October 4, 2017

Breakingviews: Ford CEO Bets Ambitious Retool on Big Cost Cuts

by Breakingviews

Ford’s new chief executive is betting his ambitious retool on big cost cuts. Jim Hackett, who jumped into the driver’s seat in May, wants to slash $14 billion of fat by 2022 and switch $7 billion of investment to trucks and SUVs from cars. That should boost earnings, helping speed development of electric and autonomous vehicles. The plan will have to fire on all cylinders, though, to catch up with competitors.

The huge changes in costs and capital allocation is a stunning indictment of not just predecessor Mark Fields’ three years running America’s second-largest automaker but Alan Mulally’s reign, too. It implies that neither fully fixed the poor capital and investment decisions that almost sent Ford into bankruptcy in last decade’s financial crisis. There are, for example, 35,000 different combinations a customer can choose when ordering a Fusion sedan; Hackett is reducing that to 96. He’s also reducing to 12 from 17 the number of different internal combustion engines Ford offers, freeing up an extra $500 million a year for electrification.

Expense savings alone could generate a huge profit boost for a company that has often missed earnings estimates and posted declining pretax margins, allowing GM to take pole position. If the entire $14 billion were, once taxed, to go straight to the bottom line, it would more than double last year’s net income. Favoring larger vehicles over cars will boost margins, too.

These steps, if successful, will enable Hackett to develop the car of the future by ramping up spending on things like electric batteries, machine learning, autonomous driving and big data.

Trouble is, he’s not providing much more clarity than Fields did with many of his projects. In some respects, that’s understandable: it’s unclear when these advancements will change the way people drive – and how the industry makes money.

But BMW has been more forthcoming about its progress. And GM is promising to double its electric lineup and hints it may be able to put robotaxis on the road within a couple of years. That raises the bar for rivals, especially for one that has disappointed investors in recent years. If Hackett cannot show he’s making headway on new technology or stumbles in his attempts to pare back costs, Ford may have to go back to the drawing board.

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