Ford Takes Steps to Rein In Costs -- WSJ
April 23 2018 - 3:02AM
Dow Jones News
By Christina Rogers
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 23, 2018).
Ford Motor Co. Chief Executive Jim Hackett spent his first year
in the job hammering away on the need to cut costs, aiming to slash
$14 billion by 2020 and prodding its 200,000 employees to get more
financially "fit."
When Mr. Hackett took the post in May, he sought to jump-start
Ford's response to a rapidly changing business in which auto makers
are increasingly focusing on electric cars and autonomous vehicles.
To find the money to finance such projects, the new CEO had to look
for savings. Analysts are expecting to see more details on cost
cuts when the No. 2 U.S. auto maker reports quarterly results
Wednesday after the closing bell.
Mr. Hackett is running a company with an operating margin below
that of both General Motors Co. and the smaller Fiat Chrysler
Automobiles NV in the fourth quarter. Ford's annual 5% operating
margin trails GM's 9%, and is lower than its internal long-term
target of 8%.
First-quarter earnings highlight a shift in the Motor City. Ford
emerged from the financial crisis as the healthiest U.S. auto maker
and held that crown for several years. Today, however, Ford's
market value of $43.2 billion is closer to Fiat Chrysler's
valuation than GM's, a trend that has sharply accelerated since Mr.
Hackett took the helm.
Mr. Hackett needs to address Ford's spending habits. In the
critical area of engineering, research and development, Ford's $8
billion budget last year outpaced GM's by nearly 10%, even though
GM sells far more cars globally and has more advanced electric
cars. In addition, Ford also dished out more to cover warranties
and materials. And Ford's overall head count increased in 2017.
"They are burning a lot of cash in a lot of places," said Rod
Lache, an auto analyst with Deutsche Bank Securities. Ford's
automotive operating cash flow slipped 40% last year, and the
company's annual profits are projected by Wall Street analysts to
drop 12% in 2018, even though first-quarter earnings are expected
to increase.
Mr. Lache, who expects Mr. Hackett to elaborate on his
restructuring plan during the earnings call this week, said GM and
Fiat Chrysler have been far more decisive in exiting money-losing
parts of the business, such as unprofitable car lines or geographic
markets that return little or no profit.
"Ford really never went through this," Mr. Lache said. "That's
ultimately come home to roost."
Sinking more money into engineering cars with pricier materials,
engines and features has helped Ford better meet fuel-economy
targets and boost transaction prices of profitable trucks. But the
Lincoln lineup and certain passenger-car lines can require steep
discounts that erode or erase margins.
Mr. Lache estimates 60% of the volume delivered in the U.S. was
sold at a price below the industry average.
"The entire company is intensely focused on improving the
operational fitness of the business to deliver profitable growth
with improved returns, while building toward our vision of the
future," Ford said in a statement.
Mr. Hackett plans to shift about $7 billion in spending away
from small cars and sedans and move it toward development of more
profitable trucks and sport-utility vehicles. He also is increasing
investment in electric, autonomous and internet-connected cars.
If he succeeds, Mr. Hackett could polish Ford's image and
brighten the investment case. The road ahead, however, will be
bumpy.
Ford's own outlook for 2018 calls for a third consecutive year
of earnings decline. Operations in South America and India are
losing money, and sales in China slid 19% in the first quarter, a
decline that could further pressure earnings.
"There won't be much to get excited about with the Ford story
until 2019, or perhaps 2020," Brian Johnson, a Barclays analyst,
wrote in a recent research note.
Write to Christina Rogers at christina.rogers@wsj.com
(END) Dow Jones Newswires
April 23, 2018 02:47 ET (06:47 GMT)
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