Thus far Ford Motor (NYSE:F) CEO Jim Hackett hasn’t disclosed to owners of Ford stock exactly how the company plans to restructure (read “shrink”) itself over the course of the next few years. Indeed, Hackett outright dismissed a Morgan Stanley-suggested number of layoffs in the queue when he was queried about the matter at a recent company reception … without offering an alternative figure.
Sizable job cuts are almost certainly an inevitability though, resulting from plant closures and even outright abandonment of certain geographic markets.
And yet, it’s not as if Ford’s chief hasn’t dropped subtle and not-so-subtle hints about lost causes in the recent past, saying in October “I certainly wouldn’t take pulling out of Europe off the table.” On Wednesday, the company’s Venezuelan plants offered to buy out workers’ jobs as a means of reducing the region’s payroll costs.
It’s a development that raises the question of where F stock could, and should, cull dead weight. A plausible answer isn’t difficult to come up with.
Where Ford Makes, and Loses, Money
General Motors (NYSE:GM) was cheered late last month when it announced it would drop production of some sedans altogether in an effort to focus on what was working, and stop wasting time and money on less-than-fruitful vehicles. But for the record, Ford did it first. It just unveiled its intent with much less detail.
Ford knows its restructuring effort will come with a price tag of around $11 billion, even if it has not yet been decided exactly what the new and improved Ford will look like, how many jobs will be cut and which plants and units will be shuttered.
Yes, Ford may well be running into a demand headwind within the United States, with November’s sales off to the tune of 7.1%. Make no mistake though — North America is still the company’s biggest and most profitable arm. While it has been tightening things up within that unit, its proverbial problem children are habitually overseas.
Take a look at the company’s geographic revenue and EBIT breakdown. South America hasn’t turned a profit in years. And, though the Middle East is profitable, it’s a ‘just barely’ sort of earnings. Asia and Europe have slipped into the red the past few quarters, both of which are relatively important markets for Ford.
So why not fix or right-size those struggling overseas arms?
There may have been a point in time when such an effort would have worked, but it’s not clear that’s a viable option any longer. Rival carmakers have already made tough decisions in that regard. GM decided to exit operations in India and South Africa last year, and decided to shutter a South Korean plant earlier this year. Toyota Motor (NYSE:TM) closed an Australian plant late last year. Those decisions point to the raw challenges involved in operating manufacturing plants across a border, or across an ocean.
It’s not likely F stock will be able to fare any better than on those foreign fronts, making the shedding of certain operations the more fruitful choice in re-growing the value of Ford stock. If a turnaround or revitalization were possible, they arguably would have taken shape by now.
As for the underlying cause, better technologies, rising input costs, more competition, too much capacity and yes, tariffs are all challenges that have become increasingly insurmountable.
Bottom Line for Ford Stock
For the record, even as some carmakers are shrinking production in — and even wholly leaving — certain geographic markets, many of those same organizations are simultaneously expanding operations elsewhere, and even opening plants in new regions. Volvo, for instance, opened its first U.S. manufacturing facility earlier this year, intimating that the carmaking business is a complex, nuanced one. Geography can matter, but it doesn’t have to matter.
Whatever the case, a Hackett-led Ford doesn’t appear in good position to simply reconfigure and relocate for better optimization. Its best bet is the restructuring it has already chosen, which is the polite way of saying it aims to shrink its way to better profitability.
Only time will tell, however, which plugs the company ends up pulling.
As of this writing, James Brumley held a long position in Ford stock. You can follow him on Twitter, at @jbrumley.