Ford’s Warranty Costs Rose $800 Million In The Second Quarter

Good morning! It’s Thursday, July 25, 2024, and this is The Morning Shift, your daily roundup of the top automotive headlines from around the world, in one place. Here are the important stories you need to know.

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1st Gear: Warranty Costs Are Killing Ford

Ford just cannot get out of its own way when it comes to quality issues and warranty repairs. The automaker missed its second-quarter earnings targets by a long way, and it said a surge in warranty repair costs for older vehicles was to blame.

Quality issues have been a big problem for Ford for years now, but an $800 million spike in the second quarter is an almost otherworldly amount of money to spend on fixing cars you didn’t get right the first time. CFO John Lawler said the expenditure was a “one time” jump due to issues with cars built in 2021 or earlier. From Bloomberg:

“We can’t read this quarter as the year is coming off track — it’s not,” Lawler said.

Ford reported adjusted earnings per share of 47 cents, well short of the 67-cent average estimate of analysts surveyed by Bloomberg. Second-quarter revenue rose 6.2% to $47.8 billion.

[…]

“The warranty challenges are frustrating for investors, as they come on the heels of many other warranty issues in past years and at times drag results without warning,” Barclays analysts led by Dan Levy wrote in a research note.

Last year, Ford spent $4.8 billion fixing customers’ cars. Early this year, the automaker held some 60,000 redesigned F-150 pickup trucks in lots around Detroit for extra quality checks. Chief Executive Officer Jim Farley said that helped the company avoid 12 recalls and said that would be the process going forward for all new models.

Farley said Ford is now “testing vehicles to failure” and running them “at extremely high mileage” to discover quality problems before they reach customers. It will take as long as 18 months to see the benefits of that new process show up in lower warranty costs.

“It makes our quarters lumpy and it’s challenging, but it will reduce warranty over time,” Farley said.

Ford reiterated its earnings outlook for the year, forecasting profit of $10 billion to $12 billion before interest and taxes. But that includes lower guidance for Ford Blue, the unit that makes gas-powered vehicles and hybrids, due to the quality woes. The automaker now expects Ford Blue to earn $6 billion to $6.5 billion before interest and taxes, down from a previous forecast of $7 billion to $7.5 billion.

I know spending this much money on warranty repairs is an anomaly, even for Ford, but damn guy. You all have to get your shit together. Having to fix this many cars under warranty is a great way to make buyers feel your product is unreliable, and maybe they’ve got a point.

2nd Gear: Steallantis Could Axe Brands

Stellantis may turn to drastic measures to fix its weak margins and high inventories in the U.S. That means we could see the automaker kill off underperforming brands in its massive portfolio, according to CEO Carlos Tavares.

It’s definitely a pretty big reversal from Tavares. Back in 2020, when Fiat Chrysler merged with PSA and created a 14-brand behemoth, the CEO said every last one of them has a future. I suppose some of those futures are just shorter than others. From Reuters:

“If they don’t make money, we’ll shut them down,” Carlos Tavares told reporters after the world’s No. 4 automaker delivered worse-than-expected first-half results, sending its shares down as much as 10%.

“We cannot afford to have brands that do not make money.”

The automaker now also considers China’s Leapmotor as its 15th brand, after it agreed a broad cooperation with the group.

Stellantis does not release figures for individual brands, except for Maserati which reported an 82 million euro adjusted operating loss in the first half.

Some analysts say Maserati could possibly be a target for a sale by Stellantis, while other brands such as Lancia or DS might be at risk of being scrapped given their marginal contribution to the group’s overall sales.

There haven’t been very many brands killed off since General Motors shuttered Saturn, Saab, Hummer and Pontiac during its bankruptcy in the late aughts.

Tavares is under pressure to revive flagging margins and sales and cut inventory in the United States as Stellantis bets on the launch of 20 new models this year which it hopes will boost profitability.

Recent poor results from global carmakers have heightened worries about a weakening outlook for sales across major markets such as the U.S., whilst they also juggle an expensive transition to electric vehicles and growing competition from cheaper Chinese rivals.

The CEO said he would be working through the summer with his team in the U.S. on ways to improve performance and cut inventory, a job he said is considered done in Europe.

High-margin offerings like Ram pickups and Jeeps have driven Stellantis’ profits in the U.S., but the company’s weak margins posted on Thursday raise some questions about efficiency.

3rd Gear: Volvo Walks Back All-EV Push

Volvo is the latest automaker to walk back its EV-or-bust product strategy as the growth of electric vehicle sales continues to slow. It’s pretty surprising given Volvo was so adamant about its transition to all-electric vehicles by 2030. From Automotive News:

Volvo Chief Commercial Officer Bjorn Annwall vowed last year that the automaker would not “sell a single car” globally that is not fully electric after 2030.

“There’s no ifs, no buts,” Annwall told Automotive News in June 2023.

Now, faced with slumping EV sales in key markets such as China and the U.S., Volvo’s leadership could be reconsidering going all-in on battery power.

During a quarterly investor webcast, Volvo CEO Jim Rowan said he’s a “huge believer in electrical propulsion,” which he called a better technology than the internal combustion engine.

But Rowan acknowledged it will “take time to bridge different parts of the world for full electrification.”

Hybrids “form a solid bridge for our customers that are not ready to move to full electrification,” he said July 18. “Our plug-in hybrids and mild hybrids remain very strong and popular with our customers, and we will continue to invest in this lineup.”

Volvo dealerships in the U.S. said they expect to sell hybrid sedans, wagons and crossovers well beyond 2030:

“We will have to, or we will die,” said a dealer who requested not to be identified. “Volvo has gotten way out over their skis with this EV-only strategy.”

In the next decade, Volvo will focus on supplying plug-in hybrids while the EV market matures in the U.S. and elsewhere, said a person familiar with the company’s plans.

“They are keeping their fingers crossed that PHEVs will start to be looked at favorably by the different governments,” said the person, who asked not to be identified while speaking about internal matters.

Volvo seeks to tap platforms from parent Geely Group to expand its PHEV range. In late May, Geely finalized a joint venture with Renault Group to develop and build more efficient internal combustion and hybrid engines.

The Swedish brand also is considering updating its SPA1 platform, which supports mild- and plug-in hybrid variants of the XC90 and XC60 crossover moneymakers.

Volvo is sort of just following the market right now. EV adoption continues to rise in the U.S., but the pace of growth has slowed dramatically.

The automaker’s EV lineup has fallen on its own face this year. In the first six months of 2024, deliveries of the battery-powered XC40 and C40 crossovers dropped 74 percent to just 1,981 units. That is not sustainable.

4th Gear: Nearly 300,000 BMWs Recalled For Cargo Rail Failures

BMW is recalling 291,000 X3 compact crossovers because of an issue with the rear cargo rails. Apparently, they can detach in the event of a crash, and the last thing you want in a crash is a projectile flying at your head. Right? From Automotive News:

The attachment between the rear cargo rail and the vehicle body could become damaged and separate, increasing the risk of injury, according to BMW documents filed with NHTSA. The recall covers certain 2018-23 BMW X3 sDrive30i, X3 xDrive30i, X3 M40i and X3 M models.

In August 2022, the German automaker became aware of a rear-end crash involving a 2022 BMW X3, and the owner retained legal counsel. BMW North America in October and BMW AG in January were legally served in this matter. BMW AG supplies the rear cargo rails.

The vehicle involved in the crash was made available for inspection by BMW in March. Over the following months, an engineering investigation was initiated, including examining crash test protocols and checking worldwide regulatory requirements. On July 10, BMW conducted the safety recall voluntarily, according to the NHTSA documents.To remedy the fault, BMW will remove and replace the bolts attaching the rear cargo rails to the vehicle body.

Dealers were first notified of the recall on July 17, and X3 owners should be getting a letter about their faulty rear cargo rail by August 30.

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