Ford’s fantasy: Making money on small vehicles
Posted by: in Companies Competitive StrategyFiled under: Forecasts, Industry, Competitive strategy, Ford Motor (F), Toyota Motor Corp. (TM)
Ford’s (NYSE: F) latest PR push is based around the idea that the company can make money on smaller vehicles. Traditionally the large margins in the automobile industry have been on pick-ups and SUVs. But consumers don’t want those anymore.
According to The Wall Street Journal (subscription required), “Ford Motor Co. is expressing new confidence about the auto maker’s capability to sell new small cars at a profit in the U.S. market, citing new data about how Americans are beginning to value premium features and dynamic design over cars desired simply for their size.” That assumption is based on two factors, neither of which is apt to be true.
Ford believes that it can cut its cost base low enough to make money on vehicles that retail for $20,000 or less. Chopping production expenses might lower overall costs, but it also cripples the company’s ability to “turn on the juice” if automobile sales make a sharp rebound. Fewer factories with fewer workers puts some brake on the company’s capability to swiftly push out more vehicles in a short period of time. Vehicles that can’t be made can’t be sold.
The other challenge to Ford’s assumption is that it can get a massive market share in a part of the industry that is already dominated by Toyota (NYSE: TM), Honda (NYSE: HMC), and Nissan. As Ford ramps up, the Japanese car makers are moving into hybrids and improving their own small cars. Most consumer satisfaction surveys put Ford behind the Japanese in terms of the quality of their products.
Aside from those few small details, Ford’s plans should work just fine.
Douglas A. McIntyre is an editor at 247wallst.com.
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