Ford executives have laid out big plans in recent years to improve its profitability, but they have long known they face a sceptical audience.
“Ford has been stuck in a box with thin margins, weak growth and low valuations . . . and it’s now time to break out,” chief executive Jim Farley told investors last year. Even then, though, chief financial officer John Lawler said: “We’ve told you this before . . . and we haven’t delivered.”
More than a year later, the US automaker is struggling to break that pattern.
Last month it missed Wall Street’s second-quarter earnings expectations after being blindsided by an $800mn jump in warranty costs. Investors reacted by sending its stock down 18 per cent, its largest one-day drop since 2008. Then, last week, Ford announced a rethink of its electric vehicle plans, scrapping a planned sport utility vehicle at a cost of up to $1.9bn to make it a hybrid instead.
The double blow to an emblem of American car manufacturing has raised sharp questions about its strategy, execution and shareholder returns.
“Jim, you said that Ford’s a different company from what it was three years ago,” Morgan Stanley analyst Adam Jonas told Farley on its earnings call. “But the stock market really doesn’t seem to agree with you at all on that.” Ford’s price-to-earnings ratio, he pointed out, had fallen to 494th in the S&P 500.
Across the industry, consumer appetite for electric vehicles has cooled and carmakers are no longer benefiting from the pricing power that supply shortages gave them coming out of the pandemic. Inventories on dealer lots are growing, and discounts are creeping up as high interest rates make new vehicles less affordable.
But Ford has felt the effects more than others, with its stock down 56 per cent since its post-pandemic peak in January 2022 while rival General Motors has fallen 31 per cent in the same period.
Farley has been trying to implement a plan introduced in 2021 to cut costs, improve quality, increase revenue from digital subscription services and hit a 10 per cent adjusted operating margin by 2026. But he acknowledged last month that remaking Ford involved “growing pains”.
When it scrapped plans for an electric three-row SUV last week, Ford explained that the model had failed to meet its target of profitability within one year. It also said it would cut the share of capital spending it dedicated to EVs from 40 per cent to 30 per cent, while moving some battery production from Poland to Michigan to take advantage of US tax credits.
Ford had already cut production of the F-150 Lightning, the electrified version of its flagship pick-up truck, and last month it said a Canadian plant meant for electric versions of the Ford Explorer and Lincoln Aviator would make petrol powered Super Duty trucks instead.
But it has had to back away from an earlier target of turning a profit on EVs in 2026, and reported a $1.1bn loss on the vehicles in the second quarter. “Overall, the EV journey has been humbling,” Farley said.
His hope of controlling costly quality problems has also proved elusive. Ford has set aside increasing amounts of money for repairing vehicles under warranty in the past decade, rising from $4.8bn in 2014 to $11.5bn in 2023. The amount Ford has actually paid out each year for repairs has also grown, from $2.9bn to $4.8bn.
As Farley detailed the warranty outlays, Bruno Dossena, an analyst with Wolfe Research, asked: “How can investors really build confidence in an earnings trajectory when every year, the surprise warranty issues keep happening?”
The latest problems behind a warranty challenge that Barclays analyst Dan Levy called “frustrating for investors” stem from models launched as long ago as 2016.
“It’s clear that we had a period of time where the robustness wasn’t what it needed to be,” Lawler said.
Farley has said quality is the company’s “number one priority”, tightening its processes for signing off on new models and hiring an executive from market research firm JD Power two years ago to head its quality initiatives.
The focus has been on improving quality at the point when new models hit the market, as Ford has averaged a 70 per cent increase in defects following the launch of new vehicles over the past five years, compared with an industry average of 20 per cent.
This year it has delayed the launch of 60,000 F-150s and 21,000 Explorer SUVs to test them more thoroughly for problems, for example. The approach brought defect rates to at or below industry levels and avoided about 12 potential recalls, Farley said.
Ford is also working with dealers to address quality problems. Dave Veenendaal, the service and parts director at Haggerty Ford in the Chicago suburbs, said that for about a year the carmaker had been requiring dealerships to report problems on vehicles that customers brought in within three months of purchase. The idea is to identify repeat problems, trace them back to their manufacturing line or engineering source, and fix them rather than keep churning out vehicles with defects.
“Say a car comes in from the factory, or it’s been out less than a month in a customer’s hands, and we find a wire repair,” Veenendaal said. “Ford wants to know that right away.”
Quality is improving, Farley told analysts last month, citing a JD Power survey that tallies the number of problems new owners experience per 100 vehicles in the first 90 days of ownership. The results showed that Ford had moved from 23rd in the industry to ninth on “initial quality”.
The company is studying diagnostic codes and testing vehicles until they fail, which “has caught many, many issues in our industrial system that we’ve been able to correct before we release the vehicle”, Farley said.
It was “painful” to not ship vehicles to dealers before the end of a quarter, hitting the company’s earnings, he added: “But . . . it is the only way we believe in addressing our warranty spend.”
The fact that warranty costs can stem from vehicles produced years ago make them “a particularly vexing problem for management”, said Fitch Ratings analyst Steve Brown. Ford was now “going through vehicles with a fine-tooth comb”, he said, but it will take several years before investors and car buyers know if the amped up testing has paid off.
The second quarter was “very disappointing”, said Morningstar analyst David Whiston, but Farley’s attempt to revamp launches “is the right course of action, even if it makes earnings lumpy”.
Buying back shares would placate investors in the meantime, Whiston said. General Motors said in June it would repurchase $6bn in stock, on top of the $10bn in buybacks it committed to late last year.
But buybacks are rare at Ford since the Ford family favours dividends and wields 40 per cent of the votes through class B shares worth 2 per cent of the total equity. On last month’s analyst call, Farley told investors the automaker had better ways to spend its capital, such as investing in Ford Pro, its business aimed at commercial customers.
The lack of buyback news contributed to the stock’s slide last month, according to Morgan Stanley’s Jonas, who said executives’ comments seemed to “lack the same sense of contrition expressed on recent calls”.
“Investors were hopeful Ford would crack open the hood on buybacks,” he said. “On this call, at least, they slammed it shut.”
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