Analysis

The myth of Ford's decline

The automaker is doing very well. So why did its CEO just get ousted?

It's not every day that a major corporation suddenly ousts its leader. And it's doubly dramatic when that company is a 114-year-old staple of American industry. So when automaking giant Ford tossed out CEO Mark Fields on Monday, observers could hardly be blamed for assuming there must be real problems with the company.

Except those problems are proving rather hard to spot.

Ford, along with the rest of the U.S. auto industry, certainly got creamed by the Great Recession. But since then, its overall revenue has steadily climbed upward — from $116 billion in the worst of the economic collapse to $152 billion in 2016. The company's profits bounced around a bit since 2008, but they've stayed in positive territory and remained reasonably strong, with a respectable $4.6 billion in 2016. In fact, Ford's pre-tax profit last year was its second-best in history. A whopping $9,000-a-person in extra profit-sharing was handed out to 56,000 company workers.

Profits in the first quarter of 2017 did drop 30 percent compared to the first quarter of last year. But that could easily be a blip. Ford has also dealt with declining auto sales, a recently scuttled effort to build a $1.6 billion auto plant in Mexico, and a few recent safety recalls. Yet falling sales are a problem across the entire industry, and the plant opening was complicated by the anti-outsourcing political atmosphere of the new Trump administration. The safety recalls, while certainly embarrassing, were hardly catastrophic.

Fields also showed business savvy: growing sales in China, resuscitating Ford's luxury Lincoln brand, and improving fuel economy by using aluminum in trucks. Overall, his tenure is defined by strong and steady improvement in the all the basic measures of a business' health.

So what gives?

Well, Ford's stock price also went into a slow downward slide. It was around $17 per share in 2014, when Fields became CEO. Now it's a bit over $10 a share. That's not as bad as things got in 2012, and it's definitely not as bad as the 2008 aftermath. Still, shareholders don't like falling stock prices. And shareholders run the governance of public corporations, voting on major decisions and electing the board of directors, who then hire the CEO. Hence Fields' dismissal.

But there's a reason I didn't include stock price in "the basic measures of a business' health." Companies only get money from the financial markets when they sell new stock. And they rarely do that: American businesses usually raise financing by borrowing or through retained earnings.

As much as business reporting regularly treats stock price and market capitalization as big things companies need to worry about, neither Ford's workers nor its customers are affected by the fall-off in its share price. Only the shareholders are hurt, because now they might make less money if they sold off their Ford stock to someone else.

So why retool a company based on something so removed from its fundamentals?

Well, defenders of Wall Street say that everyone who buys and sells stock has an incentive to closely study companies and the markets they inhabit. Stock traders may spot problems that management misses. So maybe Ford's stock price doesn't signal a problem now, but one coming down the road.

Specifically, industry observers point to three big technological changes about to upend the industry: electric cars, ride-sharing, and driverless automobiles. The hit on Fields is he wasn't doing a good job readying Ford for those changes. So financial markets punished him.

But this narrative also gets a whole lot fuzzier the closer you examine it.

Under Fields' leadership, Ford made plans to invest $4.5 billion in electrical vehicles and $1 billion in driverless technology. The company is already putting money into startups working in artificial intelligence, autonomous vehicle technologies, and more. Fields and Ford even chose to keep most of the company's work in these areas confidential, so stock traders couldn't know the full extent of the company's efforts.

Wall Street was clearly spooked by the narrative that Fields wasn't preparing Ford for the future. But there's scant evidence that narrative is, you know, true — or that the company itself even really believes it. (Tellingly, Fields' replacement is Jim Hackett, best known for successfully retooling a comparatively tiny office furniture company.)

If you read between the lines, observers and experts basically admit Fields was sacked simply for not "communicating" well enough with Wall Street and Ford's shareholders. And sure, communication is important. But if Tesla is sexy in stock traders' eyes and Ford isn't, it seems perverse to blame Fields for that. Keep in mind Wall Street drove the 2001 tech bubble, nearly destroyed the global economy with the housing crisis, and is now arguably driving secular stagnation. Contrary to the image of investors as cold-eyed economic rationalists, financial markets are often driven by cultural fads and crowd panic.

So maybe Fields was properly preparing Ford for a future of driverless electric cars and mass ride-sharing. And maybe he wasn't. The real question is whether you trust Wall Street to make the call.

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