Chips put brakes on Ford's progress

DETROIT — Most of Ford Motor Co.'s most profitable assembly lines sit idle. Tens of thousands of partially built F-150s and other vehicles that could easily find buyers languish in parking lots.

And the worst is yet to come, CEO Jim Farley says.

Ford last week told some dealers that they won't get any meaningful amount of new inventory delivered until at least August. Many expect to be wiped out of what little they have left long before then.

One Michigan dealer has created an emergency fund for its salespeople to draw from after that happens — likely sometime this month.

"We know for sure there's going to be three months of heartache and hand-wringing," said Mark O'Brien, chairman of Roy O'Brien Ford. "We don't want our people having concerns about where the next meal's coming from."

The microchip shortage is expected to slash Ford's vehicle output by half this quarter, holding back the company at a time when resurgent consumer demand would otherwise send profits soaring. A crisis that initially was expected to ding 2021 output by just a few hundred thousand vehicles is now on track to cost the company 1.1 million and zap $2.5 billion from the bottom line.

Ford now expects to earn less money in the last nine months of the year than it did in the first quarter alone. The dire outlook cast a pall over a company that is finally starting to reap the rewards of an overhauled product portfolio and win over skeptical investors after years of restructuring.

"There are more whitewater moments ahead for us that we have to navigate," Farley said after announcing a $3.3 billion first-quarter net profit.

Ford stock, after months of steadily climbing, sank 10 percent the next day.

"Ford's 1Q was far 'too good' to extrapolate while the remainder of the year is 'too challenged' to extrapolate," Adam Jonas, a Morgan Stanley analyst, said in a research note.

"Put it all together and the most favorable auto supply/demand balance in a generation and Ford's cost-cutting efforts are bearing fruit at a critical time for the House of Dearborn. 2021 is likely to go down as an 'oddball' time for the industry given the confluence of consumer strength, inventory tightness and extremely disruptive supply chain issues."

Ford isn't getting caught in the rapids alone. Nissan, Honda, Volkswagen and BMW were among the automakers that scheduled new plant downtime last week.

But Ford is having more trouble than most securing enough microchips to keep assembly lines running as a result of a March fire at Japanese supplier Renesas.

Nine of Ford's Tier 1 suppliers source chips from Renesas, Farley said. The supplier is working to restore operations, and Farley expects it will be back to full capacity by July.

In the meantime, Ford's inventory will continue to dwindle. CFO John Lawler said the company had a 33-day supply of retail vehicles and expects that to "tighten a bit further" as the spring selling season wears on.

Roughly 22,000 incomplete vehicles, including F-Series pickups, are waiting for chips so they can be finished and shipped to dealers, Lawler said.

In some cases, Ford is wrapping the vehicles for protection and conducting additional quality checks to ensure they won't be affected by the wait.

O'Brien, whose store is in St. Clair Shores, Mich., said Ford told a group of dealers last week that they wouldn't get new wholesale shipments until August and that "there wasn't a dealer in the group that had sufficient inventory to get them through June."

His store is trying to stock up on used vehicles but finding high prices at auction sites.

"What's the lesser of two evils — having nothing to sell or having overpriced used cars?" he said. "We'll choose the overpriced used cars so we'll have something to sell."

O'Brien said he has roughly 25 employees who rely on commission, so the dealership set up a fund in case money gets tight. The expectation is that employees can borrow from it and repay the loan once the crisis abates.

"It's a drastic measure to counter a drastic situation," he said. "They can go to the well as many times as necessary. Now if someone wants to borrow $5,000 to go to the Caribbean on a cruise, that ain't going to happen. The main goal is to keep our staff comfortable financially so that they'll stay with us and look forward to bluer skies coming."

Despite the chip shortage, Ford executives said they were pleased with the company's financial performance and said it's a sign of a more profitable company.

Ford earned $2.9 billion in North America, with its 12.8 percent margin outpacing the 10 percent it has long targeted. Ford also earned $341 million in Europe and $201 million in its International Markets Group as turnaround plans in those regions took hold. South America, while still $73 million in the red, improved for a sixth consecutive quarter.

"The good news is our business is so much more robust to absorb these kinds of body blows," Farley said in an appearance last week on CNBC's "Mad Money."

That's mostly because Ford slashed thousands of jobs under former CEO Jim Hackett and reorganized its product portfolio around the globe, placing a greater focus on popular retail nameplates and profitable commercial vehicles.

Without the chip shortage, Ford had estimated full-year earnings before interest and taxes would come in between $8 billion and $9 billion. Now it's postponing that optimism to 2022, when it expects to have put the chip issue in the past and will be helped by new vehicles such as the full-size Bronco SUV, E-Transit van and, potentially, Maverick compact pickup.

But for 2021, Ford now projects to finish at $5.5 billion to $6.5 billion — not much more than the $4.8 billion accumulated in the first quarter.