Ford Motor and Choosing to Lose

It was big news on Monday that Ford replaced its CEO with the head of its new mobility division. The company’s chairman, Bill Ford Jr., made a point of saying the carmaker is pivoting from conventional production to new kinds of vehicles and new advanced manufacturing processes. Is Ford is finally getting serious about becoming a 21^st carmaker focused on “transportation as a service”? Or is this move more symbol than substance?

With Tesla’s market valuation recently speeding past both Ford and GM, investors are clearly interested in bold changes in the industry. But the investor response to new CEO Jim Hackett has been tepid.

That’s because it’s going to take a lot more than a new CEO to transform the 114-year-old firm. This is the company, after all, that gave us “Fordism”: the wildly successful 20^th century manufacturing strategy that sought efficiency through rigid scale economies, assembly lines, and global supply chains. For decades the car industry has been dominated by a few giants with heavy investments in physical assets and intricate processes.

Ford epitomizes a general rule for large firms. As Clayton Christensen has argued, these companies are structured around reliability at scale, not innovation. To move a giant like Ford away from its longstanding focus on the internal combustion engine, injection-mold manufacturing, and individual car ownership is a huge undertaking.

Whenever a big company faces disruption, it always has the option of “choosing to lose.” Instead of trying to compete head-on in this new context – which requires massive investment with no guarantee of success – it can hold on to what it has and milk it as long as possible. Executives will never admit this strategy, and they might make symbolic or superficial changes toward this new reality to prop up sales. But they’re still choosing to lose. Deep down they’d rather keep doing what they’re comfortable with, rather than exercise strong leadership to turn the company around.

That’s clearly what Edward Lampert has done with Sears. Since buying the retailer in 2005, he focused on cutting costs and extracting money from real estate and other secondary assets. Instead of trying to compete with Amazon, he’s underinvested in merchandising and gradually shuttered stores. Along the way the retailer has tried a variety of new concepts around its marquee brands, but it hasn’t fundamentally changed how it does business. In March it told investors that it might not survive as a going concern.

And now it looks like General Motors is doing the same. In the past five years, GM has spent $17 billion of its cash not to invest in future technologies, but to buy back its stock. It’s still paying a 4.6% dividend. Against that it has a few token investments that get a lot of media play, such as its $500 million investment in Lyft. Meanwhile it has been pulling out of unprofitable overseas markets to concentrate on the US cash cow.

Maybe GM learned a lesson from the EV-1, the electric car it developed in the 1990s. The limited-edition car proved popular with consumers, but internal resistance doomed the project in 1999 before it gained much traction. None of its divisions wanted it, so it had to market the car by itself on the corporate nameplate. Imagine if GM had stuck with the EV-1 and kept investing in it. What if Cadillac had had the gumption to build on that head start to develop a Tesla-like dream-car?

From the perspective of shareholders and senior executives, what GM and Ford are doing is completely rational. Investors choosing to lose will still make plenty of money along the way. The net present value of immediate cash flows from milking the business most likely will exceed the cash from a long-term turnaround and transformation effort that won’t pay off for decades.

Choosing to lose won’t be good for the shrinking workforce, nor for society – which will lose a major economic force that fuels many other American industries. The companies that do bring on the future will have fewer competitors to stimulate innovation and discipline around price and quality.

What does a big company look like when it isn’t choosing to lose? Take General Electric, which is pouring billions into new additive manufacturing technologies and industrial internet software. It recently bought two leading metal 3-D printing companies, and is converting hundreds of factories to software for the emerging internet of things. (It is also spending tens of billions on stock buybacks, but that’s arguably connected to selling off its huge finance unit.)

GE aims to become one of the biggest software houses in the world, and moved its headquarters to Boston partly to revamp its culture around new technology and get access to MIT and Harvard engineers. Investors still haven’t warmed to the company, but CEO Jeffrey Immelt is truly betting the company on the transformation.

Maybe Jim Hackett can turn things around at Ford. He can start by reducing the firm’s 5.5% dividend (stock buybacks have been minimal), and then work on wholesale change. Anything else is just choosing to lose.

This blog was originally published online by Forbes magazine on May 24, 2017, at https://www.forbes.com/sites/richarddaveni/2017/05/24/ford-motor-company-and-choosing-to-lose/#2b542f3b534a
Copyright Forbes 2017

New Ford CEO Jim Hackett with chairman Bill Ford Jr.: Serious about a digital pivot? (AP Photo/Paul Sancya)