Notebook > Money

Ford tough

Money | Hard times just keep getting harder as the U.S. automaker learns that it costs to cut

Issue: "Exit strategies," Aug. 5, 2006

Sometime next year, customers who head to a Ford dealership to look for a new minivan will have to be ushered by salesmen to the used cars.

By the end of 2007, Ford Motor Company, an icon of the automotive industry and one of the world's strongest brands, won't have a minivan to sell.

And it's not by choice. In 2004, Ford redressed its flagging Windstar minivan, switched the nameplate and released it as the "all-new" Freestar for the new model year. But consumers balked at the frumpy design and high cost. Upon its release, Freestar cost about $5,300 more than its comparably equipped Japanese rival, the Honda Odyssey. "The second it hit the ground it was dead," says Ed Wallace, an automotive industry expert who reviews cars for BusinessWeek and hosts a call-in show in Dallas.

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Freestar is one of three recent Ford releases that have flopped and that industry experts point to as the reason the Blue Oval continues to lose money hand over fist. On June 20, Ford announced it had lost another $123 million in the second quarter in 2005. The losses seemed light compared to the automaker's second quarter in 2005 when it lost $936 million, but still, analysts expected less red ink this year. A decade ago, more than a quarter of cars sold in the United States were Ford products. Now, all Ford brands-including Mercury, Lincoln, Mazda, Volvo, Jaguar, Land Rover, and Aston Martin-account for just 17.9 percent of the U.S. market. Last year alone, Ford's North American operations lost $1.6 billion and saw its market share shrink by 5 percent.

What plagues Ford is an industry-wide ailment among U.S. automakers. Effectively owned by the United Auto Workers, they owe billions in pension and health benefits to union members. Ford is the target of environmental groups and is also under a boycott from the American Family Association for its pro-gay and lesbian policies. And the automaker can't seem to stay ahead of the game in making cars Americans want to buy. At Ford, losses pushed the automaker to announce that it planned to speed up its "Way Forward" program, a reorganization strategy that debuted in January. Ford chairman and CEO Bill Ford said the company would move quicker to slash 25,000 jobs and close 10 factories in North America in an effort to reduce costs.

None of the cost-cutting measures will matter if Ford keeps bombing the market with cars that consumers don't like. While the company continues to reap the benefits of its successful truck lines and the Mustang sports car, Ford has struggled to find traction with fuel-efficient sedans-not surprisingly a growing fancy among American buyers. "The products we have coming are right for this environment. We just couldn't develop them quickly enough," said Ford during a conference call with investors and the media. Experts agree that Ford is trying to play catch-up while simultaneously trying to scale down.

A J.D. Power survey found that drivers "universally disliked" the Ford Five Hundred's styling when the sedan hit the market in 2004. Sales of the car came only after deep discounts that nullified whatever profits Ford could recoup from the vehicle. Worse, Wallace says sales of the unprofitable Five Hundred cut into potential sales of Ford's popular and profitable Fusion sedan, a Mazda-inspired design Detroit couldn't dream up.

"It's selling, but they didn't need a Fusion and a Five Hundred. They just needed the Fusion," Wallace said. "It's not like Ford hasn't done some things right, but you can't just blow three major product launches."

Along with unprofitable launches, high labor costs have kept Ford from infiltrating the sub-$15,000 market becoming increasingly dominated by Korean automakers Kia and Hyundai. Benefits from layoffs and employee buy-outs at the company's St. Louis and Atlanta assembly plants actually cost Ford $1.7 billion in the second quarter, revealing the harsh reality that in the hyper-unionized automotive world, it costs money to cut back. Still, the company hopes that the slimmer work force pays off in the long run.

"The very fact that the Ford Escort was the bestselling car in America for a decade tells you that Ford doesn't have to build great cars to sell a bunch of them," Wallace said. Any car can sell as long as the price is right.

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