According to CNN/Money, Ford Motor Company concedes that high gas prices are here to stay, and as a result the company will not be able to execute on its profitability plan by 2009 as forecasted earlier. Readers maybe wondering why this is news. Detroit has been a single trick-pony for a long time. All three manufacturers had established businesses in light-to-heavy trucks and SUVs. These bet paid off handsomely through the 1990s and well into the first half of this decade with the exception of the brief recession following dot-com implosion. Meanwhile the passenger car market was ceded to foreign imports and there was virtually no interest in new fuel efficient alternatives. But such over-specialization is extremely dangerous: it is generally recognized that dependence on a single product line creates a major vulnerability. The technology parallel is MSFT, a perennial two-trick pony with operating systems and productivity software. The difference is MSFT has been very aggressively trying to diversity into online services, gaming consoles and automative computing, to name a few. Ford has been forging full speed ahead.
It’s not clear whether Ford management failed to see this coming or if the internal structure prevent action. A more charitable interpretation is that Ford did not hedge correctly on price of oil. The last decade of the 20th century showed a clear upward trend in price of crude and gasoline, with long periods when the price of the refined product seemingly “unhinged” from the price of the underlying commodity. Yet the fluctuations did not appreciably change lifestyles. There was no price elasticity, commentators argued, because the amount of fuel consumed is decided a long time in advance based on the commute and vehicle. Once individuals migrate to the exurbs and commit to 45 minutes of rush-hour driving with the 8000lb SUV, it’s difficult to respond to changes in pricing.
But the laws of economics were not permanently suspended. There is a price point where even existing owners may change their consumption pattern. More importantly before that point is reached another pressure appears: prospective car buyers will gravitate towards higher milage options. Ford CEO Alan Mulally says: “We saw a real change in the industry demand in pickups and SUV in the first two weeks of May. It seems to us we reached a tipping point.” This acknowledgment is an important first step but arrives about 5 years too late. Interesting enough Mulally was vice president at Boeing earlier, another company very vulnerable to oil prices and no easy way out: there is no such thing as a hybrid 747 although Virgin airlines grabbed headlines with a brief biodiesel experiment. Fortunately airlines unlike consumers have always factored efficiency into their purchasing decisions. Bringing this insight into Ford could be one of his main contributions. Meanwhile Ford remains unlikely to garner a “buy” recommendation any time soon.