Ford's Core Product Goes on Weight Loss Program
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Following the rather lackluster Q2 results that the automaker released in the middle of the trading week of July 23rd, Ford (NYSE: F) went on to announce one of the single biggest product changes it has made to a core product over its 100+ year operating history. The Ford F-Series line of trucks, which have been in production since the late 1940s, will soon be constructed with a largely aluminum body.
Being newly designed for debut in 2014, the new Ford F-150 truck will contain significantly more aluminum, as opposed to the widely used steel in the industry, to cut total vehicle weight by an impressive 15% (700 pounds). The weight loss will lead to several key improvements for one of Ford’s highest volume units – primarily, less dead weight means drivers can travel further on every gallon of gas. Similarly, the lighter body also means Ford can begin experimenting with smaller, but adequately powerful, engines for further fuel efficiency gains.
The 15% reduction in total vehicle weight is expected to increase the unit’s fuel efficiency by as much as 25%. For a truck that gets drivers a mere 22 miles per gallon on the highway (2012 model year, 3.5L, 6 cylinder, 2WD single cab), the estimated efficiency gains imply the F-150 could be seeing highway economies in the high 20s within a couple years. Considering that this is the point where many mid-sized sedans were several years ago, the news is quite significant.
The innovation could not have come at a later time. All automakers have been under increased pressure over the past several years with wildly fluctuating fuel prices and an overall greater emphasis on eco-friendly transportation technologies. The Obama administration’s updated CAFE (Corporate Average Fuel Economy) standards issued in the summer of 2011 called for a gradual increase in the average economies of automakers’ products through the mid 2020s, with the ultimate goal of reaching 54.5 miles per gallon highway ratings by 2025.
Although the new legislation has made automakers scramble to invest heavily in expensive fuel-saving technologies, it has arguably led to some of the most positive habit changes in the industry’s history. Automakers have been motivated like never before to infuse their fleets with smaller and efficient vehicles, and because consumers are generally unwilling to sacrifice safety/comfort, certain manufacturers are now enjoying their most impressive product portfolios over the past several decades. The largely updated lineup at General Motors (NYSE: GM), for example, which has a new emphasis on compactness with the Chevy Cruze, Sonic, Spark, and the Cadillac ATS, is a far cry from the corporation’s pre-bankruptcy reliance on bulky sedans and SUVs.
Does the Plan Hold Weight?
The inclusion of more aluminum in a vehicle’s body is by no means an automotive industry breakthrough. Aluminum use in auto manufacturing has been growing uninterrupted for the past forty years, and is now the second most used material (in terms of total weight) behind steel. For the 2012 model year, average aluminum content surpassed 340 pounds for all vehicles, a figure that is expected to double by 2025 (source: Ducker Worldwide). Much of the aluminum infusion has been used in vehicles’ wheels and engine blocks, however, and it has traditionally been more expensive premium autos that have used the metal in body panels.
So the plan does sound like a win-win, right? Ford consumers will save more at the pump; the automaker will receive much-needed eco-friendly bonus points and is one step closer to complying with CAFE standards. It is not as easy as that…
The F-150 is extremely important to Ford’s operations. In 2011, nearly one-third of Ford’s $8.8 billion global operating profit was generated by the F-Series (includes the F-150 and its larger brothers). The automaker sold nearly 585,000 F-Series trucks in the US last year, and the entry-sized F-150 is estimated to count for around three-quarters of the figure (both statements are Barclay’s estimates). Building in more aluminum into the truck’s body could have several effects on one of Ford’s most important vehicles:
- Higher Cost: Aluminum is more expensive than steel, and there is no reason to think that Ford can simply eat the extra costs. The truck market has some ferocious competition with domestic alternatives including GM’s Chevy Silverado and GMC’s Sierra lines, and Dodge’s (NASDAQOTH: FIATY.PK) Ram. Similarly, Japanese automakers have placed an emphasis on their own truck lineups more than ever over the past decade, and Toyota’s (NYSE: TM) full-sized Tundra has taken a meaningful market share in the U.S. market. A relatively more expensive F-150 might have a tough time competing against such alternatives.
- New Machinery: One shouldn’t expect that Ford can simply start sliding aluminum sheets into its existing production equipment and lighter-weight F-150s will start coming out the other end. Ford will need to invest hundreds of millions of dollars into new manufacturing equipment to be able to ramp up high production volumes.
- Core Followers: Ford’s core truck purchasing consumers are the high-willingness-to-pay drivers who may not compromise the “macho-ness” of their rides for anything. It is uncertain how such a designed truck will fare with these consumers, and even if it does save them money at the pump there is always the risk of consumer alienation.
There can be no doubt that it is now make or break time for the automaker. Ford just announced a second quarter loss of $404 million from its European operations, which compares to a profit of $176 million in Q2 2011. Full year losses from the region are now projected to top $1 billion, up from original company estimates of $500-$600 million, and management does not see any quick fixes in Europe coming anytime soon.
Despite being in the black in its core U.S. market, Ford has significant pressures on the near-term horizon. Toyota and its fellow Japanese automakers have largely recovered from the 2011 earthquake and tsunami that rocked their home region, and are making bold moves to get back to the front of the pack. Toyota, for example, seems to be focusing much more on total volume than per unit profitability in its race to win back lost market share. The company sold 4.97 million vehicles in the first half of 2012, and beat GM and Volkswagen (NASDAQOTH: VLKAY) by 300,000 and 520,000 units, respectively. The automaker, however, has boosted its total expenditures on incentive spending relative to its historic rate. The first mandatory milestone for the government’s CAFE standards in 2016 is simply adding more underlying pressures for Ford and the competition.
Although it is difficult to determine how consumers and competitors will receive such a dramatic move with the F-150 -- it may start a new industry trend with full-sized trucks – it is certain that Ford does need to boost short-term confidence in its stock. Ford shares fell to new 52-week lows following its Q2 earnings release, and with per share prices just over 2x past twelve-month earnings, the automaker should be repurchasing troves of its own shares. With so much uncertainty on the near-term horizon, investors will undoubtedly appreciate a price floor being built into their investment.
gibbstom13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.