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Ford's Strategy Update: Big Promises, Few Specifics

By John Rosevear - Oct 5, 2017 at 9:34PM

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Here's a high-level look at some of the changes coming to Ford's products and processes.

As expected, Ford Motor Company ( F -0.75% ) CEO Jim Hackett announced a revamp of Ford's strategy during a presentation to Wall Street analysts on Oct. 3.

Hackett didn't give a lot of details; rather, he gave a high-level view of how he wants Ford to think about and approach the challenges ahead. But within that presentation, there were some specific commitments and news items that are worth pointing out.

That's what I've done for you here. We'll have in-depth looks at how and why Hackett plans to shift Ford's direction for you in the coming days. But here, for reference, are the specific promises and commitments made by Hackett and his senior leadership team during the presentation.

Jim Hackett is shown standing before a white backdrop with a blurred Ford logo.

Ford CEO Jim Hackett. Image source: Ford Motor Company.

Cost cuts

Ford will reduce its costs by $14 billion over the next five years, saving an expected $4 billion from product engineering and $10 billion from material costs. The expectation is to reduce the rate of growth in Ford's automotive-related costs by 50% over that period.

A slide outlining Ford's cost-cut plan, as discussed in the text

Image source: Ford Motor Company.

The reduction in engineering costs will come in part from a revamp of Ford's product-development process. That revamp is also expected to reduce new-product engineering time by about 20%, Hackett said.

Profit-margin improvements

Hackett recommitted Ford to its goal of a sustainable 8% (or better) operating margin in its automotive business. (Ford's automotive operating margin was 6.7% in 2016.) The cost cuts are part of his plan to make that happen.

A slide with two charts showing that Ford's revenue and sales have grown since 2009, but its operating profit margin hasn't

Image source: Ford Motor Company.

Ford's revenue has grown significantly over the last several years, Hackett observed, but its spending has kept pace. The idea is to keep revenue strong and growing while reducing the rate of spending growth.

Product shift: More SUVs, fewer sedans

Ford will continue shifting new-product investment away from its sedan models and toward hotter-selling market segments (namely, SUVs). Ford has several all-new SUV models in the works that are focused on off-road ability. The all-new Ford Bronco, due in 2019, will be the first of these -- but not the only one. The car models that remain in Ford's lineup may shift a bit upmarket to improve their profitability.

A slide from Ford's presentation outlining the changes it will make to its product portfolio, as discussed in the text

Image source: Ford Motor Company.

Ford is also shifting capital investment away from traditional internal-combustion engines in order to develop more (and more advanced) hybrid and fully electric drivetrains. Spending on internal combustion engines will be cut by a third, or around $500 million, by 2022, with that sum being added to the $4.5 billion that Ford had previously committed to hybrid and electric-vehicle development.

Electric vehicles

Ford has formed a new internal team, called "Team Edison," to accelerate its development of a new line of battery-electric vehicles (BEVs). The team's mandate is to build a "sustainably profitable" business around BEVs, by "leaning into" market segments where Ford has a strong revenue position now. (Ford didn't say what those were, but they're obvious: pickups, commercial vehicles, and SUVs, and possibly performance vehicles as well.)

Hackett expects that by 2030, only about a third of Ford's vehicles will have internal-combustion engines. But Hackett and the other Ford executives didn't give any specifics on the number or timing of Ford's upcoming electric vehicles.

The company had previously announced that it will launch a compact BEV crossover SUV with 300 miles of range in 2020; that's still happening.

Autonomous vehicles

Again, Ford didn't give a lot of specifics. But expect Ford's early self-driving vehicles to be on the large side -- people-movers and commercial vans -- and aimed at commercial-fleet operators, not individual consumers.

Reducing complexity

Ford will greatly reduce the number of "orderable combinations" on several of its high-volume models, presumably by offering fewer individual options. The idea is to simplify manufacturing (thus reducing costs) and make it easier for consumers to get the vehicles they want.

An example: Right now, Ford's Fusion sedan can be ordered in about 35,000 different combinations of options, colors, and so forth. With the next-generation Fusion, due in a few years, that total number of available combinations will fall to just 96. That should make the Fusion less expensive to manufacture -- and presumably, more profitable.

A slide showing that the number of orderable combinations on the Focus, Escape, Fusion, and Explorer will all fall drastically with the next-generation models of each

Image source: Ford Motor Company.

The move to electric drivetrains will also reduce manufacturing costs, operations chief Joe Hinrichs said during the presentation. He estimates that final assembly of an electric vehicle will require half the capital investment (in the factory) and 30% fewer labor hours per vehicle.

Reducing the number of orderable combinations on Ford's small cars was something Ford executives talked about during the company's Investor Day last year, before Hackett became CEO. But Hackett confirmed that it will happen, and not just on the Focus and Fiesta.

The upshot: Not a lot of specifics

How will Ford cut $10 billion in material costs? How many electric vehicles will it launch in the next five years? When will its first self-driving vehicle come to market? What is its profit outlook for 2018?

The answer to all of those questions (and many more) is the same: We don't know yet. Ford promised answers in the months to come (it'll give 2018 guidance in January, for instance). It's frustrating for investors to wonder what Ford is thinking, at a moment when many rivals are making very specific future-tech commitments, but my sense right now is that a short delay will result in better answers -- and the timing won't matter much in the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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