How is the Ford Fiesta like the Apple Newton? Both of them, it seems, are deadweight products that their manufacturers would be better off without.
When Steve Jobs returned to Apple in 1997, one of his first actions was to slash the company’s product line by 70 percent. No more Newtons, no more fine gradations of different Macs for different people. Going forward, Apple would make just four computers: a desktop and a laptop for consumers and an equivalent pair for pro users. That decision turned Apple around and set the stage for the biggest comeback in corporate history.
Ford’s announcement that it will phase out most of its car models by 2020 is not quite as drastic, but the impetus is the same: It’s much better to do one thing really well than it is to try to be all things to all people. All the top-selling sedans in America—the Toyota Camry, Honda Civic, Honda Accord, Toyota Corolla, Nissan Altima, and Nissan Sentra—are Japanese. Ford could try to compete with those, but to what end? Over many decades it has learned that it’s not going to build a category-killing sedan.
What’s more, even if Ford did manage, against all odds, to build a car that outsold the Camry, it would be able to do so only with the slimmest of profit margins. The investment would be huge, while the payoff would be minimal.
Meanwhile, the Ford F-series has been the top-selling truck in America for 41 years. The company sells a new F-series pickup truck every 42 seconds, at an average price of $49,439. The franchise is a license to print money: Each truck, it’s been estimated, nets Ford more than $13,000.
Ford’s decision applies only to North America; the calculus in Europe is different, for many reasons. Ford sells few trucks there and would essentially be leaving the market entirely were it to stop selling cars. Also, it’s much more difficult, both legally and politically, to close down car-manufacturing plants in Europe. Besides, the Ford Fiesta is the fourth most popular car in Europe: Ford is more competitive there than in its home market.
In corporate America, bigger is not always better. If Ford wants to improve its profit margins, the easiest way to do so is to stop making cars. The Ford Fiesta will never be very profitable: It just doesn’t sell for enough money, and it appeals to extremely price-sensitive consumers.
Trucks, by contrast, are much more expensive, and frequently get upgraded by purchasers wanting specialized bells and whistles.
Most CEOs look for growth, but in a competitive area like autos, sometimes shrinking makes more financial sense. A smaller Ford, with higher margins, will have fewer employees and much more scope for buybacks and dividends. Shareholders across the sector will win: Ford will become more profitable, and so will the Japanese carmakers, which will see diminished competition and higher sales.
The losers, of course, will be the workers. If you’re working on the Ford Taurus production line today, your future is far from rosy. Ford CEO Jim Hackett is working for shareholders; the old paternalism of the Ford family has fallen by the wayside, destroyed by financial logic.
People will always buy cars. But fewer and fewer people—and fewer and fewer companies—are going to make them. We’re living in a winner-takes-all world, where Ford has won in trucks and the Japanese carmakers have won in sedans. So don’t be surprised if, in a few years’ time, the Japanese companies start getting out of the truck game. Being fourth or fifth in a market is almost never a financially sensible place to be.