Ford's new CEO hopes to win over Wall Street and boost profit margins by doubling down on trucks and Mustangs

• On his first day as CEO of Ford, Jim Farley shook up his management team.
• CFO Tim Stone departed, and another executive was tasked with focusing exclusively on the Lincoln brand.
• But the biggest news was Ford's declaration that it would hit an elusive 8% annual profit margin, a target it has missed for a decade.
• Farley, known as a demanding leader, has the new vehicles coming to market that he needs to bring in lots of cash.
• But he has to manage Wall Street expectations driven by the runaway success of Tesla, negotiate a shift to electric vehicles, deal with the ongoing coronavirus downturn, and stare down an inevitable sales decline after a five-year boom.

Ford has a new CEO, and he's making changes.

Jim Farley took over from Jim Hackett (as announced in August) on Thursday, and other changes soon followed. Ford announced that CFO Tim Stone, who had worked for Amazon prior to the automaker, was departing, while Lincoln head and chief marketing officer Joy Falotico would relinquish the CMO title and focus on bolstering the luxury brand's reinvention, especially in China, the world's largest growth market for autos.

Critically, Kumar Galhotra, who has been rising through the Ford leadership ranks since he ran Lincoln and now oversees Ford's global footprint, remained in place, suggesting that Farley wants some continuity.

The management shakeup makes clear Farley's intent to do what Ford's last three CEOs couldn't do: deliver an 8% profit margin that the company has been promising Wall Street since the financial crisis. But he's not going to do it by playing at making Ford "the next Tesla."

The $11 billion solution

Hackett's goal at Ford, often derided for being too slowly pursued, was to get as much excessive cost out of the carmaker's operations as possible and maximize the contribution that perennial bestsellers, such as the F-Series pickups, could make to an $11 billion restructuring.

That made sense. Ford emerged from the Great Recession as the only Detroit automaker to avoid bankruptcy. But margins were trapped in a 5-6% range, and both Hackett and his predecessor, Mark Fields, struggled with that embedded problem as Ford's stock price was cut in half over the past five years, even as the profitable US auto market boomed on the back of cheap gas and resurgent pickup and SUV sales. Meanwhile, upstarts like Tesla put Ford's market capitalization in the rearview.

Farley is seen as a hard-charging leader who made his bones at Toyota and was instrumental in making the Lexus luxury brand into a major challenger to BMW and Mercedes. He came to Ford in 2007, and when Hackett replaced Fields in 2017, Farley and Joe Hinrichs (who left Ford earlier this year) managed the auto business while Hackett tried to recast Ford as a company transforming itself to compete when it came to electric vehicles and self-driving cars.

New vehicles and a resilient market

Farley takes over at a time when Ford has critical new vehicles hitting the market. The carmaker rolled out a redesigned F-150 pickup right after the COVID-19 pandemic forced it to idle all its US and European production for more than a month. A rebooted Bronco SUV has raked in more than 100,000 reservations, and the Mustang Mach-E, Ford's play at taking on Tesla head-to-head, goes on sale this fall.

A post-coronavirus US market recovery should help Ford. Sales cratered during the widespread pandemic shutdowns, but Ford's annual pace has bounced back to nearly 16 million. That's well off the near-records of 17-million plus from 2019 and 2018. Ford has shed slow-selling sedans and concentrated on large pickups and SUVs, vehicles that have been boosting average transaction prices to historic levels: nearly $36,000 in September, based on J.D. Power data cited by Bloomberg. That means Farley should have money flowing through Ford's business, and the pandemic crisis wasn't so severe that it forced Ford to raid the roughly $30 billion on its balance sheet.

As much as Wall Street wants Ford to join the rush to electrification that Tesla's epic stock market rally in 2020 has symbolized (shares are up over 400%, and Tesla's market cap is a staggering 15 times Ford's — $390 billion versus $26 billion), Farley's plan is to retrench.

The carmaker plans to allocate "more capital, resources and talent to its strongest businesses and vehicle franchises," and you don't have to read between the lines to figure out that the truck-and-Mustang company is going to double down on trucks and Mustangs.

An old story trumps a new narrative

Investors craving a new narrative will be disappointed, but Farley has a more serious concern on the horizon. Halfway through Hackett's restructuring, with costly product launches and COVID-19 continuing to weigh on the business, the new CEO has to prepare for an inevitable, prolonged sales downturn.

The pandemic's shock effect crushed sales for a quarter, but the US market could plausibly post a 16-million-plus total for car and light truck sales in 2020, extending a cycle that has endured since the end of the financial crisis. Automakers have been pulling all kinds of levers to boost sales, and with interest rates at rock-bottom levels, Farley ought to get another year or two of profits that he can try to elevate to that 8% mark by continuing to improve what Hackett termed Ford's "fitness."

In that sense, it would be a mistake to assume that Farley's goal is to erase the memory of Hackett and his deliberate revamping of Ford.

"After being in the industry for decades as a product planner, I thought I knew a thing or two," Farley told Business Insider when he got the CEO job. But Hackett's guidance "forever changed us as leaders at the company," he said.

"We're all in. It's what you'll see in the next generation of vehicles. That was all informed by what Jim gifted us with. I can't imagine Ford without it."

What Hackett — and Fields, and even financial-crisis Ford savior Alan Mullaly before him — couldn't give Farley was an 8% annual profit margin. Over the next year and a half, Ford is going to work hard at rebranding itself to investors and consumers, but for Farley, that 8% is job one.