Ford brand sedans to be nixed in N.A. under deeper cost targets

Hackett: 'We're going to feed the healthy parts of our business'

April 25, 2018 01:00 AM

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Ford says the only Ford brand cars it will keep in North America beyond their current generations are the Mustang and the new Focus Active, which arrives in 2019.

DETROIT -- Ford Motor Co. on Wednesday said it plans to stop selling all Ford brand sedans in North America and that it is nearly doubling its cost-cutting target by 2022 from the plan it laid out only six months ago. The automaker said it will fix or eliminate unprofitable global operations.

Ford said the only cars it will keep in North America beyond their current generations are the Mustang and the Focus Active arriving in 2019.

The automaker said it now expects to achieve an 8 percent global profit margin by 2020, two years sooner than planned. It upped its five-year cost-cutting goal to $25.5 billion, from the $14 billion projected by CEO Jim Hackett in October.

“We’re going to feed the healthy parts of our business,” Hackett told analysts on a conference call Wednesday, “and deal decisively with the parts that destroy value.”

Ford announced the improved guidance as the company reported a 9 percent increase in first-quarter net income. Its global profit margin was 5.2 percent in the quarter, as higher commodity costs reduced earnings in North America. The company posted a 6.4 percent margin during the same quarter last year.

Ford shares rose 2.6 percent to $11.40 in after-hours trading on Wednesday.

Cars being cut in North America are the Fiesta, Fusion and Taurus. They will be discontinued over the next few years as their life cycles end. Joe Hinrichs, Ford’s head of global operations, said other vehicles will replace the cars at factories in Mexico and Chicago where they are now built.

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Ford's global profit margin was 5.2 percent in the first quarter, as higher commodity costs reduced North America earnings, down from 6.4 percent during the same quarter last year.

Ford’s head of global markets, Jim Farley, said the company is exploring new vehicles that give people the space and versatility of a utility vehicle without a fuel economy “penalty.”

“We will have a very diverse passenger car business,” Farley said. “It just won’t be traditional silhouetted sedans that tend to be commoditized.”

Small cars lose money

Ford CFO Bob Shanks said small cars and "most Lincoln products" are among those losing money.

Ford officials had signaled that some cars would be removed from the portfolio as consumers gravitate toward far more profitable pickups, SUVs and crossovers. Shanks said Lincoln is not in overall danger but noted that it lost money in China because it is in ramp-up mode there after being introduced in 2014.

Although Ford didn’t mention them, analysts say the Lincoln Continental and MKZ sedans, which share platforms with many of the Ford cars slated to be scrapped, also remain in doubt.

Shanks suggested that Ford could reduce investment in certain geographic regions or exit them if it did not see adequate returns on the horizon. That echoes the strategy General Motors has used in selling its European business and abandoning several other countries, including Russia.

“Everything will be on the table,” Shanks said. “We can make different investments; we can partner; we can exit products, markets. And we will do that."

Less capital spending

He also said the company was reducing its planned capital spending from 2019 through 2022 by $5 billion to $29 billion through such actions as using common “modules” to account for 70 percent of the value of each vehicle and reusing tools and equipment.

Shanks wouldn’t say whether Ford would need to eliminate jobs to achieve the additional $11.5 billion in cost cuts. Nearly half of the cuts would be in sales and marketing -- through incentive optimization, reduced advertising and other actions -- with the rest coming from engineering and product development, material costs, manufacturing and information technology, in that order.

About $4 billion of the $11.5 billion in cuts would be accomplished in 2019 and 2020, Shanks said, with the rest occurring in the subsequent two years. He said the company used “hard work” to find more efficiencies after Hackett unveiled the plan in October. The plan was met with a tepid reaction from analysts and investors, who have been eager to hear more specifics.

“We have looked at every single part of the business,” Shanks said. “I don’t think they’re done yet.”

In the first quarter, net income rose $144 million to $1.74 billion, and revenue grew 7.4 percent to $42 billion. About $100 million of its income was due to a lower tax rate.

Ford’s North American pretax profit fell 9.2 percent to $1.94 billion, with commodity costs accounting for more than the entire decline. It lost $149 million in South America, 37 percent less than in the first quarter of 2017, and earned $119 million in Europe, down 43 percent. Its Asia Pacific business swung to a $119 million loss, from a $148 million profit a year ago.

Ford Credit’s profit jumped 33 percent to $641 million, while the automaker’s fledgling mobility ventures lost $102 million, 59 percent more than a year ago.