Ford Still Thinks Small Cars Are the Future

Despite a drop in oil prices and renewed market interest in trucks, Ford is pushing ahead with plans to make their US lineup look like their European offerings.

By Brendan Moore

11.05.2008

There is no doubt that Ford appreciates the fact that gasoline has dropped in price lately, along with oil prices, and that this has made selling the new 2009 F-150 trucks a lot easier than even a couple of months ago. Ford had to push back the launch of the new F-150 from its original window of late summer because the market environment was just so toxic for anything that looked like an SUV or a pickup truck.

But this respite from high gasoline prices, although welcome, is viewed as temporary by the executives at Ford. In particular, by Alan Mulally, the CEO of Ford.

So Ford is still moving with all due haste towards getting as many of its small, fuel-efficient cars in the US market as soon as possible. Ford’s point of view is that the severe economic recession in the US will push consumers towards small, fuel-efficient cars, and when the recession is over, oil (and therefore gasoline prices) will go up once more as demand increases. When the price of gasoline increases again, then, voila, Americans will want vehicles that get great fuel economy. Ford surmises that either way, they need to be selling vehicles that get really good fuel economy.

What Ford believes, fundamentally, is that the US consumer preference for large thirsty vehicles has changed forever. Ford believes that Americans will want mostly small to mid-size cars that are miserly in their use of fuel. They are betting everything on this premise with their current and future product strategy. If they are wrong, even for a short time (say, the next three years), they will be out of business. They don’t have enough cash reserves to weather a mistake like that. If they are correct, then Alan Mulally will look awfully clever.

It is somewhat of a paradox that Ford, who was in the most precarious position of all the Detroit automakers when Mulally came on board, is now arguably in the best position. Ford borrowed a tremendous amount of money when the credit markets were still generous and so therefore has enough in the way of cash reserves to ride out the current poor market conditions, and does not have to starve important parts of the company to do so.

Its counterparts in Detroit are not so fortunate. Chrysler has cash, but no product in the pipe to possibly save the company from its deepening decline. GM has plenty of good product in the pipe, but is facing such a severe cash crunch that they have delayed new product launches and are pinching off R&D.

Hmmm – maybe those two should get together.

Just some black humour there.

The future will tell if Mulally has made the right choice in terms of product strategy, and the future will also tell if Ford can be a profitable company with a lineup of mostly small cars. They carry it off in Europe, but the prices they get for their cars there are higher than the prices they historically have been able to command for their cars here in the States.

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Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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3 Comments

  1. I think another part of their thinking is that if they can figure out how to break even or make profit on Focus or Fiesta – they will be able to squeeze out more profit from the trucks as well.

    Besides – it is a marketing excercise – Ford has to offer these cars to be perceived as a true competitor to Toyota and Honda … otherwise they will remain perceived as “Truck and Mustang builder”

    Igor

  2. I hope Alan Mulally and Ford have enough time and money to properly execute the One Ford plan to unify the global product lineup. I hope Mulally has killed the Not Invented Here syndrome in Dearborn; a watered-down (“Americanized”) Fiesta (or Focus or Kuga or…) is the last thing anyone wants.

  3. I don’t think there is any danger of Ford over-reacting to gasoline prices. They are not dropping large vehicles or under-investing in trucks (with the glaring exception of the Ranger) but simply addressing the hole in their competitive line-up.

    Assuming the economy allows enough time, they will eventually have strong contenders across the line-up, with no apologies for half-hearted models.

    I think Mulally has gotten the message across that most outsiders would consider obvious: a car company must find ways to make cars profitably. Yes, there are many challenges to making small, inexpensive cars at a profit – that’s what managers and engineers get paid to figure out, with the help of employees at all levels.

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