Ford Cuts Production, Sees No Near-Term Profits

May 22, 2008
Ford Blue Oval Logo

Ford Blue Oval Logo

With fuel prices soaring, car sales plunging, and the weak economy holding out little promise of a turnaround, the situation is looking increasingly bleak for Ford Motor Co. The troubled automaker revealed on Thursday that it no longer expects to return to profitability next year and will have to sharply scale back production in the meantime.

During a conference call with reporters, CEO Alan Mulally revealed that the increasingly dire situation will require some drastic responses by Ford. Among other things, the automaker plans to cut production 15 percent during the second quarter, up to 20 percent during the third quarter, and as much as 8 percent during the final three months of the year.

The cuts will be focused on Ford’s light truck lineup, for, as Mulally noted, there’s a fundamental shift under way in the market, away from pickups and SUVs to more fuel-efficient passenger cars and crossovers.

“Unless there is a fairly rapid turnaround in U.S. business conditions, which we are not anticipating, it now looks like it will take longer than expected to achieve our North American Automotive profitability goal," said the former Boeing executive, who signed on with Ford in the fall of 2006.

Mulally declined to say whether he believes Ford can return to the black by 2010, suggesting, “We’ll all know a lot more after the next few months.” The problem is that there is no way of telling where the economy is going, particularly with no end in sight to soaring fuel prices.

Chief Financial Officer Don LeClair, who joined in on the call, said Ford is forecasting gasoline prices of $3.75 to $4.25, “for this year and the balance of next,” but some analysts now believe that petroleum itself could top out at $200 a barrel, which would push pump prices up to $6 or more a gallon.

That is, of course, only part of the problem for the conventional light trucks, such as the F-150 pickup and Explorer SUV, which had dominated Ford’s production and profits for much of the last two decades.

In recent weeks, the pickup segment of the U.S. motor vehicle market has plunged from 11 to 9 percent. The CEO said, “I think part of [the weak truck market] will come back because there’s a fundamental need” for big pickups, particularly to support housing construction. But he conceded he is unsure “how much of that will come back.”

The cuts in truck production are only part of the effort being made to adapt to changing market conditions. Ford is studying a number of changes to its product portfolio, Mulally confirmed. While he didn’t directly respond to one reporter's question, he tacitly acknowledged recent reports that Ford is developing a smaller version of its big F-Series truck.

Separately, a source highly placed within the company’s product development system told TheCarConnection that new concepts, aimed at improving aerodynamics, could make such a vehicle far more fuel efficient than traditional truck designs.

But car-based crossovers, such as the Ford Edge and the upcoming Flex “people mover,” appear to be dominating the company’s future line-up. The next generation of the once-wildly popular Explorer SUV – which has lost nearly half of its volume since the decade began – will be crossover, rather than truck, based.

Meanwhile, Ford revealed it will speed up plans to start merging its North American and European product programs. The first tangible example of that move, at least as now scheduled, will be an American version of the Fiesta subcompact, currently scheduled to hit market here in 2010. Ford desperately needs an entry into that segment, which has been dominated by Japanese offerings, such as the Toyota Yaris, Nissan Versa, and Honda Fit.

Ford’s cross-town rivals are also looking to fill that niche. General Motors has turned to its Korean subsidiary, Daewoo, for models like the Chevrolet Aveo, while Chrysler has negotiated small car deals with both Nissan and the fast-rising Chinese carmaker, Chery.

The market misalignment has complicated the problems Ford faces in the current, fast-declining auto market. CFO LeClair noted that going into 2008, Ford had forecast demand for 16 million vehicles, but that has now fallen to somewhere between 15 to 15.4 million. At the same time, Ford’s share has fallen from an estimated “low end of 14 percent to 15 percent,” to somewhere closer to 14 percent for 2008.

The reality, said Mulally, responding to an industry analyst’s question, is that Ford’s recovery is “going to be slower than everybody thought.”

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