Ford's Profit Engine Needs a Full Overhaul --- Flabby manufacturing looms as a problem

"Ford Motor has a cost problem -- and that is before it starts selling many cut-price Mustang Mach-Es.

Investors sent shares of the company down 7.6% Friday, following results late Thursday that fell short of its guidance. Adjusted operating profit ended up at $10.4 billion for the year, whereas the company in October said it would make about $11.5 billion. Even that was the low end of the previous range of estimates it gave.

There was nowhere for management to hide on a call with analysts, and Chief Executive Officer Jim Farley didn't mince his words of apology and resolution to do better. Still, the disappointment casts doubt over the credibility of his guidance for this year. Ford is currently anticipating adjusted operating profit in 2023 of between $9 billion and $11 billion -- more or less in line with last year as it expects normalizing supply chains to make up for weakening demand.

That is consistent with the surprisingly upbeat outlook General Motors gave on Tuesday. But the analyst consensus for GM's 2023 operating profit is still below its guidance range, despite the company's record of outperforming financial targets under CEO Mary Barra. Wall Street may be even more skeptical of Ford's outlook.

It was clear in October that Mr. Farley was hoping for a blowout fourth quarter that didn't transpire. Using public guidance as a way to push his teams rather than play the Wall Street expectations game may be a forgivable fault of Ford's CEO, who, unlike his predecessor Jim Hackett, is at least an engaging communicator.

The real problem is cost. In a third-quarter profit warning, Ford called out surcharges paid to suppliers and almost-finished vehicles stuck in inventories. For the fourth quarter, Chief Financial Officer John Lawler said the miss was driven by lower-than-expected production due to persistent chip shortages. He also talked about the cost of expedited freight, and suppliers' equipment issues.

But the detail matters less than the big picture. Ford's gross margin -- the profit it makes relative to the cost of materials bought from suppliers -- has been lower than GM's since about 2016. The company is finally coming clean about the root causes and they run worryingly deep.

Ford consistently struggles to get parts to come together at the right time to make vehicles roll smoothly off its production lines. "Our schedule stability was probably worst-in-class," said Mr. Lawler. Mr. Farley said the "number of parts sitting on the side of the line" needed monitoring, as if the lean-manufacturing revolution Toyota brought to the U.S. in the 1980s passed Ford by. Mr. Lawler also said the company wasn't getting bang for the bucks it spends on product development and engineering, with an inefficiency of "probably about 25% to 30%."

A looming question is how EVs, which are more expensive to make and require a different approach, will change the picture. At first, fast-ramping products such as the Mustang Mach-E and F-150 Lightning seem likely to only add to the chaos and cost problems at Ford. Further down the road, Mr. Farley needs to make sure they become an opportunity to streamline its entire industrial model. Investors will be able to monitor this because Ford, unusually, plans to account for the two technologies separately, starting this quarter.

Something Ford didn't mention on Thursday is head count: It had about 183,000 employees worldwide at the end of 2021. For GM, with a similar level of revenues, the number was 157,000. GM went through the cleansing ignominy of bankruptcy. Ford didn't, and it shows." [1]

1.  EXCHANGE --- Heard on the Street: Ford's Profit Engine Needs a Full Overhaul --- Flabby manufacturing looms as a problem
Wilmot, Stephen.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 04 Feb 2023: B.12.