Why Ford (NYSE: F) is Really Cutting its Car Lineup

If you caught the headlines on Ford (NYSE: F) this week, you just might have been left with the impression that the American car company was planning to stop selling its passenger car lineup entirely.

As a Bloomberg headline purported on Wednesday: “Ford is About to Abandon American Sedans.”

And as the title of one Jalopnik article read, “Why Ford Killed its Cars.”

The qualifier these publications left out (probably for the sake of getting a few extra clicks) was the word “some.”

The truth is, Ford will not be killing its entire car lineup; it’s merely simplifying it. Soon, the only passenger cars Ford will be producing are the Mustang and Focus Active (to be released in 2019). The company’s SUVs and trucks also aren’t being cut.

The most obvious factor behind Ford’s decision is OpEx. Management says it can cut $25.5 billion from costs by 2022 by trimming the fat in its lineup. Investors, of course, have applauded this bottom-line-boosting decision.

But Ford’s move to drop models like the Fiesta, Fusion, and Taurus isn’t all about expenses. It’s also about staying ahead of new technology trends, specifically the emergence of autonomous vehicles and services.

Although mainstream media has completely glossed over this decision, Ford was quite deliberate in its first-quarter conference call this week.

Here’s the relevant text:

Enabling human progress through freedom of movement has always been central to our mission, and it’s the reason we have been successful for 115 years. We’ll remain true to our heritage as we transform our business model to capitalize on the trends I just described: by making smart choices; by building smart vehicles that integrate the best technology; and by providing customers with the most trusted mobility platform and services in the industry. We are on an incredibly exciting journey to redefine the automotive industry. And as we said, it starts with making these smart choices.

[One of these choices] is autonomous technology. We’re going to develop a profitable autonomous vehicle service that offers the most trusted and human-centered ride-hailing and goods delivery experience. Our partners at Argo AI have assembled an incredible collection of talent and expertise. I can’t really exaggerate that. This is a great group of people, and we’re working hand in hand with them to build a great AV business model…

I’m proud to tell you that we’re on track together with Argo AI to deliver a commercial-grade self-driving vehicle at scale in 2021 for the movement of people and the movement of goods.

While headlines were obsessing over the fact that Ford was cutting its sedan lineup, they ignored what was easily the most important aspect of that call: The company is transitioning to autonomous vehicles in what’s poised to be a momentous shake-up of the automaker business model.

Forget the iPhone. Ford is building the iCar.

In the context of Ford’s plan to transition to driverless vehicles, the company’s plan to simplify its lineup makes plenty of sense. It will be much easier to build an autonomous platform across a tighter lineup of vehicles because of the limited variation.

It goes without saying that building driverless cars is a complicated task, but just imagine how much more difficult it is to write software for 10 different models, all with different wheel bases, turning radiuses, clearance heights, and so forth. Standardization will be key in the early stages of rollout.

A decade ago, this kind of lineup simplification would have spelled trouble for an automaker, but not anymore. As automakers like Ford shift their business models, cars are going to be less about individual identity than they have been in the past.

When you own your car, it says something about you, but if you’re just hailing a driverless car, then that personal element is no longer so important.

Ford and its peers are taking notes from tech companies like Netflix and Amazon, realizing that recurring revenue can be more profitable and more sustainable than one-time sales. “Transportation as a service” and “mobility as a service” (MaaS) are terms you’re going to be hearing a lot more of over the next five years as auto companies aim to transition to subscription models.

The idea might sound far-fetched, but it’s already being done. Volvo, for one, debuted a monthly subscription service for its XC40 just last year and already expects 10% of revenue for the vehicle to come from those subscriptions. This is with a non-autonomous vehicle, mind you. Just imagine how much more popular a subscription to a fleet of driverless cars is going to be.

For some added perspective, consider this:

• Markets and Markets forecasts the smart transportation market to be worth $220.76 billion by 2021, at an annual CAGR of 25.1%.

• Deloitte has stated that by 2025, it will be “unnecessary for [city] residents to own a private car.”

• ABI Research forecasts global MaaS revenue to exceed $1 trillion by 2030. That may seem like a long time away, but the growth will be parabolic the whole way up.

As for where investors should be looking, Ford Motor Company isn’t a bad bet. The company’s stock is fairly cheap (even after this week’s rally) and pays out a hefty 5.28% dividend.

For true growth, though, component suppliers are the obvious profit opportunity when it comes to driverless cars. Autonomous driving equipment supplier Mobileye, for instance, was acquired for $15 billion by Intel last year.

We tipped our readers off to Mobileye’s stock back in 2014, but it wasn’t the only autonomous vehicle stock we had in mind. In fact, I have an even bigger opportunity in my sights today: a tiny, $180 billion stock manufacturing a crucial device for autonomous vehicles.

This company has been providing the technology to the military for years, but it’s now on the brink of supplying every major automaker in the world. Frankly, it’s my top speculative stock on the market right now, which is why I’ve put together all the details for you right here.

Until next time,

Jason Stutman

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