Fixing Quality Problems Tops Ford’s To-Do List

Ford said Thursday it will cut F-150 production at a Detroit-area factory next week to just one eight-hour shift, from three shifts. Its other F-150 plant, in Kansas City, will run two of its three shifts next week, with both factories returning to their normal round-the-clock schedules on Feb. 15.

The cuts mark a significant escalation in the chip-shortage problem that has disrupted the auto industry globally in recent weeks.

The F-150 is the nation’s top-selling vehicle and Ford’s profit engine, fueling most of its global income.

Ford is scheduled to report earnings Thursday after the closing bell.

Cuts in production can have an immediate effect on an auto maker’s financial performance because revenue is booked as soon as cars are shipped from the factory to dealerships.

Most major auto makers have been forced to curtail at least some factory output in recent weeks amid the chip shortage, which sprung up as the auto industry and other sectors were scrambling to rebound from shutdowns last spring.

Chip makers globally have struggled to keep up with orders, too, as demand for laptops, gaming systems and other personal-electronics has surged during the pandemic, driven in part by people being stuck at home.

Remote work has also fueled a boom in computing services and the data centers behind them—all of which is straining availability and leading to higher chip prices.

At the same time, car companies have in recent years become bigger purchasers of semiconductors, using them in everything from engine-control units and transmissions to the large tabletlike displays that are embedded in the dash board.

The Covid-19 crisis led many auto manufacturers to pull back on production early on in the year and then dial back their forecasts for the remainder of 2020. But demand for cars and trucks has since rebounded faster than expected, putting strains on certain critical parts, including computer chips.

The disruption comes at a critical time for Ford, which has been trying to crank up production of a redesigned F-150, the first overhaul of its flagship vehicle in about six years. Company executives have stressed the importance of a smooth rollout of the trucks

The company also continues to grapple with nagging vehicle-quality problems, an obstacle in Chief Executive Jim Farley’s bid to boost profitability at the nation’s No. 2 auto maker.

Ford has signaled it will report higher warranty costs for 2020 when it posts fourth-quarter and full-year financial results, expected after market close Thursday. Paying for repairs it is obligated to fix has eroded Ford’s bottom line by an additional $1 billion to $2 billion annually over the past few years, compared with historical norms, company executives have said.

Mr. Farley, who took over in October, has expressed frustration over Ford’s quality issues, which have also dinged the company’s rankings in third-party quality surveys. The CEO has said reducing those expenses is among his top priorities as he tries to tighten operations in Ford’s core car-making business while also pursuing future bets on data services and other technologies.

“We haven’t fixed the issues that have held us back in our automotive business. They include warranty costs, which remain unacceptably high,” Mr. Farley told analysts in October.

Ford is likely to report its third straight year of warranty expenses that top $4 billion, after averaging $3.1 billion during the six years before that, stretching back to 2012, regulatory filings show.

The elevated expenses are complicating a turnaround effort at Ford, which on Thursday is likely to post its fifth straight annual decline in operating profit. Mr. Farley has said he wants Ford to achieve an 8% global operating margin, up from 1.2% in the pandemic-plagued first three quarters of 2020, and 4.1% in 2019.

Ford’s ballooning warranty costs come as it and other auto makers pour billions of dollars into the development of electric vehicles, an area that has drawn investor interest because of its growth potential, but for now is generally a money loser for the car companies. Its quality problems also have exacerbated Ford’s profitability gap with rival General Motors Co. , which posted a global operating-profit margin of 6.1% in 2019.

Over the first nine months of 2020, Ford incurred about $3.9 billion in warranty expenses, vs. about $1.7 billion for GM, regulatory filings show.

Improving margins hinges largely on Ford’s ability to improve product quality and vehicle launches, UBS Group AG analyst Patrick Hummel said in a November research note.

Ford executives have said the roots of the quality problems run the gamut from design and engineering flaws to manufacturing flubs to subpar parts from suppliers.

Lisa Drake, who Mr. Farley appointed last year to a new role of operations chief for North America, said in December that Ford is using data from its cars and dealer feedback to flag problems more quickly. Ford also is holding suppliers more accountable for flawed parts that lead to problems, she said.

Ford’s standing in some influential quality rankings has slid amid the problems.

In Consumer Reports magazine’s annual reliability ranking in November, the Ford brand fell six spots, to 22nd among 26 car brands. Ford’s other brand, the luxury Lincoln marque, was rated last.

Consumer Reports pointed to the redesigned Explorer SUV that rolled out in 2019, the first significant revamp of the popular SUV in about eight years. Survey respondents reported problems with the transmission and electronics among other troubles, the magazine said.

Ford executives have said the overhaul of the company’s Chicago factory to build the new Explorer was overly ambitious and complex, which led to quality problems that have since been ironed out.

O.C. Welch, a Ford dealer in Hardeeville, S.C., said Ford has increased its efforts to keep customers happy when they are experiencing trouble.

“Ford has had some issues, but so far customers have stayed pretty loyal,” he said. “Ford is not leaving anybody out to dry.”

Corrections & Amplifications
Ford’s fourth-quarter and full-year financial results are expected after market close Thursday. An earlier version of this article incorrectly said Tuesday. (Corrected on Feb. 4.)

Write to Mike Colias at [email protected]