Ford Is Right to Fear Getting Left Behind -- Heard on the Street
April 29 2021 - 8:05AM
Dow Jones News
By Stephen Wilmot
Last year, car makers experienced the cardiac arrest of
shutdowns followed by the blood rush of fast-rebounding auto sales.
This year, they're getting both at the same time.
Ford reported record quarterly operating profit after the bell
Wednesday while also guiding analysts to a full-year profit below
expectations. Since markets only care about the future, the shares
fell 3% in aftermarket trading.
The well-documented chip shortage was the main culprit. Ford
said it would produce 1.1 million fewer vehicles than planned this
year for want of semiconductors, equating to roughly $2.5 billion
in adjusted operating profit -- the top end of the range it
estimated at the start of February.
The confusing thing is that Ford produced 17% fewer vehicles
than planned in the first quarter and yet generated far more profit
than the company expected. Against a backdrop of strong consumer
demand, an undersupply of vehicles as a result of last year's
pandemic-related shutdowns and this year's chip-related ones is
pushing up prices across the industry. Ford made 7% more automotive
revenue than in the first quarter of last year by selling 6% fewer
vehicles. Skyrocketing used-car prices also boosted its finance
arm.
The message from the company Wednesday was that these conditions
can't last. It is assuming automotive operating margins, which
reached 12.8% in North America in the quarter, will normalize as
purchase incentives creep back up and rising commodity prices feed
into raw-material bills. It also expects used vehicle inflation to
moderate.
Some of these predictions are more reliable than others. Car
makers have good visibility over raw-material prices, and the
production impact of the chip shortage is becoming clearer. As the
first quarter showed, though, the all-important question of pricing
is hard to forecast in such unusual market conditions.
Much depends on how Ford's competitors have been affected by the
chip shortage. So far, General Motors seems to have maintained
output of its big pickup trucks and sport-utility vehicles, whereas
Ford has had to trim production of its chief money-spinner, the
F-150. If that continues, GM could take market share and what at
first looks to be cautious guidance from Ford might simply be
realistic. Investors will learn more when GM and Chrysler-owner
Stellantis, which makes the RAM and Jeep brands, report next
week.
The long-term lesson of today's semiconductor shortage is that
car makers either need to hold higher inventories or work more
closely with chip foundries -- and probably both. The crisis has
also shone a spotlight on other elements of the supply chain. Ford
this week announced plans to follow GM, Toyota and Volkswagen into
the expensive business of building electric-vehicle batteries. This
is in part to manage the risk that batteries become like chips:
crucial inputs to which some car makers have better access than
others in the emerging battle for EV market share.
Ford's move into batteries and its downbeat profit outlook both
betray a fear of getting left behind. For a company that has
consistently lagged behind in recent years, that is no bad
thing.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
(END) Dow Jones Newswires
April 29, 2021 07:50 ET (11:50 GMT)
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