Ford Targeting Massive $25.5 Billion Cuts, Confirming End Of Major Automotive Cycle

The rising cost of commodities, combined with the end of a bubble in the automobile sector, are taking tolls on automobile companies and forcing drastic restructurings at major US automakers like Ford.

Ford announced that it is hacking off a large portion of its business – a move that will make the company 90% reliant on its pickups, trucks, SUVs and commercial vehicles – by the year 2020. The company is targeting $25.5 billion in cost cuts by the year 2022.

Bloomberg wrote an article examining the details of the company's restructuring effort:

Ford Motor Co. is sharpening its knives to cleave another $11.5 billion from spending plans and cut several sedans, including the Fusion and Taurus, from its lineup to more quickly reach an elusive profit target.

The automaker expects to save $25.5 billion by 2022, Chief Financial Officer Bob Shanks told reporters Wednesday as Ford reported first-quarter earnings per share and revenue that beat estimates. The company now anticipates reaching an 8 percent profit margin by 2020, two years ahead of schedule.

The cuts are aimed at kick-starting a turnaround effort almost one year after Ford’s board ousted its chief executive officer. New CEO Jim Hackett has been trying to convince investors that betting on a rebound is a worthwhile wager by laying out plans to get rid of slow-selling, low-margin car models and refocusing the company around more lucrative sport utility vehicles and trucks.

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.

For Ford, the focus is now exclusively on higher margin models, as Bloomberg wrote:

“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.”

These types of restructurings in automobile manufacturers are generally indicative of a longer-term cycle in the industry coming to an end. Companies like Ford and General Motors often undertake these large restructurings after all other options for pushing out the boom portion of the cycle have been exhausted and it's finally time to "pay the piper".

We have recently been identifying a number of signs in subprime automobile lending that are indicative of a large bubble throughout the entire sector getting ready to burst. The smaller subprime lending shops are always the first to go, and these are the businesses that we see folding up shop right now. We wrote on April 8, 2018:

We are in the midst of watching the subprime auto lending bubble burst in its entirety. Smaller subprime auto lenders are starting to implode, and we all know what comes next: the larger companies go bust, inciting real capitulation. 

In addition to our coverage out just days ago  talking about how the subprime bubble has burst and, since then since has been crunched even further, additional reports today are showing that smaller subprime lenders are starting to simply implode after being faced with losses and defaults. In addition to losses and defaults, Bloomberg reported this morning that there have been allegations of fraud and under reporting losses, tactics that are clearly reminiscent of <throw a dart at any financial crisis/bubble burst over the last 30 years>.

In the case of Ford, rising commodity costs were yet again assigned some of the blame:

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.

The rising cost of commodities continues to put pressure on all types of industrial businesses. We wrote yesterday about how the rising cost of lumber is causing housing prices to soar and we predicted that these rising prices will eventually result in pricing buyers out of the housing market. For the automotive sector, these costs are just another headwind coming at the worst possible time in the automotive industry cycle. 

For Ford, this "restructuring" and the resultant layoffs that'll happen come at the hands of two problems caused by monetary policy: cheap debt that caused the bubble and the boom to begin with, and inflation helping drive up the prices of commodities.

Comments

FireBrander Joe Davola Wed, 05/02/2018 - 10:01 Permalink

My money is on this being a Union Busting scheme.

These cars are not Fords bread and butter, but they are profitable...they will be more profitable once all of those high paid, Harley riding, health insurance rate risen, unionized workers are replaced in 3 years with $12hr non union workers when Ford decides it "made a mistake" when it decided to stop selling cars.

Is Ford selling the plant equipment, the buildings, the land?...or are they just "idling" all of that...

"Idling" = Union Busting.
"Selling" = Out of the "Car Business" for good.

In reply to by Joe Davola

mkkby Juggernaut x2 Wed, 05/02/2018 - 15:49 Permalink

Every sedan ford makes, somebody else does better.  A LOT better.  Toyota, honda, hyundai and now kia.  It's smart not to waste billions designing new models that won't sell well.

Stick to the trucks/suv's that morons will pay $50-70k for.  Make them good quality.  You can always ramp up car production again if oil prices and interest rates get too high.

In reply to by Juggernaut x2

Curmudgeon49 MARDUKTA Thu, 05/03/2018 - 10:35 Permalink

Does that include the unions for lawyers, doctors, engineers, etc?

Unions aren't the problem, corporate culture is. Germany is heavily unionized, but the corporations and unions primarily work together, not in opposition. The same can be said for other European countries, and for that matter, Japan and Korea.  The "crush the peasant" mentality is alive and thriving in corporate America

In reply to by MARDUKTA

Curmudgeon49 FireBrander Thu, 05/03/2018 - 10:28 Permalink

Perhaps, but the bigger problem is overproduction of automobiles. South Korea alone has the capacity to produce enough vehicles for the entire world. China could do the same in a couple of years.

While it is true that the US automakers were their own worst enemy by starting to produce unreliable crap, the Asian (Japanese) makes were given free access to the US without following the normal trade rules. European cars shipped to the US were the same models as were available in Europe, except for the British models that were the same, except converted from right to left hand drive. The Japanese models were not available in japan, they were made solely for export to the US. A more recent example was Lexus. Toyota built a plant in Germany to build Lexus, but it was only available in North America. Add to that, the emissions standards were pretty much custom made for Japanese cars. Japan, like China more recently, kept the value of its currency artificially low, making the cars less expensive.

South Korea's Hyundai was massively state backed. Hyundai had it's own labor laws, separate from the rest of the country. It started in cars as one method of using up its excess steel production, which was being dumped on the market undercutting US producers.

It's all part of the controlled demolition of the American economy planned by the internationalists who own congress. 

In reply to by FireBrander

inhibi TahoeBilly2012 Wed, 05/02/2018 - 13:14 Permalink

Even if they gave that to you, it would be a pile of shit.

I did a recent teardown of the Ford 350 vs Toyota TRD Pro. Night and day. From calipers, to using bolts instead of dot welding, to the powertrain torque limitations, the Toyota COMPLETELY outclassed the Ford. No comparison at all. You can see the corners Ford cut EVERYWHERE. Its almost as if they had a guy go through and make everything purposefully shittier to save like a few cents on part cost.

Its no wonder that the best contractors ive seen buy Toyota trucks: they dont want to lose a job because their POS Ford stalled on the side of the road.

Ford is shit and has been for so long its hard to remember their glory days. Do you recall when they took over Jaguar? They fucked that takeover so royally that they ended up selling their shares for a slight loss less than 6 years after. They did the same with Mazda and a few others. And nothing spells 'idiot' like being granted the oppurtunity to buy more brands, mismanaging, and then losing them 5 years down the road. If Ford was competent, they would have Lincoln, Mazda, Jaguar, Mercury, and Range Rover under their brand. But they dont, they got shitty cars with shitty designs, which is the ultimate fuckup for a car company.

That new Ford Focus SI with the Ricardo seats? Test drove it a few days ago. The seats were so small that I, at 5' 11" couldnt fit into them. I was literally falling out of the car to get out. Another disaster. And compared to the Civic TypeR, its not even in the same ballpark. 

In reply to by TahoeBilly2012

Chauncey Gardener inhibi Wed, 05/02/2018 - 15:17 Permalink

Spot on! Just like the braintrust who decided to use an aluminum tailgate on the new Ranger with the one engine/one transmission for all powertrain. I guess groceries don't dent the tailgates like real truck usage does...

 

And, what about those CAFE standards? What's next, Ford--drop the V8's from the trucks and Mustangs? Just brilliant product planning and complete lack of vision. 

In reply to by inhibi

FireBrander Agent P Wed, 05/02/2018 - 10:08 Permalink

LOL!

Upvoted you for the comedy, but if you really don't know, Kia builds great cars at competitive prices.

The real problem is that people will be underwater in the loan the second they drive it off the lot...3 years later...Yikes!...6 years later?...who wants the same car for 6 years?...the Jones's buy new every 3 years..gotta keep up.

In reply to by Agent P

FireBrander bpj Wed, 05/02/2018 - 10:28 Permalink

Bologna!

Modern cars have no problem with ethanol; if the manufacturer says it's ok, then it's ok.

Ethanol actually helps to prevent rust in the fuel system as it readily absorbs water and quickly passes it through the fuel system.

Back in the 70's, especially in the winter, if you wanted to prevent "gas line freeze-up"...aka get water out of the fuel system, you add the product called Heet...it was methanol...

In reply to by bpj

SamuelMaverick FireBrander Wed, 05/02/2018 - 11:14 Permalink

Firebrander, you are as wrong as wrong gets.  Go talk to small engine repair shops, marine shops, motorcycle shops all over the USA.  You will give them a good laugh. I have a friend that all he does is rebuild carburetors every week in his shop. Week after week. Never had to do that before the onslaught of ethanol being mandated in 2007. Cars that sit unused also have the same problem. Most mechanics cant diagnose worth shit, and these cars end up being shitcanned or end up costing a few grand to get fixed. Funny stuff.

A good example of getting mis info from the interwebs !!

Ethanol is corrosive, and becomes more and more corrosive the longer it sits. Not a good idea to let it sit for more than three months.  Go talk to boat owners, motorcycle owners, and lawnmower owners - especially in the parts of the country where stuff sits unused in the cold months ( 4 to 5 months / year ).   Freaking disaster.   Oil Pipelines  have to be specially designed in order to pump ethanol thru them.  Stuff eats the shit out of regular pipelines and causes pipeline failures

In reply to by FireBrander

FireBrander SamuelMaverick Wed, 05/02/2018 - 11:48 Permalink

Any engine component damaged by ethanol was not designed to run ethanol and the owners were morons for putting it in their engines.

Yeah, "Go talk to"...yeah right, lots of idiots repeating stupid shit they "know to be facts".

I'm a motorcycle enthusiast..I've rebuilt a lot of carbs. If they were not designed for ethanol, it eats away/pits the components horribly...seen it over and over...idiots using it where it should not be used.

If the components were designed for ethanol, no problems. I've ran ethanol in a car I've owned for 21 years that was designed for ethanol...ZERO fuel system issues in 200K+ miles..original fuel pump too!

Owned many motorcycles...and the only "damage and issues" from ethanol have been where it was used when it should not have been used.

Stop perpetuating old myths.

PS. The biggest, real, issue I see with ethanol is in engines that do a lot of sitting (mowers,etc.). Ethanol absorbs water, so if your engine sits for an extended period in a high humidity environment, the gas can become "water logged" which makes for hard starts and poor performance.

In reply to by SamuelMaverick

FireBrander Consuelo Wed, 05/02/2018 - 11:57 Permalink

If your engine doesn't "burn oil" it's going to have a very short life.

The oil rings wipe the walls and should leave a film behind to lube (and seal) the compression rings...that film will get burned which = your engine will PROPERLY "burn oil".

100k miles in a 0W/20 vehicle, zero issues, and yeah, it does use a quart every 3k or so...and I'm glad to see it.

Viscosity is so misunderstood...go ahead, put some nice thick 20W50 in your engine to "extend it's life" and watch what happens.

Most wear occurs at Startup...oil flow is critical at startup...0W20 flows much faster than 20W50...oh it's a long story...I'll stop.

In reply to by Consuelo

cbxer55 FireBrander Wed, 05/02/2018 - 18:46 Permalink

Been running 20W-50 in my V-6 Ranger for 18 years and 155,000 miles. Haven't had one single problem. Not a one. 

Running 20W-50 petroleum oil in my 2006 Suzuki for 12 years. It's an 1800 cc V-Twin. 

I run 10W-40 in my 2004 supercharged V-8 Lightning.

Run 10W-40 in my 2008 Suzuki B-King. 

I refuse to use colored water oil in my vehicles. 

In reply to by FireBrander

Observant FireBrander Wed, 05/02/2018 - 12:51 Permalink

FireBrander;  You are WRONG! A few years ago I was driving a Lincoln Town car in my chauffeurs job. It could burn E85 as well as reg. 87 octane. I did an experiment with a tank full of one and then another.

  The E85 got 30% worse gas mileage while only saving 15% in price. Ethanol is a scam and always has been.

 

In reply to by FireBrander

FireBrander Kat Daddy Wed, 05/02/2018 - 13:51 Permalink

You are lost in the 80's too...it's from a lot more than corn.

"Ethanol is produced from biomass mostly via a fermentation process using glucose derived from sugars (sugar cane, sugar beet and molasses), starch (corn, wheat, grains) or cellulose (forest products) as raw materials"
http://biofuelsassociation.com.au/biofuels/ethanol/how-is-ethanol-made/

Algae ethanol is coming up..grown vertically on cylinders..the research results are very impressive...it's just a matter of scaling it to million gallon proportions...it will come and it will kill oil.

The Production of Ethanol from Micro-Algae Spirulina
https://www.sciencedirect.com/science/article/pii/S1877705815008619

That research was 3 years ago...they've come a long way and I've seen it first hand...amazing stuff...bio-fuels from Algea is going to be the next "big thing"..it will be along the lines in scale of the boom in Drug sales/research.

In reply to by Kat Daddy

cbxer55 FireBrander Wed, 05/02/2018 - 18:41 Permalink

Been driving my 98 Ford Ranger for 18 years.

Been driving my 2004 Ford Lightning for 10 years.

Been riding my 2006 Suzuki M109R for 12 years.

Bought a used 2008 Suzuki B-King from a friend who was the original owner, last year. 

Haven't had a new vehicle since 2000. Won't have a new vehicle again. 

The Jones can go jump off a bridge. I won't follow them. 

In reply to by FireBrander