This article was published by The McAlvany Intelligence Advisor on Wednesday, May 22, 2019:
Ford’s announcement of its resurrected Bronco for 2020 shows pictures of steep technical trails heading off into the woods while calling it a “no-compromise midsize 4×4 utility for the thrill seekers who want freedom and off-road functionality, with the space and versatility of an SUV. It’s capable of conquering everything from your daily commute to gravel roads and boulders.” (See Sources below)
This is how capitalism works. The Jeep Wrangler owns a huge share of the “off-road SUV” market despite the fact that 99 percent of their vehicles never venture off the pavement. Ford wants part of that market.
This resurrection is only a tiny part of the revolution that has been taking place at Ford over the last two years. When CEO Jim Hackett took over the company in May 2017, it was losing market share to its competitors: GM, Chrysler, VW, Toyota, and others. Hackett was tasked with cutting the fat (the company had added 60,000 top level employees since the end of the Great Recession), getting lean, and creating a management structure that is more nimble and able to face the changes in the automotive industry.
When CNBC reported on the announcement, it made it sound not only like doom for Ford but for the world’s economy. Its correction was weak: “This article was updated [corrected] to reflect that Ford is cutting about 10% of its white-collar employees, not 10 percent of its total global workforce.”
CNBC didn’t complete its correction. Ford has 200,000 employees worldwide with 70,000 of them being salaried, the rest hourly. The cuts apply only to the white collar positions, and most of them are overseas. Only 2,300 of them apply to positions in the United States, and 1,500 of them accepted buyouts last year. That leaves just 800 to be laid off this year, each of them with severance packages. That’s four-tenths of one percent, CNBC, not 10 percent.
To put Ford’s announcement in perspective, let’s remember the enormous upheaval taking place in the automotive world: buyers are switching from regular vehicles to SUVs and pickups in such large numbers that Ford, GM, VW, and other carmakers are all but eliminating standard vehicle production. The coming wave of technology is providing impetus to electric and autonomous, self-driving vehicles, which are expected to represent a much larger portion of new sales by 2025, and likely even sooner.
For that revolution, Ford, GM, Volkswagen, and other car makers are hurrying to make the shift, cutting some 30,000 management positions worldwide. But not a single worker in any factory is being touched by these layoffs. It’s all about becoming leaner and meaner at the top, where those decisions are being made.
In his letter to his people, Hackett said “We are now entering the final phase of Smart Redesign [the company’s agenda since Hackett took over as CEO two years ago] … most of the organization will [now] be structured with nine layers or less [compared to] 14 organizational layers [previously].”
It’s also about reducing overhead costs:
Cost reduction is a key aspect of Smart Redesign. Overall, by the end of the process later in August, we will have eliminated about 7,000 salaried positions, or about 10% of our global salaried workforce. This includes both voluntary and involuntary separations over the past year. Within that total, and consistent with our goal to reduce bureaucracy, we will have reduced management structure by close to 20%. This will result in annual savings of about $600 million.
In the last year, Ford’s competitors have done similar downsizing to become leaner and more nimble. GM has cut about 8,000 salaried positions in North America, and has closed several factories. VW announced in March that it would be cutting 7,000 salaried positions. Worldwide, carmakers are axing an estimated 30,000 white-collar positions to prepare for the new wave of technology driving the industry.
For additional perspective, remember that auto sales in China are shrinking and that U.S. buyers, being put off by higher prices, are increasingly looking at the used car market. Kelly Blue Book notes that new small SUVs average $26,000, while midsize SUVs roll out at $33,000. Pickup trucks average $41,000, while luxury SUVs average $51,000. The most effective strategy to maintain and improve profitability in such a market is to cut costs.
Ford earned $1.1 billion in the first quarter of 2019, beating analysts’ expectations. Investors see what’s coming: they have driven the price of Ford’s stock from $7.90 a share at the first of the year to over $10 currently. That’s a gain of 30 percent, with the full impact of Hackett’s Smart Redesign strategy still to kick in.
That’s how capitalism works when it’s left alone: new products, catering to customers’ changing tastes, pour into showrooms, each competing with others produced by competitors doing the same thing. The resurrection of the old Bronco into the new, more muscular Bronco, seeking to take a bite out of Jeep Wrangler’s share, is just a small example of how capitalism works.
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Sources:
Fox Business: Ford layoffs hit 7,000 jobs worldwide, hundreds in US
AP News: Seeing a twisting road ahead, Ford cuts 7K white-collar jobs
CNBC: Ford to cut 7,000 jobs by August, including 900 this week
Hackett’s letter to his employees
The Wall Street Journal: Ford to Cut 7,000 Jobs in Bid to Catch Up to Rivals
The New York Times: Job Cuts at Ford Motor to Total 7,000 by August
Road and Track: New muscular Ford Bronco takes on Jeep Wrangler
Kelly Blue Book: 2019 New Car Buyer’s Guide – average prices on new vehicles
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