Why Ford May Be Cutting Production In The U.S.

Ford Motor Company (NYSE: F) CFO Bob Shanks has stated that the company could cut production or idle assembly lines at some of its factories in the near future. The U.S. based auto maker wants to cut down production so that it can reduce the amount of unsold inventory at dealer lots. According to Automotive News Data Center, Ford’s inventory supply at dealer lots was worth only 78 days in February, compared to 95 days in the previous month.

There are two primary reasons for the possible production cuts:

1. The auto industry is largely dependent on dealerships for sales. However, if unsold inventory keeps piling up at dealer lots, it can have an adverse effect on the company’s profitability. Since fixed costs in the manufacturing of vehicles are high, companies depend on transaction prices for profits. However, cars that don’t sell for longer periods tend to require incentives and discounts, which tend to lower transaction prices. As a result, it helps to keep inventory lower at dealer lots. But there is a fine balance that needs to be struck here. Low inventory is good only if overall production isn’t affected — if production cuts are required to lower inventory, the company can lose out on revenue as well as profits for a single financial year.
2. The company recently lowered its profit guidance for 2017 to $9 billion compared to $10.4 billion in 2016. Ford cited higher launch costs, the potential impact of Brexit, higher input costs of commodities, and higher recall related costs behind the lower profits. Since the company expects higher costs from elsewhere it is also trying to cut costs in its operation, especially in the low profit segments. Cutting production or idling assembly lines could be the way to lower those costs.

This is not the first time the company is considering doing this. In 2016, Ford shut down five factories in the U.S. and has cut down production at its Kansas plant to lower the stock of the F-150 series trucks and the Transit van. The inventory of the former fell from 108 days to just 97 days, while that of the latter fell from 97 days to 77 days according to Automotive News Data.

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