Why Ford's Plan to Suspend F-150 Production Will Inflame Pickup Price War

From a recent high of 70,937 units sold in June, the Ford Motor Co. (NYSE: F) has seen sales of its F-Series pickups fall: to 65,657 units in July, to 66,946 in August and to 67,809 in September. And while sales of the F-Series are up 5.5% in the first nine months of 2016, September sales were down 2.6% year over year for the country’s best-selling vehicle.

Demand has cooled as supply has increased and Ford is responding by idling its Kansas City F-150 plant for seven days beginning next week as the company tries to work down a reported 95 days of pickup inventory on dealer lots. The Dearborn truck plant will not be affected, according to a report at Automotive News.

We’ve written before that now is the best time in eight years to buy a pickup, and the budding price war in pickups is only likely to heat up further. Fiat Chrysler Automobiles N.V. (NYSE: FCAU) offered an average incentive of $7,082 on Ram pickups last month. General Motors Co. (NYSE: GM) offered an average of $5,647 on its Silverado and Sierra pickups. Ford’s offer on the F-150 was the lowest of the three at $5,173.

Ford has some room to maneuver here and maneuver it must to clear that inventory. Neither FCA nor GM can afford simply to sit still either, so pickup buyers might be in for even bigger incentives in October and November than they’ve seen yet.

Some 13,000 Ford hourly employees will be laid off during the temporary shutdowns in Kansas City and three other Ford plants: the Louisville, Kentucky, assembly plant where the company builds its Escape crossover and Lincoln MKC will close for two of the next three weeks; the Hermosillo, Sonora, plant where it builds Fusion and Lincoln MKZ; and the Cuautitlan, Mexico, where Ford builds its Fiesta model. About 9,000 U.S. workers are affected along with 4,000 Mexican workers.

In an investor day presentation last month, Ford said pretax profit for this year would be around $10.2 billion, a drop of $600 million from 2015 due to a massive recall related to a door latch problem. The company also noted that U.S. auto sales are expected to decline in each of the next two years.

September sales of the Escape compact crossover were down 12% year over year, and Lincoln MKZ sales were down 1.7%. Lincoln MKC luxury compact crossover sales were up 2.3%, but Ford sold just 2,086 units in September. The midsize Fusion saw sales fall 17.5% year over year in September, and year-to-date sales are down 9.1%.

According to a report at Bloomberg News, research firm Autodata reckons that Escape inventory grew from 50 days to 64 days year over year in September, while Lincoln MKC climbed to 96 days from 91. Inventory levels on the Fusion and Fiesta rose from 51 to 72 days and from 56 to 77 days, respectively. A 60-day supply is considered optimal.

Bad as these numbers are, the really bad news for Ford is the inventory pile-up of pickup trucks. Even though profit margins on pickups are estimated at about $10,000 per vehicle, slicing into that margin on the Detroit Three’s best-selling vehicle plays havoc with the bottom line.

And because Ford has already chopped its full-year profit estimate, a further shortfall in profits on the F-150 could hit the stock hard.

Shares closed down about 0.3% on Monday at $11.88, not far from the bottom of the 52-week range of $11.02 to $15.84. The stock traded up a penny in Tuesday’s premarket session. The 12-month consensus on the share price is $13.00.