Ford Hits a Profit Wall in North America
Ford Motor Company says its profits dropped 9 percent in the second quarter, and warns that leaner times are coming.
Net income, global market share, and earnings per share all fell, but the automaker’s financial news wasn’t all bad. Still, Ford plans to do some cost cutting as the red-hot new vehicle market cools off in North America.
Ford’s net income of $2 billion dropped $190 million from a year ago, and its pre-tax profit of $3 billion was down $293 million. Global market share fell three-tenths of a percent to 7.5 percent of the world’s rolling fleet. Still, its overall revenue was up 6 percent, and its pre-tax profit rose to $39.5 billion. Despite some dodgy overseas markets, European pre-tax profits tripled.
So, what’s the problem? Many automakers would love to have such income. Well, the problem is growth, and Ford doesn’t expect to see much of it anytime soon.
In North America, Ford faces a wall. The company’s pre-tax profit was 5.3 percent lower this past quarter than Q2 2015. American new vehicle sales have just about reached their peak, and Ford will have to ride out the coming sales slump. (Analysts expect total sales to fall next year, and reach bottom in 2019.)
According to Automotive News, Ford adjusted its full-year industry sales outlook from roughly 18 million vehicles to between 17.4 and 17.9 million. Speaking to the media in Dearborn, Ford chief financial officer Bob Shanks said “we don’t see growth in the near term.”
Shanks wasn’t too concerned about predictions, saying, “We’re starting to see a maturation of the economic cycle. We’re at a strong level. I think that will continue.”
To bump up revenue, Ford plans to reduce its operational costs, especially in manufacturing. Shanks didn’t go into much detail on other measures, but vehicle mix and pricing will be tweaked worldwide to boost sales.
More by Steph Willems
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There was a lot of pent up demand for new vehicles after the sales slump starting in 2008 when many postponed buying new vehicles due to the economic crash. In the post slump sales volume went up mainly because of pent up demand and this continued growth cannot be sustained. The USA, Canada, and Europe are more mature growth markets with most of the continued growth in Asia especially China. There is a limit to how much vehicle sales volume can be sustained by increasing the term of the loan and low to no interest rates and making more attractive lower and shorter term leases. Vehicles last longer and many more are keeping their vehicles longer.
"Profits now, recalls later" was not a good business model that Big Al implemented.