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1 Major Takeaway From Ford Motor Company's Strategic Update

By Daniel Miller - Oct 10, 2017 at 12:35PM

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Wall Street hasn't yet bought into the plan, but investors should take heed.

Investors had waited anxiously to hear what Ford Motor Company's (F -1.91%) newly appointed CEO, Jim Hackett, would lay out in his strategic plan after 100 days on the job. Unfortunately, the plan, which Hackett delivered in a presentation on Tuesday, was initially met with some skepticism due to the lack of specific details and a vague grand-scheme strategy for a rapidly evolving automotive industry.

Let's take a look at one of the near-term core takeaways from the presentation, and at why investors should cut the strategic plan a little bit of slack -- at least for now.

The grand scheme

In an attempt to sum up Ford's grand strategy moving forward, the presentation outlined five basic principles. In the company's words:

  1. Ford will prepare for disruption by becoming fit.
  2. We will be in the vehicle business -- moving both people and goods.
  3. Our vehicles will be smart and connected.
  4. These smart vehicles will thrive in a new transportation operating system.
  5. We will evolve to capitalize on new business opportunities within this transportation operating system.

Much of the plan is focused on the future of autonomous vehicles, technology acquisitions, and mobility projects such as Ford Chariot, a shuttle service that allows passengers to crowdsource routes and reserve rides.

What about specific details for investors to chew on in the near term? There was a little bit of that, too.

Getting fit

The core takeaway, at least in the near term, of Ford's strategic presentation is this: It plans to "redesign business operations" and "attack costs" to become a more "fit" company. Between 2010 and 2016, Ford grew its automotive revenue 30%, which hardly outpaced its 29% growth in total costs. With automotive sales peaking in Ford's profit engine -- North America -- the automaker recognizes it has to do more to cut costs.

Graphic showing continued growth in revenue and 50% decline in costs.

Image source: Ford Motor Company's Oct. 3, 2017, CEO Strategic Update.

Driving automotive cost growth 50% lower is obviously not as simple as snapping your fingers. The bulk of that will come from driving down material cost by $10 billion over that five-year time frame. During that time, Ford also plans to drive down product engineering costs by a hefty $4 billion, for a total cost reduction of $14 billion between 2017 and 2022.

Trust the process

One way Ford plans to redesign its business operations is to reduce the number of orderable combinations of its vehicles. That's not a novel concept from the automaker, but there's much room for improvement. For instance, the current Escape and Fusion have 2,302 and 35,000 orderable combinations, respectively, while forthcoming models will have as few as 228 and 96, respectively.

A white Ford 2017 Fusion parked in front of a brick building at night

Ford's 2017 Fusion. Image source: Ford Motor Company.

Furthermore, Ford hopes to reduce new-vehicle development time by 20% and product changeover time by 25%. Internal combustion-engine architectures are expected to decline 29%, from 17 in 2016 to 12 in 2022. Over that same time frame, powertrain capital spending is expected to drop 32%, from $1.7 billion in 2016 to $1.2 billion in 2022 -- though that largely will be reinvested into electrified powertrains to adapt to an electric-vehicle future.

Although the major takeaway is that Ford plans to get "fit" by cutting costs and redesigning its production processes and operations, much of the presentation delved into an uncertain future with vague direction and few hard facts. That made investors cautious to buy into the strategic plan, for now.

We have to take a step back and remember that the road ahead is much different than the last strategic plan that helped turn Ford around a decade ago: "One Ford." The simple truth is that back then, there was a plethora of low-hanging fruit -- fairly simple steps the automaker could take to address its issues. Ford's decisions to consolidate platforms globally, improve its vehicles' fuel economy, and produce higher-quality vehicles in booming segments solved many of its problems.

That low-hanging fruit is gone now, and it's going to take Jim Hackett longer than 100 days on the job to find ways to solve Ford's long-term strategy problems. Let's give him a little time.

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