Almost exactly one year ago, Ford fired CEO Mark Fields and replaced him with Jim Hackett amid dissatisfaction about the company’s stock price and fears that the company wasn’t evolving fast enough to meet the fickle, ever-changing demands of today’s consumers. As recently as January of this year, Automotive News published a story that Hackett hadn’t done enough to turn the company around and investors were still impatient to see their share prices increase.
It turns out, Hackett was pretty busy. As the former head of Ford’s innovation unit, he’s been analyzing America’s and the global car market for some time, but had been holding off on making any drastic moves. That is, until yesterday. But first, let’s take a trip back in time to an age when none of us was alive – 1908. This is the year that Ford introduced the Model T, which was a terrible car despite being the most influential car of the 20th century. The reason everyone knows of the Model T is because it was the first broadly reliable, easy-to-maintain car that was affordable by a growing middle class. It defined mainstream and opened up an entirely new era in transportation to the masses.
Alan Mulally
Ford's President & CEO, 2006
Fast forward a hundred years all the way to 2008, when the average price of gas climbed to $3.61 per gallon and looked to head even higher. We were in the depth of a recession and nobody was buying cars. Banks were being bailed out and, as a consequence of over reliance on gas-guzzling SUVs to generate profits, so were GM and Chrysler. Ford, however, had remortgaged its assets in 2006 and retooled its smaller, efficient vehicles, which buyers were snapping up to avoid hefty bills at the pump. Sure, they still took the government’s money, since it was being handed out like candy, but they didn’t need to because their excellent small cars and sedans sustained them through the financial crisis.
Just ten years later, those small cars and sedans, the life vests during the rising tide of the recession, have turned to an anchor, weighing down Ford’s stock price as consumers abandon rational thought and return to purchasing gigantic SUVs and crossovers they don’t need. Hackett’s answer to the investors’ pleas for greater share value? Abandon the exact kinds of vehicles that sustained Ford as one of the biggest auto manufacturers in the world. In other words, kill the sedans.
And he’s not the first. Chrysler has mostly done away with its sedans, leaving the ageing 300 and Charger out there just in case someone is interested in looking cool on the back of a flatbed on the way to the service department. But Ford’s is certainly the most extreme. They’re killing off the Fusion, the Taurus, the Fiesta, and the Focus, its bread-and-butter entry-level vehicle. In their place will be the EcoSport, a compact crossover, the Bronco, a baby Bronco to fight the Wrangler, and refreshed Escape, Explorer and Edge. The Focus will live on, but only as a jacked-up hatchback akin to the Subaru Crosstrek. In fact, the only way you will be able to buy a Ford that has a trunk, is with the Mustang. That, or live somewhere else in the world where Ford will continue to sell its low-margin vehicles.
Dealers worry this will mean they will stop seeing first-time car buyers shopping for Fords, and it’s a valid concern. Hackett says dealers will still have the Focus Active and the EcoSport, but those will command at least a 20% price premium over the outgoing Focus. In the age of the declining middle class, rapidly growing debt and deep subprime borrowing, as well as auto loan terms of seven years becoming more common, it’s absolutely clear to anyone paying attention that people are simply less able to afford cars than they have ever been. So abandoning those buyers to the used market and focusing on higher margin SUVs and crossovers is definitely a very risky move, and exactly what got Chrysler and GM in trouble in 2008. But maybe since Ford didn’t get bailed out the same way the others did, they didn’t learn the lesson of diversification.
Of course, things are different now. The Ford Escape has virtually the same fuel mileage as the 2006 Ford Focus, so if gas prices continue to rise, as they are expected to, fewer buyers may be trading in their SUVs on fuel-sipping sedans because the gains are minimal. And the housing market isn’t a bubble ready to burst, sending everyone’s finances into a tailspin. However, one might argue that the auto lending market or higher education are two bubbles primed to burst in the near future, and that mass migration to cities could drive interest in more compact vehicles more well-suited to city dwelling. In either case, no investment portfolio manager has ever gotten rich by telling investors not to diversify and I think it’s foolish to do so with automotive lineups as well.
So what’s there to gain for Ford? While they forsake the entry level and low income buyers, despite not remotely being a premium brand, Ford will be satisfying their investors by cutting almost $26 billion in operating costs from producing lower margin vehicles and capitalizing on current sales trends. But let’s not forget that those same trends stem from the whims of consumers, who are fickle as hell, and with a possible trade war looming to increase costs of virtually everything, Ford better hope their investors aren’t as fickle if SUVs start going out of style again.
Authored by
Devlin Riggs