Ford Under Fire
Jonathan Fahey, 07.03.06
Ford must repel a frontal attack from Toyota and GM on its mainstay pickup truck as it struggles to revive the rest of its battered lineup.
In a windowless conference room in an office building near Ford (nyse: F - news - people ) Motor's Dearborn, Michigan headquarters, a handful of marketing experts have assembled a shrine to the company's bestselling vehicle, the F-Series pickup truck. Smelling vaguely of a musty garage, the room's pegboard walls are draped with flannel shirts and leather tool belts, cowboy hats and lariats, camouflage hunting gear and Nascar memorabilia. On the conference table--a waist-high slab of plywood propped on a pair of sawhorses--are 50 years' worth of Ford truck advertisements. Along one wall, hidden behind Ford banners, are confidential charts laying out Ford's pickup truck strategy for the next five years.
Here is where Ford executives, fortified by ample supplies of peanuts, are plotting marketing tactics, approving advertising campaigns and setting pricing and incentives for the F-Series. "We have no intention of giving up one inch of our turf," declares Mark Fields, 45, Ford's president of the Americas.
In a few short months the F-Series pickup, and, by extension, Ford Motor, will be faced with a ferocious assault. The world's two biggest automakers, General Motors (nyse: GM - news - people ) and Toyota (nyse: TM - news - people ), will almost simultaneously unveil new pickups aimed squarely at the F-Series.
The F-Series is Ford's crown jewel, almost single-handedly keeping the company alive. The company lost $1.2 billion in the first quarter, and its market share has withered to 17% from 25% a decade ago. Yet last year the F-Series was the nation's bestselling vehicle--again. Ford sold 901,000 of these workhorses, including the F-150 pickup and its cousins with larger payloads, the F-250 and F-350. And they are wildly profitable. Each truck sold last year contributed an estimated gross profit (before depreciation) of $8,000--or $7 billion in total. Consider that Ford had only $2 billion in net income last year, while recording a $2.5 billion pretax loss in North America.
Toyota's attack on Ford could be substantial. Its new 2,000-acre factory in San Antonio will allow Toyota to build an additional 175,000 Tundras each year, and this in a flat truck market. Assuming the new Tundra takes sales away from truckmakers according to their current market shares, Ford stands to lose 70,000 units--or $560 million in gross profit. It may be good strategy for Ford to weather this storm by cutting back capacity instead of hacking prices. Indeed, Ford announced in April it would close an efficient F-150 factory in Norfolk, Virginia in 2008.
The truck onslaught comes at an awful time for Ford. It's in the midst of a restructuring, its second in five years. Sales of its high-margin, gas-guzzling SUVs, like the Explorer and Expedition, are off 28% so far this year. Profit at its Ford Motor Credit (nyse: FCJ - news - people ) arm will likely narrow as interest rates rise.
For obvious reasons Ford is desperately trying to transform itself into a company that relies on more than just a single product. The newest man in a revolving-door job is Mark Fields, who last October was handed the task of fixing Ford's North American operations. In January he launched Ford's latest turnaround effort, called the "Way Forward," which seeks to restore North American profits by 2008 by reducing material costs, shedding excess workers and factories, and sharpening the focus of the company's Ford, Lincoln and Mercury brands.
To get new models in showrooms faster, Ford is adopting many of the product-development processes used by its nimbler Japanese partner, Mazda (where Fields fashioned a successful turnaround earlier in the decade). The changes will allow Ford to cut 8 to 14 months from its vehicle-development cycle, says Derrick Kuzak, Ford's new product development chief for the Americas. By 2008, he says, Ford's lineup will be much fresher, with 1.6 years shaved off the average age of its portfolio. And to cut waste, Ford is finally starting to eliminate the redundant engineering that allowed the European and U.S. versions of the Ford Focus, for instance, to be based on separate chassis.
But all this will take a while. Ford has relatively few new products coming up. The average age of its current lineup, five years, is greater than that of any big automaker, according to Prudential Securities' Michael Bruynesteyn. And only 8% of Ford's lineup is scheduled for renewal this year, he says. By comparison, Toyota is replacing 31% of its lineup this year, and the average age of its models is just two years.
Many of the vehicles currently in Ford showrooms, such as the Freestar and the Five Hundred, aren't competitive. In 2001 Ford tried to get out of trouble by borrowing the underpinnings of cars built by its Mazda and Volvo subsidiaries and reengineering them. That tactic hasn't worked particularly well. The Volvo-derived Ford Five Hundred, for instance, is getting an early makeover to address complaints that it is underpowered.
Defending the pickup market, however, is Fields' immediate task. The company redesigned the series a few years ago, so for now it will play a money game. Dealers expect Ford to offer plenty of incentives on F-Series before the new competition arrives. It's already offering 0% financing and $1,100 in free gas on 2006 models, which range from $19,000 to $40,000. It's also adding F-Series derivatives, like the upcoming FX2, a flashier truck for budget-conscious urban buyers. And while tweaking its current engines to improve fuel economy, Ford has revived plans for a V-8 that can go head-to-head with GM's 400hp motor.
But Toyota's gathering assault on the big-pickup market is ominous. The new Tundra will be built, pointedly, in Texas, the nation's biggest truck market. Historically Texans hadn't considered the Tundra a real truck. It wasn't quite as big or powerful as trucks from Ford, Chevy and Dodge. But since Toyota announced the factory in 2003, Tundra market share in the San Antonio area has climbed from 2.5% to 12%--and the factory hasn't even opened yet.
And Toyota promises it is done letting the Tundra get called a "seven-eighths" truck by Ford-centric cowboys and construction workers. The new Tundra is said to be so big (specs haven't been released yet) that Toyota researchers had to measure hundreds of garages to make sure the biggest version, which will have ample storage behind its second row of seats, will fit. The Tundra's convenience touches, like multiple storage bins, were designed just a few miles from where Bill Ford tries to get some sleep at night, at Toyota's Ann Arbor, Michigan technical center. Toyota's sales operation in Torrance, California has established a new group to market the truck, an effort that is said to be bigger than Toyota's launch of Lexus 15 years ago.
For the voracious Toyota the new Tundra will be the key to the company's growth; in nearly every other segment Toyota already dominates. Pickups, however, have so far remained peculiarly American. Nissan (nasdaq: NSANY - news - people )'s Titan, for example, has failed to dent the market. "Is there a force field there that can't be broken?" wonders Ronald E. Harbour of Harbour Consulting.
And then there is General Motors, which sold 935,000 pickups last year. The fate of its restructuring also depends heavily on the success of its new Chevrolet Silverado and GMC Sierra. They will have big but relatively fuel-efficient engines that can shut off cylinders when not needed. (Ford and Toyota engines don't do this.) They will also have lavish new interiors and safety features not normally found in pickup trucks, like side curtain air bags. Perhaps scariest for Ford: GM says it did all this while adding less than $100 in cost to the new design.
All of which allows Gary White, GM's head truck executive, to chuckle a little at Ford's F-Series war room. "It's going to be more like a bomb shelter when our product comes out." Not funny--to Ford.
Before the battle: Mark Fields, Bill Ford's number two executive, is looking for a way forward.
http://www.forbes.com/global/2006/0703/040.html?partner=yahoomag
i think ford is in big trouble in the truck market.