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Ford reveals rendering of Detroit train station’s future Ford Motor Company
Ford Motor Co. buys Spin, an electric scooter company, for more than $40 million.
(Photo: Ford Motor Co.)
As Ford Motor Co. works to navigate a global reorganization effort that is certain to include significant job reductions, one way forward could lie in Ford Credit — and the consumer data it collects.
More than $1 in $3 in profit is coming not from car or truck sales but the finance entity that makes loans to more than 5,000 car dealers and 4 million customers, mostly in the United States and Canada.
That’s up from $1 in $4 in 2017, according to regulatory documents.
Potential clues to the future path of Ford can be provided partly by Facebook, which has illustrated to shareholders the value of using customers’ personal information to earn billions. Advertisers buy not the customer information itself but access to the consumer based on data about their lifestyle.
Last week, Ford announced the purchase of the electric scooter company Spin, an acquisition that brings with it a new trove of data about how people travel. The value of the company may be less in the hardware than the tracking that goes along with use of the scooters — When do people travel? What are key travel routes? What days of week see the most use?
More: Ford gets into the scooter business, joins Bird and Lime
More: Ford and Volkswagen flirting with relationship possibilities
A Nov. 8 news release announcing the scooter purchase explicitly noted that the carmaker would share user data with partner cities.
Data mining has proven to be a highly lucrative revenue stream.
General Motors recently tracked the habits of 90,000 drivers in Chicago and Los Angeles who agreed to have their car radio listening habits tracked to assess the potential relationship between what they listen to and what they buy.
In recent days, Ford CEO Jim Hackett gave a glimpse into what sounds like a potentially massive data mining plan. His remarks were made during a Freakonomics Radio interview for a podcast released Nov. 8.
“We have 100 million people in vehicles today that are sitting in Ford blue-oval vehicles. That’s the case for monetizing opportunity versus an upstart who maybe has, I don’t know, what, they got 120, or 200,000 vehicles in place now. And so just compare the two stacks: Which one would you like to have the data from?” Hackett said, according to the podcast transcript.
“The issue in the vehicle, see, is: We already know and have data on our customers. By the way, we protect this securely; they trust us,” Hackett said. “We know what people make. How do we know that? It’s because they borrow money from us. And when you ask somebody what they make, we know where they work, you know. We know if they’re married. We know how long they’ve lived in their house because these are all on the credit applications. We’ve never ever been challenged on how we use that. And that’s the leverage we got here with the data.”
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Jim Hackett, President and CEO of Ford Motor Company, with the 2019 Ford Ranger at the North American International Auto Show at Cobo Center in Detroit on Sunday, Jan. 14, 2018.
(Photo: Mandi Wright, Detroit Free Press)
Ford Credit has provided financing since 1959 to customers to buy or lease Ford or Lincoln vehicles. The company also finances dealer vehicle inventory and capital loans for dealership improvements, along with other products and services to customers and dealers.
Cash flow staggering
The cash flow, which rarely gets much media attention, is staggering by any objective measure.
So far in 2018, Ford Credit has accounted for 35 percent of Ford profits, or nearly $2 billion of $5.5 billion in total profit, according to company documents filed with the U.S. Securities and Exchange Commission. That’s up from last year, when Ford Credit generated 24 percent of Ford profits or $2.3 billion of $9.6 billion total.
But their financial picture is changing.
“Automakers will lose money on electric cars for years to come. None of them knows exactly how they’re going to make money on autonomous cars,” said John McElroy, a veteran industry observer and host of Autoline.tv. “But they could make a fortune monetizing data. They won’t need engineers, factories or dealers to do it. It’s almost pure profit.”
More: Report: Ford, VW ‘want to join forces’ on electric, driverless cars
While Wall Street analysts note that Ford Credit just reported its best earnings quarter in seven years, Garrett Nelson of CFRA Research expressed concern about the strength and direction of the Dearborn-based company known simply as “F” on the stock market.
“Its international operations continue to lose money across the board with the exception of the Middle East and Africa,” Nelson said. “While year-over-year comparisons may begin to improve in the next few quarters, we think Ford faces significant operational and cost headwinds from tariffs and slowing demand across several markets, and we continue to have a low degree of confidence in management’s ability to successfully engineer a turnaround.”
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Guests check out a 2019 Volkswagen Jetta at the Garden Theater in Detroit on Sunday, Jan. 14, 2018.
(Photo: Junfu Han, Detroit Free Press)
Ford is ‘shrinking’
Doing a hardcore analysis of what’s currently making money, how to grow those margins and find new sources of cash are top priorities for a global carmaker seeing major financial loss in markets outside the United States and Canada.
“Ford is shrinking, based on sheer sales,” said Jon Gabrielsen, an independent market economist who advises automakers and suppliers. “Over the last 10 years, all of Ford’s business outside the U.S. and Canada has steadily declined to the point that all that will ever be sufficiently profitable is in the U.S./Canada. Indeed, many regions are hemorrhaging.”
He noted, “And in these two countries, Ford profits are driven entirely by pickup trucks, SUVs and vans. Its exiting cars could result in the loss of sales of 10 to 20 percent.”
That may help explain why Ford is having wide-ranging talks with Volkswagen. Executives from each have indicated a collaboration could save the companies billions in research and development costs and aid each in the development of driverless and electric vehicles.
VW and Ford are already working with BMW and Daimler to develop a rapid electric vehicle charging network across Europe. Emissions standards continue to increase worldwide, with the major markets of China and California driving significant growth.
“In Europe, Ford has lost $973 million in the last five years — indicating that, no matter what they have tried, they failed to turn it around despite being at the peak of the cycle. Things will get far worse in the next downturn,” said Gabrielsen, who pulls his data from Ford’s SEC filings. “In South America, Ford has lost $3.9 billion in the last five years.”
‘Do or die time’
Bob Shanks, Ford chief financial officer, reported big losses in Europe, Asia and South America. He told financial analysts after quarterly meetings this year:
“Clearly our European business requires a major redesign.
“Moving forward, we’re focused on getting our China business back on track.”
“We’re only going to allocate capital to new investment opportunities going forward that generate the appropriate returns on capital. In the process, we will either move the low-performing parts of the business through fitness … or we will dispose of them.”
But industry analysts have asked why change is taking so long.
The past decade has seen Ford lag in Mexico while Europe is “unsalvageable” and South America is a “Dumpster fire,” Gabrielsen said. As for China, he said, “it’s ‘do or die time’; that must be fixed because it’s a horrible tragedy to forfeit that market.”
In October, Shanks and Hackett told investors Ford must be fundamentally redesigned. They promised to announce details as things unfold.
“Around the globe, the company is moving with a sense of urgency to redesign and restructure the business to capitalize on our strengths, while selectively and smartly ‘disposition’ where we cannot make appropriate returns,” Ford spokesman Brad Carroll said. “To do this well, with a grounding in the future, takes time, but we are committed to making the right decisions for the long-term health of the company.”
From 2013 to 2017, vehicle sales in North America generated $42.6 billion profits with the help of pickup sales led by the Ford F-Series while its Ford Financial arm has created $9.6 billion in profits.
“The risk to Ford of its total reliance on just North America for all its past and future profits, is that the North American market is highly mature and saturated with vehicles, while the regions in which Ford is unsuccessful, and losing both market share and money, are the growth markets of the future,” said Gabrielsen, a 40-year industry consultant who earned an MBA in finance and economics from the University of Michigan.
“In the U.S., there are already 1.19 cars or light trucks for every licensed driver in the country, and 1.9 vehicles per household. That means that if every licensed driver in the country were driving a vehicle at this moment, 19 percent of the total vehicles in the country would still be parked doing nothing. What are the odds that U.S. consumers are going to want more than that per driver and per household? Indeed, vehicles per household have actually dropped from a peak of 2.1 in 2009, back to 1.9 in 2017. A further indication that the prospects for further growth are maxed out.”
Meanwhile, China would have to increase the number of vehicles in the country by nearly a billion just to reach the level of maturity and saturation of the United States.
Which, of course, brings the spotlight back to Volkswagen, a company widely viewed as a highly competitive player in the market — with fresh product lines.
On Wednesday, Ford is hosting a media presentation in Miami to spotlight “a self-driving journey to experience the ecosystem of capabilities we’re building in support of our autonomous vehicle business.”
Hackett has urged the investor community to pay attention to upcoming activity.
On Friday, Volkswagen executives are scheduled to meet and reportedly discuss the future of the company.
Both automakers have said a major decision about their potential engagement will be announced prior to Dec. 31.
Partnerships, common for years in carmaking, are taking on added urgency as companies try to put limited resources toward extremely expensive research and development of advanced autos.
Honda recently committed to investing $2.75 billion for a stake in the driverless vehicle unit of General Motors known as Cruise Automation.
In July, Ford created a separate company, Ford Autonomous Vehicles LLC., for its driverless operations and sought investors. In 2017, Ford announced an investment of $1 billion over five years in the driverless startup company Argo AI. It remains an independent entity with a board of five directors, including two from Ford. In recent days, industry observers have speculated that Volkswagen may be considering an investment in Argo AI. A Volkswagen spokesman said he doesn’t comment on speculation.
Ford announced an investment of $1b over 5 years in Argo AI, but the company remains independent as they are governed by a board of directors (with 2 members from Ford, 2 from Argo, and 1 independent).
Restructuring aimed at Europe
Investors are watching with curiosity.
Adam Jonas, auto analyst at Morgan Stanley, said in late August: “To be clear, we think Ford´s operations need restructuring. We do not see restructuring at Ford as a ‘nice to have’ … but as a crucial step.”
He went on to offer a grim landscape:
“It is very difficult” to see Ford continuing operations on a profitable basis in South America. “We expect operating losses to continue through at least 2020.”
“We now forecast Ford Europe losses to widen. … Excluding commercially oriented businesses, we do not believe the Ford brand has positive long-term value in the European retail passenger vehicle market. We can envision the majority of restructuring costs aimed at Europe alone.”
“Lincoln momentum has stalled after a series of marketing pushes. We do not see a path to sustaining Lincoln or Ford passenger car presence in the Asia Pacific region. Including China. We value Ford’s share of China (joint ventures) at zero.”
General Motors has already pulled out of Europe. Ford has declined to directly address its plan for the region.
While markets outside the United States and Canada look grim for Ford to many, the stakes are highest in China.
“This market’s intense focus on the new and different means that it’s never too late to catch up,” said economist David Hartman, a former Harvard professor now based in Beijing as managing director of China for Blue Canyon Partners consulting. “Market shares are quite volatile, though VW and GM have staked out solid positions. But winning in the market depends on being agile and responding quickly to trends. Ford hasn’t shown the ability to do that.”
He continued, “There are numerous new manufacturers emerging in China, especially in electric vehicles. It is a very dynamic market. Since there was very little car ownership 20 years ago, it has taken very rapid growth for China to become the largest market in the world. Growth is slowing due to serious concerns about the economy. But vehicle ownership is still a small percentage of the population.”
While most analysts are focused on China, Gabrielsen was also alarmed to see Ford slide in Mexico.
“Ford market share in 2008 in Mexico was 12.2 percent and by 2017 it was down to 5.3 percent, a loss of 58 percent of market share and the unit volume they would otherwise have had,” he said. “If they had held onto the 12.2 percent market share of 2008, through to today, they would have sold 1.4 million units over that period, instead of the 0.9 million they actually sold because their share was falling.”
Maintaining a global presence means companies keep fixed costs per unit low with scale, noted Don Grimes, senior research specialist at the University of Michigan. “That’s why Ford and all the auto companies are trying to be worldwide.”
Auto companies are “scared to death that the technology that’s going to go into new cars a decade from now, the driverless vehicles, the increase in electrification. … It’s going to be the tech firms with very deep pockets that will be able to win the good stuff, the highly profitable stuff,” he said.
So car companies must form alliances to compete.
“And the only way to make any money is to add the added-value components,” Grimes said.
Facebook as a model
So, in the end, strategy points to cost-saving partnerships, like the one being considered with Volkswagen, and data mining, like what’s happening with Spin and potentially Ford Credit.
“As our vehicles become more connected, so do the opportunities for automakers to collect data. What they do with it is the next question,” said Ivan Drury, senior manager of industry analysis at Edmunds.
“Using data to help refine your morning commute to work to avoid slowdowns, is seen as a positive. Selling your daily commute time, speed and path, to insurance companies, that might not be so positively received. Our lives are becoming increasingly refined through data and automotive data is rich. Time spent and location can reveal great insights into one’s lifestyle. The question is, do you want to share everything you do in your vehicle like it is Facebook?”
Contact Phoebe Wall Howard: phoward@freepress.com or 313-222-6512. Follow her on Twitter @phoebesaid
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