Over the past few months, a grim narrative has dominated reporting about the US auto industry.
The sky is about to fall. Profitless Tesla is on the verge of eating Ford and General Motors’ lunch, even as both legacy carmakers make billions, even as Americans continue to buy pickup trucks and SUVs.
Ford — which survived the financial crisis without bankruptcy or bailout only to see its stock decline 30% in the past three years — has been a focus of concern. Forget that Ford booked a record profit in 2016 of nearly $US11 billion amid a record year for new-car sales. CEO Mark Fields is in trouble.
“The latest evidence the party’s over in Motown: Ford Motor Co., confronting a drop in profits, vehicle sales, and stock price, plans to trim about 10 per cent of its global salaried workforce, according to a person familiar with the strategy,” Bloomberg’s Keith Naughton reported.
“This comes on the heels of Ford laying off 130 factory workers in Ohio for the summer due to slowing sales of the big trucks they build. Earlier this year, General Motors Co. cut 3,300 employees at three car plants in Ohio and Michigan that make struggling models like the Chevrolet Camaro and Cadillac CT6.”
First off, if the US sales market comes in at or around 17 million in sales for 2017, as many carmakers and analysts predict, the party will definitely not be over. Even if sales fell by a million, the market would be robust. A drop to 15 million would be just fine. The party would end if sales dipped below that level — and if Detroit suddenly saw a cratering of consumer interest in big pickups and SUVs.
For a bit of perspective on how healthy the US market really is, just look at sales of Chevy’s new all-electric Bolt, a $US35,000 (before tax credits) vehicle intended to compete with Tesla’s forthcoming Model 3. Chevy is selling over 1,000 a month, in a limited rollout to just a few US states.
This is a marginal vehicle that’s exceeding GM’s expectations. It’s frosting on the sales cake.
So what’s driving the dark story of the industry’s impending crisis?
Stock prices, obviously. But this makes very little sense. If you’re a Ford investor, you can buy a stable dividend yield of over 5% for around $US11 per share. That’s far from a bad deal. Sure, everyone would probably like it if Ford’s stock were trading around $US20. But Wall Street is disinclined to reward superb business execution and huge profits with a higher market cap for Ford (the company now lags Tesla by several billion).
The main reason why? What you hear is that we’ve topped out on the sales cycle and that a downturn looms. But analysts have been saying that for two years, even as over 34 million new vehicles were sold in the US.
Downturns are inevitable, but in the auto industry, the severity of the downturn is affected by lots of economic factors. If overall demand tops out, but the unemployment rate is low and the country isn’t in a recession — and gas is cheap, and credit is abundant — the downturn will be moderate and Detroit will continue to bring in fat profits.
A bust doesn’t logically follow a boom, but if you look at the stock market broadly, you can see how the overvaluation worriers would think that a bust is on the horizon. Ironically, the automakers have barely participated in the frothiness, so their “bust” is already baked in.
Ford’s move to trim its headcount is really needless at this point, but the company wants to placate Wall Street. It’s a type of false discipline. And it runs counter to the real discipline that Ford and its Detroit peers have shown over and over again, even as they could have move in the opposite direction amid historically high sales.
This column does not necessarily reflect the opinion of Business Insider.
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Get the latest Ford stock price here.