Ford (NYSE: F ) said this week that it will lose production of more than 90,000 F-Series pickups as it converts its factories to produce the all-new aluminum bodied 2015 F-150 later this year.
That’s a substantial loss for Ford. The F-Series is Ford’s best-selling vehicle in North America, and its most profitable product anywhere; 90,000 units is over a month’s worth of sales under normal conditions.
What’s going on? And will this be worth it?
Big changes to factories mean big downtime, and a lot of lost production
Ford North America chief Joe Hinrichs told reporters this past week that Ford’s sales, market share, and profits would likely fall this year as a result of the shutdowns required to convert Ford’s truck factories in Dearborn, Mich., and Claycomo, Mo., to produce the new aluminum truck.
That’s a big cost for Ford, but it’s evidence of how seriously the company is taking its preparations to produce the all-new truck.
I spoke to Hinrichs about Ford’s preparations for the all-new F-150 a few weeks ago. He told me that one thing that makes this different from a normal new-model changeover is that Ford will have to substantially retool the plants’ body shops in order to assemble the aluminum trucks.
Unlike the steel body panels on Ford’s current pickups, the new F-150’s aluminum body panels are bonded — glued, essentially — and riveted. This is a brand-new thing for Ford’s workers, and it requires all-new equipment.
Much of that equipment has been designed from scratch for Ford, Hinrichs said, specifically for this application. While building cars with aluminum body panels isn’t a new process, the scale of what Ford is doing is unprecedented in the industry.
Up until now, most aluminum-bodied vehicles have been luxury cars, made in limited numbers. No factory has ever built modern aluminum-bodied vehicles at the pace Ford builds trucks, Hinrichs told me: 60 trucks an hour, 22 hours a day.
Ford has done an “enormous amount” of testing to ensure that the new equipment and processes will work at the pace Ford requires, Hinrichs said, on top of the extensive testing that Ford has done of the new truck itself. He’s very confident that the new F-150’s launch will be smooth.
But Ford is determined to take the time to get it absolutely right — and to lose profits in the near-term to ensure that they can take the time.
The plant shut-downs are happening in stages: The two factories were shut down for three weeks in the first quarter, they’ll be shut down for another three weeks in July, and then there will be seven more weeks of downtime by the end of the year.
A lot of lost revenue — but Ford is already moving to offset it
I can’t tell you exactly how much it’ll cost Ford to give up 90,000 pickups’ worth of production. The profits that an automaker makes on any given model are among the industry’s most closely guarded secrets.
But we do know that these are Ford’s most profitable products. We could easily be talking $500 million or more, spread out over the rest of 2014 and into early 2015.
That’s a big hit, but Ford is already taking some steps to offset it. Sales of the F-150 were down 4.3% last month, a surprise given that General Motors (NYSE: GM ) and Fiat Chrysler (NASDAQOTH: FIATY ) both posted solid gains in pickup sales. But Ford officials said that the drop was planned.
How do you “plan” a sales decline? In the pickup market, you do it by juggling your incentives. For now, Ford is keeping its incentives lower than those of key rivals.
That increases profits per vehicle, but it means that Ford will lose some sales to price-conscious buyers. But it also raises the chances that the sales Ford and its dealers are losing are less profitable ones.
The new trucks are a bigger bet for Ford than we thought
Ford CFO Bob Shanks warned us back in December that Ford’s 2014 profits would be lower than last year’s because of the costs of new-product launches. By the end of the year, Ford will have launched 16 new or refreshed products in North America alone, and several more in other parts of the world.
That’s a high number, and Shanks warning made some sense at the time: New-product launches aren’t cheap. But Shanks may have had this particular launch in the forefront of his mind when he gave his guidance: It’s really not going to be cheap.
But that guidance is helpful to remember now. I don’t think that Ford shareholders need to worry too much about Ford’s lost pickups, because I think they’ve long since been priced into the stock: We were warned, months ago.
But with all we’ve said about the risks of Ford’s bet on an aluminum pickup, this revelation gives us a closer look at just how much Ford is betting on these new trucks.