Ford CEO’s Cost-Cutting Strategy in Focus During Earnings Slump

Auto maker is ‘burning a lot of cash in a lot of places,’ says one analyst

Ford Motor Co. Chief Executive Jim Hackett spent his first year in the job hammering away on the need to cut costs, aiming to slash $14 billion by 2020 and prodding its 202,000 employees to get more financially “fit.”

When Mr. Hackett took the post in May, he sought to jump-start Ford’s response to a rapidly changing business in which auto makers are increasingly focusing on electric cars and autonomous vehicles. To find the money to finance such projects, the new CEO had to look for savings. Analysts are expecting to see more details on cost cuts when the No. 2 U.S. auto maker reports quarterly results Wednesday after the closing bell.

Mr. Hackett is running a company with an operating margin below that of both General Motors Co. and the smaller Fiat Chrysler Automobiles NV in the fourth quarter. Ford’s annual 5% operating margin trails GM’s 9%, and is lower than its internal long-term target of 8%.

First-quarter earnings highlight a shift in the Motor City. Ford emerged from the financial crisis as the healthiest U.S. auto maker and held that crown for several years. Today, however, Ford’s market value of $43.2 billion is closer to Fiat Chrysler’s valuation than GM’s, a trend that has sharply accelerated since Mr. Hackett took the helm.

Mr. Hackett needs to address Ford’s spending habits. In the critical area of engineering, research and development, Ford’s $8 billion budget last year outpaced GM’s by nearly 10%, even though GM sells far more cars globally and has more advanced electric cars. In addition, Ford also dished out more to cover warranties and materials. And Ford’s overall head count increased in 2017.

“They are burning a lot of cash in a lot of places,” said Rod Lache, an auto analyst with Deutsche Bank Securities. Ford’s automotive operating cash flow slipped 40% last year, and the company’s annual profits are projected by Wall Street analysts to drop 12% in 2018, even though first-quarter earnings are expected to increase.

Mr. Lache, who expects Mr. Hackett to elaborate on his restructuring plan during the earnings call this week, said GM and Fiat Chrysler have been far more decisive in exiting money-losing parts of the business, such as unprofitable car lines or geographic markets that return little or no profit.

“Ford really never went through this,” Mr. Lache said. “That’s ultimately come home to roost.”

Sinking more money into engineering cars with pricier materials, engines and features has helped Ford better meet fuel-economy targets and boost transaction prices of profitable trucks. But the Lincoln lineup and certain passenger-car lines can require steep discounts that erode or erase margins.

Mr. Lache estimates 60% of the volume delivered in the U.S. was sold at a price below the industry average.

Mr. Hackhttett plans to shift about $7 billion in spending away from small cars and sedans and move it toward development of more profitable trucks and sport-utility vehicles. He also is increasing investment in electric, autonomous and internet-connected cars.

If he succeeds, Mr. Hackett could polish Ford’s image and brighten the investment case. The road ahead, however, will be bumpy.

Ford’s own outlook for 2018 calls for a third consecutive year of earnings decline. Operations in South America and India are losing money, and sales in China slid 19% in the first quarter, a decline that could further pressure earnings.


“There won’t be much to get excited about with the Ford story until 2019, or perhaps 2020,” Brian Johnson, a Barclays analyst, wrote in a recent research note.


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Author: Christina Rogers
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