possibility of a housing crisis, and/or stated that even if there was a housing downturn consumer spending wouldn’t be affected. I suppose there is a psychological need to believe that a frightening change will never happen, and to try and bend reality to meet that need.

Disclosure: At the time of publishing the author did not own a position in Ford.

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This article has 5 comments:

  •  
    May 29 08:28 AM
    Is it so hard to see the writing on the wall? The automobile company that makes its switch the fastest to hybrid and alternative fuel vehicles wins. There is no other option. Even if gas prices drop America has seen too much of the greed and momentum around a dependence on oil and does not want anything to do with it. Gasoline as a fuel option is dead. Detroit if you want to get back in the game--its alternative all the way.

    Don't let greed blind you! Take the leap you still have a chance to not close your doors--the customers have spoken.
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  •  
    May 29 09:38 AM
    The comment concerning dependency on the "tried and true" when the circumstances have radically changed is certainly on the mark. As a market researcher covering the small utility/leisure vehicle market (from golf cars to LSVs to small utility vehicles), I can testify to this psychological barrier. Company management stays wedged in traditional forms of doing business, even when much wider opportunities are very clear. This says much for keeping entrepreneurial incentives (the ability to make and keep profits) alive throughout the economy.
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  •  
    May 29 10:15 AM
    There seems to be a reluctance to embrace creativity and innovation in America these days; looks like the nation is being run by mindless bureaucrats and overpaid corporate CEO's. You could say the nation is "graying out." The fastest growing population is 85+ year olds. Maybe we are slowing down to adapt to that generation, huh?
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  •  
    May 29 03:00 PM
    I agree with the Markham Lee completely. The US car industry has been slow to accept the reality that drastic change is needed. Year after year we have watched as Toyota, Honda and almost every other competitor has stolen market share and produced superior products. The years of the domestic car company's surviving based upon blind nationalistic loyalty are over. The only hope the current investors have is to replace entire levels of management with a new generation of forward thinking leaders. F and GM need silicon valley management if they hope to survive the next 10 years. The present group of rusty dinosaurs need to retire or move into the oil industry where status quo management is acceptable.

    These two giants are on their way out. Act accordingly.

    Best Regards,

    Nice article.
    Reply | Link to Comment
  •  
    May 30 11:44 AM
    I think 'F' well do fine. They just using 'old' models to fund their 'new' models and the same old numbers to predict the turn around. Mulally's a Boeing guy with plenty of technology at his fingertips. The writing is on the wall and Ford's management will respond. They have a great presence in emerging markets and will adjust here to our concerns. It just seems to takes longer to see the results because every quarterly report is under a microscope. I trust the management, Mulally's a proven leader.
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