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.