Now Ford Accepts Market Reality – Who is Next?
Will other manufacturers quickly follow?
By Brendan Moore
As we’ve noted in the previous article, Ford held an important press conference yesterday and told reporters that the company now cannot say when it might return to profitability in its core North American operations. Ford just recently predicted a return to profitability in North America in 2009.
The CEO of Ford, Alan Mulally, said the market has dramatically shifted towards smaller, more fuel-efficient vehicles, and in a first for any U.S. automaker head, said that Ford believes this shift is “structural” (read: permanent) as opposed to temporary. Mulally stated that Ford believes “the tipping point” for this market shift was gasoline reaching an average of $3.50 a gallon nationwide. “It seemed to us that we reached a tipping point where customers began shifting away from these vehicles at an accelerated rate,” Mulally said Thursday morning. “Based on everything we can see on the outlook for fuel prices, we do not anticipate a rapid turnaround in business conditions.”
The short translation is that the high price of gasoline has just crushed sales of pickup trucks and SUVs, which Ford has a lot of and makes a lot of profit from, generally. Cars, which are selling, but are not anywhere near as profitable, are what consumers are buying, and what Ford believes consumers will want to buy more of in the future.
Gasoline is now around $4 a gallon in most parts of the country and soon will go higher in the near term with oil touching $135 a barrel yesterday. Ford has now changed their planning and forecast data. Ford is now basing their aggregate sales forecast based on U.S. gasoline prices to ranging from $3.75 to $4.25 a gallon throughout 2008 and in 2009.
I think they need to dial in some wiggle room in that forecast – on the high side.
Mulally commented that it just in the past week that the senior leadership at Ford realized that their previous forecast had just been eclipsed by rapidly moving market events.
Once the Ford senior executives realized how much the ground had shifted underneath them, they ordered immediate cuts in production in North America. The company has ordered a 15% reduction in second quarter production and a 15%-20% reduction in third quarter production. As might be expected, the cuts will be centered on the SUV and pickup production lines.
The cuts in production will be accompanied by worker cuts, both hourly and salaried.
Ford gets kudos for acting so quickly based on the changing market conditions, but it begs the question of what General Motors and Chrysler will do in the same market environment. Will they reach the same conclusions that Ford has; the conclusion that the market has now irrecoverably changed? Or, is there still sentiment that the SUV and full-size truck market will come back, not as strong as it was, but still robust? GM, of course, has a lot of SUV and pickup truck models, but Chrysler is easily the manufacturer with the greatest percentage of SUVs and large trucks in its model portfolio.
I wish to believe both GM and Chrysler have reached the same conclusion as Ford concerning the future of the new vehicle market here in the U.S. as I am personally certain it is the correct assessment, but since I am not privy to their internal deliberations, who can say?
And what about the other manufacturers? Does Toyota slash Tundra production even more? Will Honda be able to cut back production of the already slow-selling Ridgeline without compromising the profit margins of the vehicle? Does Nissan decide to pull the trigger on selling the Nissan Aprio, their private-label version of the Dacia/Renault Logan, and already on sale in Mexico, in North America? We’ve already seen Honda’s decision to bet very heavily on hybrids for the near future as a result of the fast-moving market environment; do other manufacturers follow suit?
Again, it’s (rampant) speculation on my part. But, if I could offer all the auto manufacturers (not just the three American manufacturers) some advice, I would tell them that not only has the ground shifted, it’s worse than you know. Because all you see is what is happening among the current car-buying public, and the next wave of car-buyers (they are currently 18 years old) is even more interested in buying the most fuel-efficient vehicle available, whatever that looks like in the future. I think these buyers will be looking for small conventional cars that get great fuel mileage, hybrids and electric vehicles, and not much else. I would tell them that time is running short if you want these prospective buyers.
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