Ford’s new CEO, Jim Hackett, just announced a bold strategic move for America’s most enduring automaker: abandoning the car business. Hackett completely reversed former CEO Alan Mulally’s full-line strategy to focus on trucks and SUVs. A 3 percent jump in Ford’s stock price validated Hackett’s decision, but that adrenaline shot could be short-lived. Jettisoning automobiles may prove fatal for Ford, leaving the market to GM and foreign producers.
Bowing to short-term shareholder pressures that felled predecessor Mark Fields, Hackett is undoing 115 years of Ford’s automobile legacy. Unlike General Motors CEO Mary Barra, labelled a “car gal” for her 38 years in the business, Hackett has no experience in automobiles. He comes from thirty years of making furniture and most recently as interim athletic director at the University of Michigan.
Founder Henry Ford didn’t create the automobile, but he turned it into “every person’s vehicle” in launching the Model T in 1908. In 1913 he introduced the first moving assembly line. The following year he offered a fair day’s work for a fair day’s pay, doubling wages to $5 per day to enable his workers to enjoy an adequate standard of living and be able to purchase the cars they produced.
That rich history may seem irrelevant to today’s global world. Not so. When Alan Mulally became CEO in 2006, he fully embraced Ford’s heritage and restored its focus on automobiles, insisting Ford could make money in a full range of cars by being cost competitive with foreign automobile plants in the South.
In 2007 Mulally borrowed $23.6 billion by mortgaging all of Ford’s assets, including the famous Ford Blue Oval, and acted decisively to focus on the Ford brand by spinning off Jaguar and Land Rover. He used the loan and proceeds from asset sales to finance a major overhaul of the company’s automobiles and factories and provide “a cushion to protect for a recession or other unexpected event.”
At the time the loan was interpreted as a sign of desperation. Even General Motors CEO Rick Wagoner belittled the move. When the economy collapsed the following year, Mulally’s vision saved the company as GM and Chrysler were forced to declare bankruptcy. By the time GM was back in business and Chrysler was bailed out by Fiat, Ford had a five-year head start in revamping its product line.
Ford’s F-series and its Ford Focus became America’s best-selling cars, and its F-150 the top-selling truck, enabling Ford to reverse its declining share in the U.S. In addition, Mulally negotiated a landmark labor agreement with the United Auto Workers in 2009 that eased onerous work rules and introduced a 50 percent lower wage for new factory hires. Mulally’s strategy turned Ford around, as it went from losing billions to solid profitability.
Hackett is correct in acknowledging that today’s market has shifted to SUVs and trucks and in recognizing the success of Ford’s Expedition and Explorer SUVs and F-150 trucks. But he is overplaying his hand by jettisoning automobiles.
The dramatic drop in oil prices to $40-60 in the past four years after a decade of $100 per barrel oil has lessened consumer concerns about gasoline prices and boosted SUVs and truck sales. Hackett is gambling that the present oil glut will keep gas prices so low that consumers won’t worry about fuel costs, but history shows that oil prices fluctuate wildly and will eventually get back to $100.
Hackett is also betting President Donald Trump will withdraw the Corporate Average Fuel Efficiency (CAFE) standards that Mulally signed up for in 2012. They require automakers to double fuel efficiency to 54.5 miles per gallon by 2025.
The demise of CAFE standards, administered by National Highway Traffic Safety Administration (NHTSA) under the 1975 law, is anything but a sure bet. Furthermore, President Trump may be unhappy about the factory closures and massive layoffs Hackett has triggered, especially if foreign manufacturers capture Ford’s sales.
However, the biggest winner from Ford’s move may be GM’s Barra. In four years at the helm, she has committed GM to a full line of automobiles and trucks, positioning the company to grab the share Ford abandons.
With its 50-50 joint venture with China’s SAIC, GM is currently selling more cars in China than it does in the U.S., as China accounts for more than one-third of GM’s global sales. In the future GM will likely import Chinese-made cars into America, giving it a large cost advantage over domestic-made cars.
The stock market has recognized GM’s strategies are paying off, pushing its stock up 23 percent in the past two years as Ford’s declined 15 percent.
Ford may survive for a long time as a producer of trucks and SUVs, but it will no longer be the great American automobile company Henry Ford created and Alan Mulally restored. Playing to short-term shareholder demands rarely results in long-term success.
On the other hand, Hackett may be betting when he moves on, Ford’s strategic dilemmas will rest with a future CEO.
Commentary by Bill George, a senior fellow at Harvard Business School, former Chairman & CEO of Medtronic, and the author of “Discover Your True North.” Follow him on Twitter @Bill_George.
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Published at Mon, 30 Apr 2018 14:27:03 +0000