At its recent 'Investor Day', Ford's senior management set out its strategic priorities. The plan is to build on core strengths and grow in emerging opportunities. Dave Leggett describes some highlights and offers an assessment.
Ford Motor Company has been on something of a roll. This year, Ford expects total company adjusted pre-tax profit to be about US$10.2bn (recently lowered from US$10.8bn on expanded NA door latch recall costs). It is lower than last year's record but would constitute the company's second best year since 2000. This year, Ford booked record net profit in Q1. Yes, there was a dip in Q2 but quarterly net income just shy of US$2bn. An impressive number, but profit growth has clearly stalled and the latest direction for profits is down. Ford's share price is over 10% down on where it was in July on a growing realisation that the US market environment – such a strong driver of profit in recent years – has become less favourable. The US light vehicle market is plateauing. Incentives spend has been moving up. The US economy remains strong, but the light vehicle market has been running at around 17.4m units a year and that's a high level with little potential for added growth.
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Ford's August US sales results were, at first glance, rather poor with share down this year. An expanded door latch recall in North America has also been in the news and will adversely impact Ford's bottom line in the third quarter. Now's a good time to reassure the investor community about Ford's underlying prospects and its medium-and long-term business strategy.
Investing in new technologies
This is the meat in the sandwich, the big story of Ford's semi-reinvention as something more than a car company. A major plank of Ford's strategy is to invest now in areas where it has identified future growth opportunities – principally in electrification and autonomy (both of which are also related to an emerging opportunity in mobility, with 'transport as a service' and the possibility of completely new revenue streams for Ford).
Ford is expecting a profit dip in 2017 – on top of this year's slight decline – as it invests heavily in these new technologies. Ford envisages that investment costs associated with electrification and other emerging technologies will cause profitability to dip in 2017, but rise thereafter. Electrification is having the largest impact. Ford projects that the global vehicle market will see a big shift towards electrification in the 2020s as the technology gets better and cheaper. By 2030, it sees hybrids and BEVs accounting for over half of the global vehicle market. Ford describes electrified vehicles as reaching a tipping point by 2030, and therefore Ford is "pivoting and deploying resources accordingly to win in the future". Ford electrified product offerings are forecast to rise from five vehicles in 2015, to 18 by 2020. That's a big number and Ford is also keen to remain highly vertically integrated in electrification technologies and associated control systems.
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By GlobalDataFord is apparently betting quite big on electrification. Yes, the technology is expensive, but it's getting cheaper. We can argue about the relative merits of EVs on a total energy footprint basis, but zero emissions at the point of use are only going to get more attractive to policy-makers in a more urbanised world (see China). The fossil-fuel burning ICE is far from dead, but the forecasts show a high degree of consensus that it will be in long-term decline. Seemingly reluctantly, other OEMs are now going down a path beaten by Renault-Nissan's Carlos Ghosn. As Fields says, the attitude to electrification is now changing (see 'winning' below).
There was also some detail on how Ford views the development of autonomous vehicles. CTO Raj Nair outlined the company's strategy in what it sees as a major new opportunity to exploit 'transportation as a service' in urban areas during the 2020s. By 2030, Ford forecasts that autonomous vehicles (AVs) will account for 20% of all vehicle sales.
Ford wants to have an SAE level 4 autonomous vehicle in commercial operation by 2021. It said the initial application will be in a ride-hailing or ride-sharing service. Nair described a scenario for full automation within a 'geo-fenced' area (with high resolution 3D mapping of roads in the defined territory, typically the centre of a large city with heavily used arterial routes to places such as airports or other geo-fenced areas). And Ford wants scalable volume, at least 100,000 units a year. We haven't heard numbers like that before.
Nair said that the AV Ford is working on is specifically designed for commercial mobility services. As such it will be on a bespoke engineering platform and will be radically different from conventional vehicles – it will not have a steering wheel, accelerator pedal or brake pedal. Getting that to market in 2021 is no mean undertaking. There are regulatory hurdles still to be overcome and a lot of work to be done to arrive at a viable car sharing business model – working with a partner – that makes sense. Funds are being put aside for this programme and there is a new research centre in California that will focus on this work. Great to get some granularity from an OEM on an area that is generally talked about in rather fuzzy terms. Will things evolve exactly as Ford describes? Maybe not, but at least Ford has gone public with the bare bones of a plan and a vision. And 2021 isn't that far away.
Don't forget the core
As Mark Fields puts it, there is a strong core business for Ford in designing, manufacturing, selling, financing and servicing vehicles – as it has done for the last century. The challenge now is to address emerging opportunities on top of that – electrification, autonomy and mobility (new services and business models). There is the traditional business model – which Ford is obviously not walking away from – and a new one that Ford currently has zero percent share of. Ford estimates that the traditional business model pie can be estimated at a global $2.3 trillion. The new 'other transport services' pie is valued at $5.4 trillion and that's what Ford wants to break into for future growth.
Last week, Mark Fields described a series of emerging ecosystems that Ford sees as opportunities. It's a bold vision for a changed world. But he also described Ford's core strengths. This was more nuts and bolts, feet on the ground stuff, but it is also an essential part of what makes Ford a healthy business. This ranged from Ford's reinforced position in commercial vehicles and utilities (there's a three-row Edge for China), to moving all NA small car production to lower cost Mexico. Lincoln is growing fast in China (volume to more than double in 2016, new dealerships being added) and overall is forecast to see 165,000 units of sales in 2016, up from 93,000 last year. Ford's portfolio of performance vehicles (including the GT, Focus ST, Shelby Mustang, F-150 Raptor) is another positive and profitable story, as well as a brand builder – over 200,000 sales expected in 2016. There are also cost savings from operational efficiencies and reduced engineering complexity across the board – Ford is on target to have reduced the number of its vehicle platforms from 15 two years ago to 9 by the end of this year.
Reduced complexity, increased cost savings
Mark Fields described how Ford is directing effort into cost savings in its global small vehicle range. Back in 2015 the Ford Focus had 200,000 order-able combinations (that's a huge number). This year that is down to just 300 and in the next generation model, Ford says that will be down to around 30. Fields maintains that translates to a $250-300 reduction in cost per vehicle. Within the next 2-3 years, a 'majority' of Ford's small cars will be made in low-cost areas (including the migration of all US small car production to Mexico).
CFO Bob Shanks said that Ford expects to make cost savings of US$3bn a year over the 2016-2018 period. "Every single part of the business contributes," he said. "The single largest contribution comes from design and also negotiations with our supply base. The second largest is labour and overheads in manufacturing. And we are also adding a new tool this year – zero-based budgeting – which we are really looking forward to. We have done a lot of benchmarking; looking at companies that have already rolled this out. This can take our efficiencies up to an even higher level."
Emerging markets
Fields is upbeat on Ford's strategy for 'select' emerging markets. "It's about where we can win," he said. Russia's car market has made for grim reading in recent years. GM and others have cut and run. Ford said it would stay because of good long-term prospects. Fields reiterated that stance (unsurprisingly, he probably has no real choice but to stick with the strategy). "We see good potential in a higher fuel [price] environment," he said. "Russia has the potential to be one of the top three markets in Europe. We know it has been through tough times, but we made the decision to stay and I believe that was absolutely the right decision." Fields says that improvements already made by Ford in product line-up, distribution and business structure are already bringing results, even with the market where it is. "Even in the last year we have seen much better market and financial performance in Russia," he says. The key thing for Ford will be to see market rebound in Russia as energy prices uptick over the next three years. If that doesn't happen, or the political situation there deteriorates, there will come a point at which the Russia strategy will be re-evaluated. But that's probably 2-3 years out if the market is still very depressed. Russia's economy doesn't offer much hope for non-energy growth or dynamic restructuring with a thriving private sector, but motorisation is certainly low and pent-up demand for cars may well be building.
Talking of 're-evaluation', India has not gone according to plan for Ford. India has been set-up as an export base for small vehicles but Fields acknowledged that market and financial performance in India "has not met our expectations." Ford's India strategy is being 're-evaluated'. Intriguingly, Fields said that Ford's new mobility business could be a factor that plays there. India has emerged as a big growth pole for ride-hailing services over the past few years (Ford recently took a stake in 'zoomcar', a major car-sharing/rental company in India). Watch that space. As I am fond of telling people, India has much automotive potential (vehicle market at a fraction of China's despite similar sized population) but India is not China. It is very different culturally and in its economic/political structure and requires a certain deftness of approach from multi-national corporations – in any industry – eyeing opportunity. Fields' remarks suggest that Ford gets that, now.
Fields maintains that Ford is doing the things that it needs to be doing to position for growth of demand in emerging markets. "We have to convince ourselves that there is a path to sustained profitability and if there isn't, then we take decisions," he said, citing Ford's withdrawal from Japan and Indonesia, as well as the cessation of manufacturing in Australia.It sounded like we may be hearing about more such steps over the coming months.
It's about 'winning'
Turning to growth opportunities, Fields again highlighted the three major areas that Ford is focused on – electrification, autonomy and mobility services. The attitude is decidedly upbeat and proactive, a departure with the past when OEMs have generally seemed reluctant to move away from established and incumbent technologies and business methods. "We want to become a top player in electrified solutions. I call it moving from a compliance mind-set, to one of leading where we can win – such as with our commercial vehicles. And we want to lead in autonomy. And we want to develop transformative new services and business models around mobility."
And the nub of the strategy is right there: expanding Ford's business model to be both an auto and a mobility company. "I strongly feel that we are very well positioned to take advantage of these opportunities," Fields maintains. "Why do I feel that way? First, we have a globally recognised and admired brand – it attracts customers and great partners. We are a proven systems integrator. For decades we have been integrating increasingly complex technology into the vehicle – electronics, software – whether organically or with suppliers. Systems integration is absolutely key in this business. And we have demonstrated an ability over time to be able to rapidly scale and democratise strategic innovation."
Fields also highlighted the company's finance arm ("terrific, that many in the industry would love to have") and its global distribution and dealer network as major attributes that will reinforce the growth strategy. Again, a reminder that Ford has its feet firmly in the corporate strengths of the present, as well as an eye on the changed mobility opportunities that will unfold over the next decade.
It's a delicate balancing act and a bold one. Mark Fields sought to present Ford as a 'solid investment with an upside on emerging opportunities'. The bottom line takes a short-term hit, but the hit is worth it for long-term payback. As the auto industry hits a period of unprecedented change, Ford is positioning for that, but – investors are being reassured – prioritising profitability.
There is obviously a long way to go. The automotive landscape in 2030 will look very different from now in terms of products, companies, revenue streams – the very essence of how we move around in increasingly large global megacities. Ford, at least, is thinking about how it can be a surviving and thriving brand in such rapidly changing circumstances. As Fields told me when I sat down with him at the NAIAS in Detroit in January, he has to have one foot firmly in the business challenges of today and another in setting a path to negotiate the big strategic challenges of the future. There were reassuring elements of both in his presentation to investors last week. "As we expand to be an auto and a mobility company, we're not moving from an 'old' business to a 'new' business. We're moving to a bigger business," Fields likes to point out. It's not a binary game, old versus new, although the press likes to present it as such at times. The best blend of both old (or established) and new strengths could well be the formula for long-term success for car companies that have been around for the last century.
I am sure other OEMs will be pouring over Ford's Investor Day presentations and looking at their own positions. At the very least, Ford has created an impressive slide deck of material that can serve as an evolving strategic reference point that Ford will build its business plans around. Investors are well and truly in the loop and will want to stay in it. They will need further feeding. However, there is a strategy, a coherent set of principles, objectives, aims, priorities. Telling investors that profits are going to dip could be difficult, but Ford has set out a pretty full explanation of why that will happen. Ford has even presented a credible scenario on how well it is positioned for recession in the US, should the market fall by more than expected next year. There are inevitably 'hostages to fortune' (you said X and it didn't happen) that come with setting out a strategy the way Ford has just done, but transparency of management thought and channelling collective effort in a large enterprise around clear business themes and principles – in the context of a positive and open culture – is to be applauded. It is very unlike the Ford of old. In that sense, Mark Fields is very much continuing to manage in the successful style of predecessor Alan Mulally.
See also:
Ford shoots for 100K a year AVs
Ford investment push will cause profit dip in 2017
Detroit interview – Ford CEO Mark Fields
Mark Fields presented a slide outlining 'ecosystems' providing opportunities for future mobility services (source: Ford)
Fields also illustrated how the elements of Ford's business strategy look (source: Ford)
