Bloomberg News

Ford Forecast Shows Cost of Most New Models Since 2006 (2)

December 19, 2013

Ford Motor Co. (F:US)’s prediction of stalled revenue growth and sliding profit in 2014 reflects the high cost of introducing models in the most-crowded new-car field since Alan Mulally joined the automaker.

Ford had the biggest drop in more than two years yesterday after predicting a decline in pretax profit, citing fierce competition in a slower-growing U.S. market and the spending needed to preserve strong pricing with its car and truck lineup.

The sober outlook underscores the challenges facing the eventual successor to Mulally, who is being considered for the top job at Microsoft Corp. (MSFT:US) Automakers including General Motors Co. and Toyota Motor Corp. (7203) plan to introduce 37 new models in North America next year, the most since 2006, IHS Automotive said. Under Chief Executive Officer Mulally, Ford plans to start sales of 16 fresh or updated models, triple this year’s number, resulting in a anticipated cost surge. Even with the new lineup, Ford said its mid-decade profit-margin target is at risk.

“It’s a very competitive business,” Chief Financial Officer Bob Shanks told reporters and analysts yesterday after a presentation in New York. “You really can’t sustain any competitive advantage, ever. You’ve always got to be trying to find that next thing where, for a period of time, you can separate yourself from the others.”

Automakers’ new-vehicle introductions ebb and flow from year to year, depending on the age of current models and each company’s budgets. GM brought out 18 new or revamped models in the U.S. this year and plans 14 more next year as the automaker improves its lineup from one of the industry’s oldest into one the newest.

Better Cars

Mulally, who made Mark Fields his likely successor by promoting him to chief operating officer a year ago, borrowed $23.4 billion to pay for the automaker’s restructuring when he took the helm in 2006. This allowed the company to invest in better cars such as the Ford Fusion sedan, capable of commanding prices that match or exceed offerings from the likes of Toyota. With those gaps now closed for its namesake brand, 2014 represents a renewed effort by Ford to distinguish its vehicles in a U.S. market projected to expand by the smallest amount since the industry’s crisis a half-decade earlier.

Ford fell 2.2 percent to $15.30 at the close in New York. After outpacing the rise in the Standard & Poor’s 500 Index for much of 2013, its 18 percent gain this year now trails the benchmark measure’s 27 percent increase. Auto sales in the U.S. are on pace for the best year since 2007 as Detroit built up its most competitive lineup top to bottom in a generation.

New-Model Costs

Ford will earn $7 billion to $8 billion next year after an estimated $8.5 billion pretax profit for 2013, the Dearborn, Michigan-based company said yesterday in a statement. The second-largest U.S. automaker said last week that it plans to introduce 23 new vehicles globally in 2014, more than double this year’s total.

The company’s outlook reflects the pressure that automakers face to lower prices on outgoing models ahead of introducing fresher vehicles, which then need to be supported by more marketing and promotional spending. Manufacturing and engineering costs also tend to rise when carmakers build plants and prepare existing factories to assemble new models.

Costly Aluminum

Analysts such as Matt Stover at Guggenheim Securities expect that Ford’s F-150 pickup will be among the new introductions that the company has planned for next year. The automaker’s F-Series trucks are the biggest and most profitable model line in Ford showrooms and will complete this month its 32nd consecutive year as the top-selling vehicle in the U.S. industry.

“It’s going to be really difficult for Ford to grow profits in the face of changing over the F-150, particularly when the product on the other side will have a fundamentally higher cost structure,” said Stover, who is based in Boston and has a neutral rating on Ford.

Ford has said it plans to take weight out of its next-generation F-Series trucks. The company’s anticipated use of aluminum in the body of the pickup -- a more costly alternative to steel -- could be the most “transformative trend” for the metal since the aluminum can, Lloyd O’Carroll, an analyst at Davenport & Co., wrote in a September report.

Escape Recalls

Ford has struggled recently with containing costs associated with introducing models with less at stake than the F-150, such as its Escape utility. The Escape has been recalled seven times since the redesigned version debuted in the first half of 2012.

The company yesterday said that it will pay as much as $300 million in warranty expenses this year, primarily because of recalls of Escapes with 1.6-liter engines that risked catching fire because of oil and fuel leaks.

“I am concerned about the rocky launches Ford has had,” Michelle Krebs, an auto analyst with researcher Edmunds.com, said yesterday by telephone. “There’s not a more important launch than the F-150. It means everything.”

Warranty expenses tied to models such as Escape contributed to Ford cutting its forecast for North American profit margin for this year to as low as 9.5 percent, from a previous projection of about 10 percent.

Mid-Decade Projection

Looking beyond this year, Ford said that in addition to expecting pretax profit to drop in 2014, its mid-decade profit-margin target is “at risk,” as rivals introduce new vehicles and its Japan-based competitors benefit from a weaker yen. Its projection, first presented during a June 2011 investor day, was for 8 percent to 9 percent profit margins.

“It really is a much more competitive environment,” Mike Jackson, a Northville, Michigan-based analyst for IHS Automotive, said this week. “We’ve got a tremendous number of new products coming here in 2014 and beyond.”

IHS Automotive estimates that automakers have plans to add 2.1 million vehicles of incremental capacity after this year in North America, most of which will come from Asia and Europe-based automakers. In almost all cases, new models that go into production in North America end up being sold in the U.S. market.

“This is such a profitable market, so it attracts competition, because everyone wants a piece of it,” Ford’s Shanks said. “There’s always going to be this natural push down” on profit margins. “At some point, there will be a balancing.”

Ford will face the heightened competition as it prepares for the eventual departure of Mulally, its third-longest serving leader. While the company has said it continues to plan for its 68-year-old chief to stay through at least 2014, he is a candidate to become the next CEO of Microsoft, people familiar with the company’s search have said.

Fields Meeting

Ford promoted Fields, a 24-year Ford veteran, to the No. 2 role in December 2012. Fields, 52, has spent much of the time since then preparing for next year’s product introductions, Shanks said yesterday.

Fields implemented and has led a Wednesday morning meeting to review the metrics of Ford’s product introductions, which are attended by company leaders in sales, product development, quality, manufacturing, purchasing and marketing.

While Fields has taken on more responsibilities, including the leading of Ford’s broader business plan review meetings every Thursday morning, Shanks said yesterday that he doesn’t foresee a change in the CEO position in the near future.

“I fully expect when I come back from vacation, I’ll be working for Alan, and I’ll be working for Alan into 2014,” Shanks told reporters yesterday.

Asked if he anticipates that Mulally will remain CEO through next year, Shanks said he can’t know the future and “I don’t have anything else to add beyond that.”

To contact the reporter on this story: Craig Trudell in New York at ctrudell1@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net


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  • F
    (Ford Motor Co)
    • $16.47 USD
    • -0.12
    • -0.73%
  • MSFT
    (Microsoft Corp)
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