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Summary

  • Ford’s most recent recalls total around 1.4 million vehicles under suspicion for a potential loss of power steering.
  • Ford is in the process of revamping its Dearborn Truck Plants for the production of its 2015 F-150 trucks which will require plant shutdowns.
  • 90,000 trucks could be sold minus the planned factory shutdowns.
  • Ford’s assembly costs have been reduced in Germany which will have a positive impact on its operating margin.

Ford Motor Co. (NYSE:F) is presently grappling with vehicle recalls and plant revamps. The following discussion highlights a few important aspects that would impact Ford's profitability in the next few years.

Recall Fiasco

General Motors' (NYSE:GM) auto recall issue has appalled the entire industry, giving rise to increased levels of pressure on car manufacturers to make vehicles safe for commuting. However, GM's recall issue had one positive result: it brought about awareness among the consumer group regarding lack of responsibility on the part of car manufacturers and made producers more wary of potential costs they may incur should they be deemed at fault. Although auto related recall events still average the same as the historical number of two events per day, the number of unit recalls has taken a huge leap. According to the data collected by the Stericycle Recall Index, 13 million cars were recalled over the first quarter of the present year. Previously, car manufacturing was somewhat easier since older cars were not so loaded with technology and software prone to glitches; numbers reveal that 70% of the recalled vehicles so far this year were manufactured over the past five years.

Ford's most recent recalls total 1.4 million vehicles under suspicion for a potential loss of power steering. The company learned its lesson well from GM before finding itself in a pool of lawsuits. I believe recalling the vehicles to prevent the issue is a good move made by the management as it projects an image that the company is mindful and caring towards its customers and wishes to ensure the delivery of a failure-free driving experience. Yes, the supply chain will come under stress due to this high number of recalls, but ensuring all issues are fixed across the entire supply chain will defend the image of the brand against rival firms.

Aluminum Body Trucks

Fuel prices continue to increase, thus leading to the rising demand for vehicles with better fuel consumption. To meet the changing demand, Ford is in the process of revamping its Dearborn Truck Plants for the production of its 2015 model of F-150 trucks. The production of the new model is expected to commence by the end of the present year. F-150 trucks are one of the company's bestsellers. The goal is to make the vehicle better at fuel consumption by switching the outer steel body with aluminum, which is a bit more expensive than the former metal, but is lighter in comparison. The lighter weight will lead to an improvement in mileage of as much as 30 miles per gallon.

Overhauling the plant to achieve the desired goal is going to cost the company hundreds of millions of dollars since the truck is the most profitable product of the company. The company is planning to shut down its plants for another 10 weeks, in addition to the three-week shutdown around the start of the year, and as many as 90,000 units could be sold minus the planned factory shutdowns. Ford's sales are expected to plunge by double digits this year, which will trickle down to its bottom-line performance and will affect market share as well. The company expects its North American margins to decline to 8-9%, a 100 basis point decline compared to the previous year. However, it is possible that the company may realize a slightly higher decline than the predicted figure.

However, the company is confident in its move and is taking a bold step to forgo near term profits in anticipation of larger sales, higher profits, and a larger chunk of market share in the future. By 2025, 70% of the trucks will utilize aluminum while the total number of North American aluminum vehicles will make up 18% of the North American vehicle production according to a study released by Ducker Worldwide. This is an increase of 17% from present figures. With these statistics, there is no questioning that the company's 2015 Ford F-150 trucks would yield substantial profits once they reach the market. The trucks are very popular amongst the truck drivers and I anticipate that this would not change any time soon, considering the fact that the company maintains a strong brand image and a loyal customer base.

Reducing Operating Costs

Besides revamping its operations to produce vehicles with better fuel consumption, the company has been working to reduce its operating expenses to up its operating profit margin. Ford shut down two of its manufacturing plants in Britain last year and is presently considering reducing the headcount by 5,700 by closing down a plant in Genk, Belgium towards the end of 2014.

To further reduce its operating costs, the company was seriously considering relocating its German plant to a lower cost country; however, the relocation was abandoned as the company reached an agreement with workers to slash assembly costs. There is a stark difference in the wage rate across countries: "Labor costs in German manufacturing industry were an hourly 36.98 euros per worker in 2012, compared with 29.56 euros in Japan, 25.87 euros in the United States and 3.78 euros in Romania."

The overall cutting down of operating expense will boost the operating and net profit margins of the company.

Concluding Remarks

The company is playing it smart by enacting improvements across all major arenas. The management of the company is not only taking steps to boost its brand image but it is also making efforts to control its operating costs. Innovation to improve upon its most popular vehicle to make it more fuel efficient and meet the increasing consumer demand will bolster its top line by a great deal. The bottom line will be propelled forward by a multitude of factors including but not limited to new 2015 Ford F-150 model, reduced operating costs and rising sales in China.

Source: Ford - Making All The Right Moves