Wednesday, May 24, 2017

Ford’s Turmoil Is Not About Tesla

GM doesn’t kid itself that ‘mobility’ will be the salvation of car building.


By Holman W. Jenkins, Jr.
The Wall Street Journal
May 24, 2017

Now let’s consider the defenestration at Ford Motor Company of Mark Fields. Ford’s stock price under his three-year leadership has been down 37%. Tesla’s is up nearly 50%. This has been all the explanation the media needs.

A New York Times report lays the meme on thick, blaming the car efforts of “Google, Apple, Uber and not least Tesla, the electric-car maker now valued more highly than any of the Detroit giants. The upheaval at Ford, the nation’s No. 2 auto maker by sales, after G.M., reflects the challenges that lie ahead for companies that cannot adapt to that new landscape fast enough.”

Really? Is that really what’s happening? Then why is Fiat Chrysler, a notable laggard compared with GM and Ford in all the gee-whiz categories, enjoying the best share performance of all—up 60% in the past year?

The theory falls even flatter with a simple thought experiment. Suppose GM or Ford burned cash the way Tesla does, putting off for the long-term any hope of profits. Would the market applaud and give either a Tesla-like multiple? Not in a million years. The people like Mr. Fields and GM’s Mary Barra who run car companies aren’t dumb. If they could mint stock-market wealth by investing heavily and not worrying about profits, they wouldn’t need to be asked twice.

To continue with the now-standard narrative, GM’s stock price has held fairly steady while Ford’s has dropped so this must mean GM is doing a better job of not falling behind Tesla, Google, etc.

Here’s the truth about GM. It’s valued on the profits it generates from cars and trucks—mostly trucks. Its diversion of a few billion in capital toward autonomy, ride-sharing, electrification, etc., is looked on indulgently by investors because they see what’s going on. Such investments are partly a brand-burnishing accompaniment to hardheaded business decisions to withdraw from unprofitable markets like India, Russia and Europe, and to minimize the burden of manufacturing profitless small cars for the domestic market under U.S. fuel-economy regulations.

It’s the sense that GM’s Ms. Barra is shedding unprofitable cost structures. It’s the sense that she is focusing GM on those geographical and product markets (trucks, SUVs) that can provide acceptable returns. This is why GM is perceived as playing the underlying game better—the underlying game being all about capital efficiency and rationally maximizing shareholder value.

At Ford, Mr. Fields also tried to minimize small-car burdens, by shifting small-car production to Mexico. Alas, his plan ran into Donald Trump. And, like GM, he understood that Ford’s profits and persistent competitive advantage come from SUVs and pickups, especially the F-150. Alas, its billion-dollar bet on aluminum for its best-selling pickup looked to many like a move to placate fuel-economy regulators, not to create commensurate value for Ford pickup buyers in a time of cheap gas. Such choices on so crucial a product naturally give rise to doubts.

The real problem became glaring every time Mr. Fields and company chairman Bill Ford opened their mouths in the past year. They kept saying, in answer to investor worries about lagging profits and the company’s long-term viability, just wait for the fat margins that our post-car businesses like “mobility” will generate.

When they heard this, shareholders were rightly terrified that Ford had lost the plot that GM leadership has been so undeludedly attuned to.

The new guy, former furniture executive Jim Hackett, gives mixed signals. His talk of faster decisions, attention to efficiency, and rethinking the small-car burden all sound good. But though he has been a director since 2013, his executive career at Ford only started a year ago as overseer of its mobility division—i.e., ride-sharing and all that.

It isn’t that autonomous driving, battery technology and car-sharing won’t affect the industry’s future. But these new technologies will be available to everyone playing in the market. They won’t be anybody’s unique competitive advantage. Ford’s meal ticket will remain its enduring strength in designing and assembling complex, consumer-ready machines. And its bread-and-butter trucks and SUVs will be the least affected. Yes, technology will transform even these vehicles. What boat owner won’t want computerized help in keeping the trailer straight when backing up? But these will remain vehicles that suburban and exurban Americans will want to own and drive themselves (and cherish) for a long time to come.

GM’s leaders don’t kid themselves or their shareholders that profits from new “mobility” businesses will be the salvation of the old, metal-bashing business. Making vehicles needs to be profitable in its own right. Ford shareholders want to know that Ford’s leadership understands this too.


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