A week removed from the breaking news that Ford was cutting all of their passenger vehicles with the exception of the Mustang, Focus Active and SUVs or crossovers, I’ve had some more time to think on and read about the decision, and the more I reflect on it, the worse the decision seems to sound.
Clearly needs a truck.
First, a reminder of why this happened. Cars and sedans are about as popular as getting kicked in the nuts. Sure, some sickos out there still like it, but, just like getting kicked in the nuts, owning a sedan makes you feel like less of a man because you could’ve just paid $10,000 more and bought a real man’s car. And by man’s car I mean a truck. In any case, cars and sedans are not selling well, and even when they do, they are low margin vehicles, meaning there’s not a lot of profit to be had for companies selling them. For publicly traded companies like Ford, continuing to sell unprofitable things that you have to continuously sink money into in order to remain competitive means it’s a profit suck, which affects your all-important balance sheet and is reflected in the stock market’s valuation of your company. The more profit you earn, the higher your valuation, the more satisfied your investors are that they made the right choice in buying your stock.
And there’s some old business wisdom to back up axing the sedans. It’s called “core competencies” and is the reason I pay someone to do my taxes and spread mulch around my front yard. It’s just easier, faster and more efficient if I pay someone who does those sorts of things all the time to do them than to try to do them myself. Those are not among my core competencies. And I pay different people for those things because my tax guy’s core competencies don’t include spreading mulch either. At least, not as far as I know. So what Ford is basically saying here is that, “we understand that the car market in the U.S. is not really growing and that we do not make cars and sedans that are compelling enough to compete well against such cars from Toyota, Honda, Hyundai or even General Motors. Therefore, we are willing to sacrifice a larger market share in favor of a smaller share that is more profitable by focusing on our core competency - producing SUVs, crossovers and the Mustang. And we’re going to save $26 billion by doing so.”
In fact, other companies have thrived on this sort of business model, including Porsche, Lamborghini or Ferrari, all of whom focus on sports cars, or Land Rover or Jeep who focus exclusively on SUVs.
Right now you’re thinking, “oh well that does sound pretty logical and I guess they made the right decision so that’s the end of the top stories, right?” Wrong, and sorry, it’s not the end. Porsche and Lamborghini have both hopped on the SUV bandwagon and Ferrari is about to because Porsche’s Cayenne became the company’s best selling vehicle when they first produced it in 2002. And no, that does not mean that Ford is right for sticking with SUVs, it means that those companies understood that they needed a diverse product offering to withstand economic fluctuations. Land Rover can produce only SUVs because they are owned by Tata, who also owns Jaguar, so they have all the product diversity there, it’s just across different brands but under the same umbrella. Jeep is just a freak and is literally the only good thing Fiat Chrysler makes.
And paring down their products doesn’t mean Ford instantly becomes a lean, mean healthy profit machine. It means they have all their eggs in a single basket that is far from immune to market volatility. Healthy companies like Toyota and Honda are constantly evaluating their products and if they deem a certain model isn’t as competitive as it should be, they invest in improvements and get better, more competitive models out there. Think back to Honda’s newly redesigned 2012 Civic, which was universally panned by critics for being noncompetitive. Honda didn’t say, “Oh well, we tried, might as well kill off the civic, it never made much anyway.” They dumped money on redeveloping the car and came out with a completely redesigned model the very next year! Because Honda knows about a thing called owner loyalty, and while the Civic may not make much money, it’s a great first car for kids or young professionals who need an appliance and not a race car. After the Civic, maybe the owner will graduate to an Accord or Pilot or even CR-V. It’s like Black Friday Sales. Those deep discounts exist not because companies want to not make money, but because they want to get you into the door so you’ll spend more money with them, either now or later.
Toyota knows this too. It’s why, this week, they announced that they’re investing $170 million and hiring 400 new people to produce the next generation Corolla in Mississippi. Toyota sold more than 300,000 Corollas last year, so even though the sedan market is tanking, you cannot say with conviction that there isn’t money to be had by selling them, and if buyers aren’t cross-shopping the Corolla with the Focus, that’s a failing on Ford’s part, either in marketing or in product development, not a sign from the market that they should just quit.
Plus, by exiting the small car market, Ford creates a bit of a vacuum there to help its competitors sell more cars, more entry-level vehicles that will generate future loyalty sales. Whether it’s for Toyota, Honda or Hyundai or if the hole is big enough, attracting some Chinese auto manufacturers to come sell their goods here on the cheap. And one of those Chinese companies, or even Hyundai or Mazda (who actually used to be part-owned by Ford) could have been someone Ford could have partnered with to develop a new small car platform that was both more competitive and more cost efficient. But they chose the lazy way and just said screw it, I’m out.
And for what? $26 billion back in their pocket that they’re going to spend somehow. And by the looks of things, not wisely. This week we learned about Ford’s Smart Window concept that utilizes a motor attached to the window to vibrate at different frequencies, allowing blind people to “feel the view” out the window of a car. We also learned about a patent Ford filed for a vehicle with an integrated electric motorcycle. What?! Ford, you can’t make a good Focus or Fiesta, but you’re going to make us a damn transformer? Or how about the fact that Ford is looking for buy-in from its board to purchase and refurbish Michigan Central Station, which as you might be able to tell from the title, is for trains.
Look Ford, honey, darling, I get it. Your shareholders are whiny babies who wanna be fed. But remember that their love is temporary. You can create all the value in the world for them, but you are far, far behind in autonomous tech and electrification. Yet here you are blowing cash in window vibrators and center consoles that become motorbikes. How long do you think the bump from cutting less profitable models is going to last? Probably right up until Toyota and Honda have compelling electric vehicles out there and you’re still trying to shill the new Bronco, which we all know is going to be a shadow of the original. Investor love comes and it goes. It’s a hell of a lot easier to log on to E-Trade and click “sell” when the going gets rough than it is to design and produce a compact, fuel-efficient vehicle if the minds of American consumers start to change again. I just can’t help but feel like you’re going to be sounding a whole lot like Gob Bluth here in a few years.
Authored by
Devlin Riggs