Why is the Ford Motor Company Dropping the Production of Cars?

With the exception of the iconic, relatively low volume Mustang, Ford will be producing only crossovers, SUV’s and pickup trucks. Part of the reason is the shift in consumer taste. Toyota, Nissan, Honda, KIA and Hyundai sedan sales are also down significantly. Most automakers are committed to production of hybrids and electric vehicles, but the internal combustion engine will be around for a long time. Most companies with the exception of Mercedes and BMW, have had to resort to deeper discounts to move their sedans.

According to The Wall Street Journal, “By 2020, 90% of Ford’s North American sales will be larger vehicles with lower fuel economy, because nothing bad ever comes of that. It’s the end of an era. In the beginning of the 1990’s when Ford, outsmarting federal fuel economy standards, built and marketed the hell out of the Ford Explorer, which as a light truck was subject to lower standards.”

With Ford betting its future on gas guzzling vehicles, according to The New York Times, in a way they is betting the company. When oil prices shot through the roof in 2009, GM and Chrysler declared bankruptcy and Ford escaped doing it because it hocked all of its assets from paper clips to the oval Ford logo. It was the worst economic downturn since the Great Depression. It was the greatest shock to the automotive industry since 1979 when in response to the Iranian Revolution, President Carter decided to suspend Iranian oil imports. OPEC increased prices to compensate and gas lines were stunning.

Ford management has opted to maximize profits since their margins on larger vehicles are much more robust. Shareholders want earnings and management wants to make money on their stock options. When gas prices shot up in 1979, high mile per gallon Toyotas and the VW Rabbit made inroads in the US market and the K car platform saved Chrysler.

According to the Times, they call it the SUV Profit Paradigm: Added height elevates the price people are willing to pay for what is essentially the same vehicle. SUV’s and crossovers sell at higher prices than cars of equivalent size, but they cost little if anything more to build.

Now the current administration is moving to reduce fuel economy standards even further.

It’s a stunning moment - the head of a great American car company is calling the great American family sedan a value destroyer and walking away from 35% of the of the vehicle buying population and millions of passenger cars a year.

What’s happening is that this move effectively cedes the passenger car market to old competitors (Japanese, Korean and German) and new (Chinese). Incidentally, the Chinese own Volvo.

Ford’s race to the bottom is consistent with GM’s recent decision to sell its German Opel division, virtually quitting Europe and with it, its most advanced small car development program. Fiat Chrysler, too, announced the cancellation of its small and medium-size car lines in the United States in 2016.

Whatever the momentum to boost share prices, the decision to go all out for SUV’s and light trucks poses a long-term risk: Ford will be much more susceptible to the crippling effects of rising oil prices. One severe oil price spike could send consumers back to passenger cars, the ones that Ford is no longer making. No one knows yet the effect of pulling out of the Iran nuclear deal, but oil has recently moved from $40 to $71 a barrel.

High oil prices, at least Ford understands. Autonomous cars and ride sharing on the other hand could spell the end of the business model business as Ford knows it. So, while American automakers are preparing, or at least thinking of preparing for the world of tomorrow. They are also trying to make as much money as they can as fast as they can.

Rolls Royce

They don’t know what the future will be, and they’re kind of afraid of it, but they are convinced it includes SUV’s. Jaguar, Mercedes, BMW, Porsche, Maserati, Bentley and Lamborghini all now make SUV’s. Even Rolls Royce has one in the works for a bargain $325,000. They do not use such a plebeian term as SUV. It is called a Go Anywhere Car.

Probably the motivation to own a SUV is to want to be active, to go on adventures, and to focus on what we do rather than what we have.

Hybrids and electric cars are making penetration.

Ford Eco Sport

In a gas spike, smaller SUV’s may be an option, but conversion is slow and tooling costs are major.

The EPA has announced that the softening of standards was necessary due to consumer demand for larger and more capable vehicles.

Certainly, you need to make and sell what the customer wants, but what about abandoning contingencies? The WSJ goes on to say, “Automakers always say that they just aim to give the customer what they want. Just like in the 1990’s the industry is pitching larger vehicles precisely because they are more profitable.”

What do you think?

Ira Friedman