Dacono logic required
It seems like just yesterday that Bill Ford took control of his family’s automobile company. He promised a new vision for the future in which the name Ford would be synonymous with the term “mobility,” which was meant to be much more than just the manufacturer of motorized vehicles. Ford promised to remake American manufacturing by reducing large-scale durable goods production’s environmental impact and help save the planet. Ford, who appeared on Fortune magazine’s cover under the headline, “Motown Cool,” proved he was serious by choosing an all-electric Ranger truck as his company car.
Of course, it wasn’t yesterday. It was almost 20 years ago; and since then the Ford Motor Company has almost gone out of business, had to borrow over $23 billion just to gain time to try and recover from many disastrous decisions, hired an outsider to right the ship of state, and, when that guy finally succeeded, took his money and ran, and then Ford reverted back to the same “mobility” promises that had failed the company before.
Now the claim has been made that the world is on the cusp of self-driving cars and according to Ford, its offerings would make them a leader. At other times being the “mobility leader” meant bike sharing or owning an Uber or Lyft competitor — or who knows what?
Still, while announcing these new visions of a future automotive utopia, the company did manage to turn in another year or so of record profits. Obviously, the CEO who managed that impressive fiscal feat, Mark Fields, had to go; he was terminated for having the audacity to run the Ford Motor Company and make money doing so.
The person tagged to take the helm and steer Ford back onto the exact same course that didn’t work the first time around was Jim Hackett.
It’s been a year since then. And, setting aside all the sports analogies with which Hackett loves for some reason, Wall Street analysts have been bugging him for real details on what he’s putting into play at Ford. This past January, according to the New York Times, Hackett was discussing his six efficiency initiatives with those same analysts when Adam Jonas of Morgan Stanley pointed out that there was zero definition to what any of those six key points were. Six points to fix Ford, apparently all a big secret; and Jonas finally told Hackett on the conference call, “That’s a problem, Jim.”
Shortly after that story appeared on April 24thcame the first big news: The Ford Motor Company was going to get out of the car business. Well, kind of get out of the car business.
Apparently, Hackett had either food poisoning or a religious vision, but as a result Ford will dump all its car lines into history’s trash bin — except the Mustang and a new Focus crossover that will be built in China and exported to America. Oh, and Ford will slash another $11.5 billion in expenses, as if that’s a real possibility. (Car companies love to talk about slashing expenses, when often they merely deferring expenses by moving new vehicle introductions, new models, and updates way down the line.)
Last Wednesday during a conference call, while making the announcement that Ford was for the most part ending car production for the U.S. market, Hackett said, “We’re going to feed the healthy part of our business and deal decisively with areas that destroy value.” It is truly frightening how little this man knows, not just about the automobile industry, but about the cyclical nature of the American economy.
First, value in a car company rarely comes from the profit and loss statements of any given vehicle line in any given year. Moreover, what loses money this year may be the big money maker next. Remember, just a decade ago oil hit $147 a barrel, gasoline prices skyrocketed past $4 a gallon, and the incentive cost to sell trucks and SUVs soared — while buyers flooded into the dealerships to buy the most fuel-efficient vehicles. Back then, Alan Mullaly, Ford’s most successful CEO of the past 50 years, knew the only way to survive was to downgrade his company’s reliance on expensive trucks and SUVs. Or, the opposite of Jim Hackett’s new plan.
Circumstances Alter Cases
Second, in 2008 it wasn’t just Honda and Toyota dealerships doing well thanks to gasoline’s high price; many individuals were finding fuel-efficient Ford cars among the best of the best and calling them world class vehicles. And those are the vehicles that Hackett wants to kill today, simply because oil prices collapsed years ago, gasoline got cheap, and car sales fell and truck and SUV sales jumped substantially. Someone should remind the CEO of Ford what happens to a company that makes only trucks and SUVs when oil turns ugly again. Maybe send him a Hummer brochure to jolt his memory of the consequences of having tunnel vision.
But third, Hackett isn’t the only one who has done this; Ford is simply chasing a Chrysler decision to do virtually the same thing, also based on a reversal of fortune. After all, who can forget the famous 2011 “Imported From Detroit” commercial, 2 minutes long during the Super Bowl and considered one of the most brilliant TV ads of all time. That ad would introduce the Chrysler 200 sedan — like many Ford products of recent years, as fine a compact sedan as there was on the market. But that car also lost money for Chrysler on a per car basis, as did the last generation of the Dodge Dart; and so CEO Sergio Marchionne announced that Chrysler would also discontinue products it could not make money on. Today if you go to Chrysler.com, you will see only two vehicles that still carry the Chrysler nameplate, the famed 300 sedan and the Pacifica minivan. That’s it.
Unpopular Until Needed
It’s been brought up before in this column, but it’s worth reminding everyone that in famed GM Chairman Alfred Sloan’s book, My Years with General Motors, one of his most stunning admissions was that at no time in GM’s history were all five of their automotive divisions profitable at the same time. (Chevrolet, Pontiac, Oldsmobile, Buick, Cadillac) Never happened. Not during the Roaring Twenties, when GM was growing into America’s largest corporation, and not in the boom years of the Fifties or Sixties. Now, did Alfred Sloan, who gave the corporate world its modern accounting system, ever once shut down a well-known GM division because it was “destroying value”? Absolutely not. Even with two and sometimes three divisions losing money in any given year, General Motors’ overall health was outstanding; and as a result GM controlled nearly half of all new car sales in America. Since Sloan left, his successors have altered the chain of command and consolidated and closed whole divisions, claiming they were getting rid of things that destroyed value — and GM today has less than 18 percent of the American market.
Well, let’s be fair: There’s more competition now and GM would have found it hard to hold on to half the U.S. market even if Sloan were still alive. But history shows us that the vehicles that you can’t sell today, because the public’s completely indifferent to them, are the same vehicles that tomorrow may save your company.
Consider this: On the eve of the Second Energy Crisis in 1979, Nissan (then known as Datsun) was desperately concerned about its poor sales in America. Dealers had refused to accept more product for months, and the Nissan yards at American ports were overflowing with new cars that no one wanted. Then came the oil crunch; and almost immediately all of the tens of thousands of unsold Datsuns sitting in port transit yards disappeared overnight as dealers begged for that fuel-efficient product. It’s why in 1979 Nissan’s sales jumped faster than Honda’s or Toyota’s — because Nissan had the largest inventory of unsold fuel-efficient product theirdealers had previously refused.
Back to the Future
So, for the most part Chrysler is now a company of trucks and SUVs and Ford will shortly join the club. GM will likely continue to migrate in that direction, too. But in many ways this turns the American car industry back into what it once was, builders of large vehicles with large profits. After all, today’s SUV and crossoversare selling to the same demographic that full-sized Impalas, Imperials, and LTDs did back in the Sixties and Seventies.But that can be a dangerous position to be in long term. The last timethe public switched and wanted high-tech, high-quality, and high-fuel efficiency vehicles they were forced to go the Japanese to fill the void in the market.
It did not go unnoticed that just as Ford announced that it was were dumping more car lines, Toyota announced another $170 million investment for its Mississippi factory to build the next generation of the Corolla. Toyota even admitted that this factory is underutilized, but they believe to succeed in the long term they have to be a full line producer of vehicles. Or to offer, as GM’s Alfred Sloan once famously said, “a car for every purse and purpose.”
Today Ford, GM, and Chrysler are all world-class manufacturers of trucks, SUVs and automobiles. True, people didn’t buy enough Ford Fusions, Chrysler 200s or Chevy Impalas, but those vehiclesproved that Detroit’s automakerscould hold their own with any manufacturer from anywhere in the world. It took decades of playing around and failed promises before Detroit finally did it right, but that’s not really going to matter much now. No, the next time oil goes crazy, and it will, and gasoline jumps in price, which it will, you may well be over at a Toyota dealership looking at the next generation of the Corolla — because Toyota made a huge financial commitment to it that didn’t make sense that day, but was the correct decision in the long haul.
This brings up the last thing that the heads of Detroit’s Big Three forgot:Because in the past when they didn’t make world-class, fuel-efficient cars, it was their own dealers who bought Subaru, Honda, Toyota, and Nissan franchises back in the Sixties and Seventies —which became the competition Detroit never expected. Next time around I’m guessing that the best car dealers will be looking for the next big automotivething out of China. Yes: Detroit will again create its own void in the marketplace by claiming it’s fiscal suicide to try and fill it, and then their own new car dealers will help an automotive importer, possibly China this go around, to fill it.
You see, nothing is new in the car business. It’s simply repeating a cycle that’s already happened numerous times in the past. It has always astonished me how many high-ranking officials I’ve met in the auto industry who know absolutely nothing about the history of the car business or even of their own companies.
That must be why they always seem so astonished when a cycle repeats; to them it’s always something completely new and unexpected.
© Ed Wallace 2018 Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: email@example.com