FEATURES/Cross Border | Feb 23, 2012 | 9173 views

Why Ford Should Worry

Chief Alan Mulally and his executives are rightfully proud they avoided bankruptcy. But they're not safe yet. Not by a long shot
Why Ford Should Worry
Image: Sam varnhagen/ Ford Motor Co.
LONG ROAD AHEAD CEO Alan Mulally is sitting pretty at Ford, but he shouldn’t get too comfortable


he coronation went exactly according to Ford’s script. At the North American International Auto Show in Detroit, 2,400 reporters hushed as video screens the size of tractor trailers flooded their vision. A booming voice shook Joe Louis Arena: Two household names, Toyota Camry and Honda Accord, dominated the midsize car business last decade. “Then,” said the voice, “something changed.” Their sales and market share ran flat in 2008. When the recession hit, they plummeted. “What you might not realise is that Camry and Accord never recovered.” Camry sales fell 31 percent between 2007 and 2010. The Accord fell 28 percent. Both slid further after the 2011 quake in Japan.

But not the Ford Fusion. Its sales rose 66 percent in the last four years. By 2011, it passed the Accord, but still trailed the Camry and Nissan’s Ultima.

Cue the loud music, the smoke machine and the car: The reinvented Fusion, a pretty sedan with premium features like technology that keeps you in your lane or helps you parallel park. When it goes on sale later this year, it’ll be available with a variety of fuel-efficient power trains: Gasoline, hybrid and plug-in hybrid that Ford says will get the equivalent of 100mpg—better than a Chevrolet Volt or a plug-in Toyota Prius. No price just yet.

The message is unmistakably aggressive, arguably arrogant: Ford just redefined the midsize-car market. The rest of the field, including General Motors’ redesigned Chevrolet Malibu and the popular Hyundai Sonata, should pack it in. “I think we’re going forward with some quiet confidence,” Ford’s president of the Americas, Mark Fields, said later that evening over a filet mignon dinner with reporters at the stately Detroit Athletic Club. Aggressive? Nah. “We’re just laying out some facts.”

As anyone in this town will tell you, believing one’s own hype in the car business is more reckless than texting while driving. Just ask General Motors.
Ford should keep this in mind. While it would have you believe that the new Fusion is the latest in a string of product home runs—stylish, fuel-efficient cars, loaded with technology, that consumers around the world are dying to drive—here in the US facts suggest otherwise.

Let’s start with the Fiesta, Ford’s smallest car. Introduced in 2010, it had a decent first year, but it’s already fading. In the last two months of 2011, Chevrolet’s new Sonic handily outsold the Fiesta, which is among the highest priced in the segment. Ford ended the year with 126 days of supply, but says that’s typical for December. Dealers generally like to have 60 days’ supply or less.

Then there’s the Focus, Ford’s new compact. It, too, has great looks and lots of premium features (and a premium price). But it was outsold by the Toyota Corolla, Honda Civic, Chevy Cruze and Hyundai Elantra in 2011. Launch issues last spring hurt production—some bad dashboards and transmissions—but those seem to have been ironed out. Now there’s a glut: 89 days’ worth.

There’s no denying that the new Ford Explorer, now more car-like and fuel efficient, is a bona fide hit. And sales of Ford’s bestseller, the F-series pickup, rose 11 percent as the housing market started to improve (but Chevy and Ram trucks sold faster, so Ford lost market share). Some of Ford’s other best-known products lost ground in 2011, too, including the Taurus, the Mustang and the Flex. Oddly, Ford’s hottest sellers are products that are in the last year of their life cycle and about to be replaced: The Fusion and the Escape. Best guess: Bargain shoppers are scooping up great deals on these out going models.

Ford ended the year with 16.5 percent market share, one-tenth of a percentage point better than in 2010. But it achieved that only by shoveling more cars into commercial fleets and rental lots. Counting only showroom sales, Ford lost an estimated two-tenths of a point. (This, by the way, will hit top executives in the wallet, since their bonuses are tied to retail share growth.)

In fact, Ford sells more of its cars to rental agencies and other fleet customers than does any other major carmaker. In 2011 about 32 percent of the 2.1 million cars Ford sold went to fleet customers (45 percent of Focus sales). GM, by contrast, sold 23 percent to fleets. Most others were below 10 percent. Why does it matter? Because fleet customers buy in bulk, they tend to pay less than showroom buyers, and that means carmakers earn less profit on those sales. While fleet sales aren’t necessarily bad, most car companies prefer to limit them. Toyota and Honda, for instance, sell very few cars to fleets.

Another interesting statistic that challenges conventional wisdom: Ford recalled 3.3 million vehicles in 2011, almost as many as Honda (3.9 million) and Toyota (3.5 million), according to the National Highway Traffic Safety Administration. Meanwhile, GM recalled 500,000 vehicles, and Chrysler, usually tagged as having the worst quality among the domestics, recalled 773,000.

This article appeared in the Forbes India magazine issue of 02 March, 2012
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