Ford Motor Company (NYSE: F) said that it will temporarily halt production at five of its North American factories, three in the U.S. and two in Mexico, in order to repair recalled commercial vans and reduce inventories of slow-selling car models.
Sales of Ford's mainstream sedan models have slumped this year as more buyers have switched to SUVs.
What we know: These Ford factories will be idled
Ford plans to shut down production entirely at four factories, two in the U.S. and two in Mexico. A fifth plant will be partially shut down.
Not only are overall U.S. light-vehicle sales down somewhat this year, but sales of car models have fallen disproportionately as more buyers have chosen SUVs and trucks instead. Ford isn't the only automaker facing this shift in consumer preferences, but it's still a challenge for Ford. Not surprisingly, four of the five affected factories make Ford- and Lincoln-brand cars.
For sedan models, automakers generally like to have about 60 days' supply of vehicles in inventory. As you can see, supplies of some of Ford's car models have swelled well beyond that point.
In addition to the four factories listed above, Ford will also idle one assembly line at its Kansas City Assembly Plant. The Kansas City factory makes Ford's F-Series pickups and its Transit commercial vans. It's the Transit that's the concern here: Ford recalled over 400,000 Transits in June because of a faulty driveshaft coupling.
Ford will shut down the assembly line that makes the Transit for two weeks in order to maximize the parts available for repairs -- and to help its dealers clear out inventories that swelled while Ford was working on a repair. (Kansas City will continue to build F-Series pickups while Transit production is idled.)
Ford said that the shutdowns would occur before the end of the year, but didn't say exactly when. It's not clear how many workers will be affected. Under the current agreement between Ford and the United Auto Workers labor union, workers at the U.S. plants will be placed on temporary layoff. They will receive about 80% of their usual take-home pay during the layoff period.
What it means: The new-vehicle market has slowed
Ford's decision to temporarily shut down most of its sedan assembly lines follows a similar move by rival General Motors (NYSE: GM). GM said in June that it would extend the traditional summer shutdown at the two U.S. factories that make its Chevrolet Cruze and Malibu sedans.
Auto sales are cyclical, meaning that they rise and fall with the cycles of the broader economy. It's easy to see why: When incomes are tight or uncertain, as during a recession, individuals and businesses tend to put off new-vehicle purchases.
Over the last year and a half or so, it has become clear that the current economic recovery -- which started way back in 2009 -- has begun to fade. The pace of auto sales is still quite strong by historical standards, but growth is hard to find.
A stalled market gives automakers a tough choice. They can either boost discounts in an effort to generate incremental sales growth -- but at the cost of reducing their profits. Or they can try to hold prices steady, and risk losing sales to rivals that have discounted more aggressively.
Ford is following Alan Mulally's old playbook
Former Ford CEO Alan Mulally always promised that Ford would match supply to demand in order to prioritize profitability over sales totals. His successors have kept that promise, and that's the driver behind these plant shutdowns. (That goes both ways, of course: Ford increased production of its strong-selling Escape SUV by shortening that factory's summer shutdown in July.)
It's an effective strategy. Ford did fairly well in the second quarter, posting a 9% operating profit margin in its North America region. But it's worth noting that both profit and margin were down from a year ago, and Ford lowered its expectations for the full year.
The shutdowns should help bring Ford's car inventories more in line with current demand. Ford's overall U.S. inventories are in pretty good shape. But matching supply to demand in a slipping market will occasionally mean idle time for production workers. From a shareholder's perspective, it's the right move for Ford to preserve profitability in a declining market. But that doesn't make it good news.
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