In this segment from the MarketFoolery podcast, host Chris Hill and Motley Fool Funds' Bill Barker dig into the rumor that Ford (NYSE:F) is going to buy out a 10th of its employees to reduce costs and what it suggests about the future. The outlook for the automotive industry broadly is expected to be full of even more rapid disruption from autonomous vehicles, ridesharing, and more, and that presages a lot of trouble for the major players. Will Ford survive in its current form? And what will the secondary effects in related industries like oil and insurance and repairs be?
A full transcript follows the video.
This video was recorded on May 16, 2017.
Chris Hill: Let's move on to the automotive industry. There are multiple reports out this morning that Ford Motor is planning to cut around 10% of its jobs around the world. Ford Motors has around 200,000 employees. As of this taping, Ford has not confirmed this report. But for the sake of this conversation, let's just assume these reports are accurate, and they are, in fact, looking to cut about 20,000 people from their workforce. When you look at their profit margins, when you look at the stock hovering around a five-year low, it kind of makes sense that they would take this approach.
Bill Barker: It does, they have to find savings somewhere, and employees are, more or less, always the most expensive part of your business. The stories that are coming out, which, as you pointed out, are not yet confirmed, point to Ford looking to buy out employees rather than having layoffs, and reduce their costs over the long-term that way, by reducing pension obligations in particular, which is always an issue. So I think it is not going to be good times over the next decade or two for automotive workers, as much as this Administration would like to claim that it's going to be different.
Hill: Yeah. You forwarded a report to me from I think your colleague Nate Weisshaar down in Fool Funds about a recent conference having to do with, among other things, autonomous driving. And one of the takeaways in this report appears to be that the timeframe for autonomous driving, when are self-driving cars coming, when is autonomous driving going to be much more mainstream? And the timeframe for the folks writing this report was, "We went into this thing thinking 2025 to 2030. That's roughly when we were thinking autonomous driving would come. And now that we've gone to this well-attended conference and listen to all of these presentations, our conclusion is it's going to be sooner than that, we think it's going to be 2020 to 2025." And, I think to your point about tough times for auto makers, I think there are a bunch of factors that go into this, certainly pension obligations is one of them. But I think the technology part of this is a big disruptor in the automotive industry.
And I have no idea where it's going, but it really does seem like ... I don't want to compare automotive companies to retailers, but I think in the same way that, I think Ron Gross made the point last week on Motley Fool Money that, when you look at the retail industry, the general retailers, the fact is, some of them just aren't going to make it. And that is, unfortunately for the people who work there, how capitalism works. And I think you could probably say the same thing about the automotive companies. Not in the next couple years, but certainly 10 to 20 years down the line, some of them just aren't going to make it.
Barker: Let's give credit to the authors of this report that we're going to riff off of. ReThink X is the entity that produced this, and the specific authors are James Arbib and Tony Seba. This was a very recent report. The authors' analysis is that this is going to be a much bigger disruption, really, even than retail. You say you don't want to compare it to retail. If you read this report and buy into it, or just entertain what might be, it's bigger than the change that has occurred yet to retail. Amazon came around 20 years ago. Retail is suffering right now, but it still looks a lot like our retail experience 20 years ago. Maybe you're buying 5%, maybe 95%, of your stuff from Amazon. But as much as malls are in decline, they're pretty much all still there. This is projecting that once autonomous vehicles are approved, the adoption is going to be rapid, because you're going to be able to save somewhere up to 90% of your driving costs. The report projects that 95% of miles by 2030, not that long from now, will be done by autonomous vehicles. Not necessarily 95% of the vehicles, but the actual miles covered, because the cars are these fleets of cars out there, and you will no longer need to own a car. You're not using your car close to 100% of the day. But with fleets of autonomous vehicles, they will be, once the electrical equation is improved, this is going to disrupt the oil industry and everything that services the oil industry, and oil prices are going to plummet, and the insurance rates are going to go down, and the cost of cars is going to go down. It's pretty comprehensive what the changes could be. And this is two peoples' opinion about how it's going to go. But we have seen some things disrupted far more than we ever expected them to be.
Hill: And to take the insurance piece of that, at the recent Berkshire Hathaway meeting, Buffett talked about self-driving cars. Buffett, there are plenty of things he will tell you he doesn't know a lot about, but he knows the insurance business, and he's looking out at self-driving cars and seeing, "Oh, yeah, that's totally going to hammer Geico, and any other business that looks like Geico."
Barker: Yeah. If nobody in the family needs to be insured, and no cars need to be insured, that is going to decimate Geico. And the number of accidents and repairs, if the technology is brought to where people hope it will be, it's going to change a lot of things, or potentially could. So Ford, right now, is facing declining auto sales. I think the last four months have seen declining auto sales, not just for Ford but industrywide. That is the first time that has been the case since 2009. Now, invoking 2009, first time blah blah since 2009, might make it seem like, ooh, there's panic that we should consider, and I'm not claiming that. Actually, the profitability is pretty good right now, because people are, again, buying heavier and bigger cars and trucks, SUVs, given the price of oil and gas. So it is not terrible times. But if you're looking out over the factors, and Ford is certainly concentrating on what the future will be for its industry, how it participates in whatever the future ends up being, it looks like you don't need as many employees.