(Bloomberg) -- The future of the auto industry is being tested, and the travails of Ford Motor Co. and Toyota Motor Corp. may offer a few lessons.
That would follow some already drastic shifts announced earlier in the year. To deal with a sagging sedan market, Ford has said it will mothball certain models in North America, plus it’s doubled down on cost cutting, with a goal of slashing expenses by almost $26 billion over the next four years. Investors were unsympathetic, sending the stock down 9 percent since January.
Meanwhile, Toyota executives on a recent earnings call were also repeatedly mentioning the C-word. Toyota only spends about 3.6 percent of sales on R&D, less than its peers, but still there was lots of talk about a once-in-a-century revolution and automation with a human touch, all of which requires investment.
Investors mainly ignored the fact that Toyota’s uptick in earnings came from cutting costs at about the same pace it always has. The Japanese firm also presented a dismal outlook for sales, yet its shares rallied as much as 3.9 percent as the call progressed.
Like any car company headed into uncertain territory, Toyota and Ford are going down the cost-cutting route. The reductions at Ford have been far more pronounced than at Toyota.
Investors shouldn’t become complacent, though. Take one of Toyota’s biggest expenses in North America. Marketing incentives have steadily ticked up, helping the company boost sales. But they’re proving difficult to shed without volumes dropping off.
The big question is how deep cost cutting can go without eroding R&D expenditure.
Ford spends more than 5 percent on R&D as a portion of net sales. It’s got 16 electric vehicles coming to market by 2022, and over the same period it intends to slash billions from the budget. Earlier this year, Ford unveiled an $11 billion plan to invest in electrification. R&D increased 9.6 percent last year, compared with Toyota’s 2.6 percent. Such outlays obviously weigh on profit, and represent spending on an undetermined future. Toyota, for its part, only recently established an electric car unit, after focusing on solid state batteries for many years. Its share of the hybrid car market has also been falling.
This single-minded focus on cost cutting isn’t new, and it hasn’t always gone according to plan. To limit expenses, automakers have traditionally put pressure on suppliers. That’s led to a consolidation of parts producers, but has also created an undesirable dependence on a handful of operators. The fire at Meridian Magnesium Products of America is one example, affecting not only Ford but General Motors Co., BMW AG and Fiat Chrysler Automobiles NV. Goldman Sachs Group Inc. estimates Ford will take a $350 million hit to Ebit for each week that production is down.
Carmakers, and investors, are understandably concerned about how to navigate the pothole-filled road in front of them. But they would do well to look up and think about their ultimate destination every once in a while.
©2018 Bloomberg L.P.