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 $11 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
confronting a drop in profits, vehicle
sales, and stock
price, plans to trim about 10
percent of its global salaried
according to a person familiar with the strategy,” Bloomberg’s
Keith Naughton reported.
“This comes on the heels of Ford laying off 130 factory
in Ohio for the summer due to slowing
sales of the big trucks
they build. Earlier
this year, General Motors Co. cut
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
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
$35,000 (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
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 $11 per share. That’s far from a bad deal.
Sure, everyone would probably like it if Ford’s stock were
trading around $20. 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
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