Ford did not make enough cars, or make them well enough, or get the parts it needed, all of which resulted in ugly fourth-quarter earnings and a net loss for 2022. Ford CEO Jim Farley wore a rhetorical hairshirt in confessing the company’s execution issues and expressing his frustration. “We should have done much better last year,” he said in the fourth-quarter 2022 earnings release.
“We left about $2 billion in profits on the table that were within our control, and we’re going to correct that with improved execution and performance.” The continued mea culpa in a call with investors to discuss the financial results came with descriptions of the deep level of angst and reorganization taking place internally to become a leaner company, starting this year.
Missed Opportunities, Poor Execution
In essence, the complexities and legacy operations of a 119-year-old global company are weighing it down as Ford works to transition itself to an electric mobility company. Farley and his team are boring into all aspects of the industrial system to improve it. Half the missed $2 billion in opportunities was from lost sales due to production shortfalls, and the other half was because of costs, many of them intrinsic, that still need to be addressed.
Farley gave some examples. Each vehicle platform is 25-30 percent cost inefficient. That means Ford has to get more production from the current pipeline or reduce how much it costs to maintain the current lineup. While engineers tackle that, the supply chain is under a microscope after spending $1 billion in premiums last year on increased freight, shipping, and other costs of the supply chain disruption and fallout from the Covid-19 pandemic.
The extra money spent to try to get enough parts did not prevent the automaker from falling short of expected sales by 100,000 units, which adds up to about another $1 billion in lost revenue. Ford also needs to reduce the complexity of its vehicles; complexity means they take longer to build and cost more.
Digging Deep to Find Sustainable Solutions
Teams have spent the last few months getting deep into where Ford needs to go, Farley said, and we can expect to get updates on this exercise over the course of the year. Ford has done cost-cutting in the past, but the largess and inefficiencies grow back. The CEO wants sustainable change that is subject to constant evaluation and vigilance.
Moving to EVs offers a fresh start. The first three EVs on the market: the Mustang Mach-E, Ford F-150 Lightning pickup, and Ford E-Transit, were a huge learning curve. “We didn’t know what we didn’t know,” Farley said. Mistakes were made, like engineering electrical harnesses far longer and thus heavier, than needed. But the lessons learned are being applied to the next cycle of EVs in the works, Farley says. And they will be more dependent on software to enhance their features and capabilities, but also software services that will generate additional revenue.
Ford reported $1.3 billion in net profit for the fourth quarter and lost $2 billion for the full year. Q4 net income fell 89 percent to $12.3 billion, in part because a year ago Ford had a big bump from its investment in Rivian whose stock was soaring in value. For the full year, Ford earned $10.4 billion before interest and taxes, which was on the low end of forecasts for the year.
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