Here’s Why Ford Motors Is Cutting Production At Its North American Plants

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As the passenger car market in the U.S. slows down, auto manufacturers are witnessing piling inventories of sedans, as customer preferences shift to SUVs and crossovers. Recently, Ford Motor Company (NYSE: F)  announced that it would halt production in five of its North American plants for ten weeks to bring inventory levels of certain models down. These models include the Ford Fiesta, Ford Fusion compact car, and its Lincoln mid-size sedans. In August 2017, Ford saw a nearly 9% decline in car sales in the retail segment while its F-series pickup trucks saw a 15% increase in sales. (Read Ford’s August Sale Results Have A Silver Lining). High levels of inventories can impact the company’s performance adversely and hence a production pause appears to be the right strategy. Reports suggest that as of September 1st Ford had 111 days of inventory for its Mustang brand versus an average inventory of 65-70 days usually maintained by auto manufacturers.

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Strategic Shift  As Customer Preferences Change

While cheaper oil prices should lead to an increase in demand for gasoline vehicles, customers prefer the flexibility of a crossover or SUV over sedans. Further, the ride quality and fuel economy of these vehicles is now almost at par with sedans, thus making them an easy choice.  Auto-makers including Ford are now more focused on these vehicles – upgrading them with better navigation and infotainment systems. We believe this strategy should help the company navigate the changing automotive landscape better. Ford is focusing on mobility solutions, electric vehicles (as government regulations encourage auto makers to increase the number of clean energy vehicles in their portfolio), and budget cars for emerging economies. For the U.S., reducing inventory levels of sedans is the right step as it allows the company to focus on its profitable F-series pickup trucks in the region.

Ford has been struggling to grow revenues in a challenging environment. It could not perform better than the industry and registered an overall decline of 2.1% in sales for August 2017. General Motors, on the other hand, could register a 7.5% increase in sales for the same period. The company needs to reshuffle its portfolio of cars to adapt to changing customer needs and halting production of slow moving cars appears to be the right step for the short term.

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