America’s Going Out of the Car Business
Ford, GM, and Chrysler are all moving almost exclusively to trucks, SUVs, and crossovers.
Ford made news yesterday by announcing it is all but phasing out cars for trucks and SUVs. But GM and Chrysler (to the extent the latter still counts as an American company) are on the same path.
Bloomberg (“Ford Is About to Abandon American Sedans“):
The Model T, the ’32 deuce coupe, the Thunderbird, the Mustang: For much of its 115-year history, Ford Motor Co. has been synonymous with cars.
But now Ford, one of the great engines of 20th Century American industry, is about to do the unthinkable: abandon the American car business almost entirely.
Just two years from now, a mere 10 percent of the vehicles rolling off Ford assembly lines and into North American showrooms will be sedans and sports cars like the Taurus or Mustang. The rest will be pickups, SUVs and commercial vehicles — more lucrative models that the company hopes will secure its future as change tears through the global auto industry.
Ford’s board ousted its chief executive officer last year and replaced him with Jim Hackett, a cost-cutter who’s prepared to make the sort of audacious gambles that Wall Street thinks have been missing.
“The passenger car rationalization plan is just the sort of bold and decisive action we believe investors have been waiting for,” Ryan Brinkman, an auto analyst at JPMorgan Chase & Co. wrote in a report Thursday. “It is indicative of a management team for whom there are no sacred cows and which seems increasingly likely to pull other such levers to aggressively improve earnings and shareholder value.”
Ford shares rose as much as 3.8 percent, the biggest intraday gain in six weeks, and were up 3.3 percent to $11.48 as of 3:16 p.m. in New York.
Hackett, 63, is choosing a route similar to the one Fiat Chrysler Automobiles NV used to pass Ford in North American profitability. Sergio Marchionne, CEO of the Italian-American automaker, killed off the Dodge Dart and Chrysler 200 sedans and retooled the factories that had been assembling them. They now build Jeep SUVs and Ram pickups instead. Marchionne aims to surpass General Motors Co.’s margins in North America before his retirement in 2019.
While scrapping several sedans paid off for Fiat Chrysler — the company almost halved net industrial debt in the first quarter — the move wasn’t devoid of risk and won’t be for Ford, either. Both may have to count on fuel staying cheap and supporting demand for Ford Expeditions and Jeep Wrangler SUVs, plus the F-Series and Ram truck lines.
In the long-term, abandoning car segments may turn out to have been the wrong move if the Trump administration’s plans for weaker mileage standards don’t last long after his presidency. And Japanese automakers also are likely to welcome less competition for some of their best-sellers, including the Toyota Camry and Honda Civic.
“For Ford, doubling down on trucks and SUVs could be just what the brand needs,” Jessica Caldwell, an analyst for Edmunds.com, said in an email. “But this move isn’t without risk: Ford is willingly alienating its car owners and conceding market share.”
By not investing in next generations of any car for North America except the Mustang, Ford now anticipates it’ll reach an 8 percent profit margin by 2020, two years ahead of schedule. Abstaining from that spending is part of Hackett’s plan to cut $25.5 billion in costs by 2022. That figure, announced Wednesday, is almost double what the CEO laid out in October.
“We’re going to feed the healthy part of our business and deal decisively with areas that destroy value,” Hackett said on an earnings call Wednesday.
While battery-powered vehicles have been money losers thus far, Ford’s plans aren’t completely inconsistent with the global march toward electrification that’s shaking up the auto industry.
Ford will hedge against risk of rising pump prices by spending $11 billion to bring out 40 electrified vehicles by 2022. Among those will be 16 battery-only models, including the Mach 1, a high-performance electric SUV coming in 2020.
The company will expand its offering of crossovers, with vehicles such as the Focus Active coming next year that combine the high-riding attributes of an SUV with lighter-weight car frames to improve fuel economy over traditional big rigs.
Ars Technica (“Say goodbye to nearly all of Ford’s car lineup: Sales end by 2020“) notes that “Ford dropped a bombshell during its Q1 earnings call” and this seems more about stock prices than profitability. A CNBC report (“Ford is basically giving up on US car business, and GM is not far behind“) quotes Adam Jonas, an analyst at Morgan Stanley, saying, “Virtually eliminating Ford’s NA car portfolio makes a lot of sense, in our view” but goes on to note,
[D]espite the fact that American companies are reshaping their lineups, sedans will still form a substantial portion of the vehicles sold in the U.S. for the foreseeable future.
“Although passenger car segments have declined over the last number of years, they are still very important,” GM’s Stevens said Thursday. “Small cars are important internationally, and they still make up a chunk of sales in the United States.”
As a January Bloomberg report (“The American Sedan Is Dying. Long Live the SUV“) notes, it was Chrysler who started this move:
Chief Executive Officer Sergio Marchionne started it off by killing the Dodge Dart and Chrysler 200 to reorient Fiat Chrysler Automobiles NV around Jeep SUVs and Ram pickups. The profit boom that’s followed has emboldened Detroit’s other CEOs to consider snuffing out sedans such as the Ford Fusion and Chevrolet Impala.
“The industry thought Sergio was a mad man when he did that, and now he looks like a genius,” said Jeff Schuster, an analyst with LMC Automotive. “He paved the way for everyone. Now, with the Detroit brands, virtually every car is under review.”
Chrysler essentially means “Jeep” at this point, with the Dodge Ram pickup and Dodge Charger Mustang-competitor all that’s left of the old-line brand. (Those of us of a certain age remember when Jeep was part of the American Motors Company.)
Essentially, American automakers are ceding a major part of the market to Asian and European competitors because there’s a larger profit margin on trucks and SUVs, which makes Wall Street happy, and because American sedans and small cars have little cachet outside the Mustang and Corvette brands. Cadillac and Lincoln simply lost their appeal to the under-70 demographic, who prefer BMW, Mercedes, Audi, and Lexus. Similarly, Ford and Chevy haven’t been able to make cars with the appeal of Honda and Toyota.
But there’s no inherent reason that has to continue indefinitely. Tesla, an American-based startup, has generated huge excitement with its Model S luxury sedan and Model X SUV, both of which are higher performing, more stylish, and more distinctive than anything coming out of Europe or Japan in those price points. They’ve had less success with their Model 3 mid-priced sedan, which is less stylish and has had production problems.
To be sure, part of the demise of the American car is about classification. A lot of the cars now being marketed as crossovers, ostensibly a cross between a sport utility vehicle and a car, are essentially station wagons. Still, Detroit is being out-designed in that segment as well.
Elon Musk has shown the way forward: make distinctive products that people want to drive. There’s simply no reason American companies can’t do that again.