Ford Driving Ahead with Small Car Fiesta

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Green, Macroeconomics

Ford Motor reported its fourth consecutive profitable quarter at the end of last month and forecast “solid profits for 2010 as a whole, a year earlier than expected. Although figures were a little lower than some analysts had been hoping no-one can argue that Ford’s turnaround has been impressive. The number two Detroit car-maker put its first quarter net income of $2.1bn mainly down to a strong turn-around in its core North American business and in Ford Credit, its finance arm. The company posted a $1.4bn loss in the first three months of 2009 according to a FT article.

So far so good. Ford sold assets, paid down debt (although it still carries a mind boggling $34.3bn of debt) re-shaped its range and maintained quality levels through a testing 18 months. So positive has Ford’s image remained in the market that the firm has not had to discount as aggressively as competitors such as Toyota in the North American market.

The firm has been quietly re-positioning itself and its supply chain to match its vision for car sales between now and the middle of this decade. Ford Motor’s plant in Cuautitlán, Mexico, which was building big pick-up trucks has been re-tooled to produce Ford’s small Fiesta car, due to go on sale in North America for the first time in June. Although in its fifth version, the Fiesta has been a best seller in Europe since the 1980’s but was withdrawn from the US two decades ago when small was no longer beautiful. Ford believes that is changing fast in the US. Cuautitlán is the third of a probable four plants to be retooled from large SUV’s and pick ups to small cars as the market downsizes.

George Pipas, Ford’s sales analyst is quoted in an FT article as saying, “Several forces are at work: social, technological, environmental, economic and political [which] all point to smaller vehicles. Mr. Pipas estimates that small vehicles’ share of worldwide sales will climb to 61% in 2013, from 58% in 2008. In North America, Ford expects small vehicles’ share will grow from 31% to 36%, entirely at the expense of the biggest pick-up trucks, sport-utility vehicles and sedans.

For Ford a lot is riding on the accuracy of this prediction. The Fiesta is a cracking car, setting new standards in comfort, economy and emissions. It doesn’t feel like a small car to drive and Ford is hoping they can make good money on the luxury “big car extras they can sell with it heated leather seats, keyless entry and start, blue tooth connectivity options, etc. Having said that the US is culturally attached to its big cars. A sub compact like the Fiesta, however good it is, will not appeal to those taking long journeys nor for those, how should we put it, physically requiring more room. But Ford believes there is a growing market at both ends of the scale the younger generation, more environmentally conscious and city dwelling, and the aging baby boomers whose children have left home and feel now is the time to downsize.

Other car producers are betting on the same trend and therein lies the challenge. This will be a highly competitive end of the market. Margins are much smaller on compact and sub compact cars than pick-ups and SUV’s. Ford has shown themselves more adept at optimizing global design and production platforms than anyone with the possible exception of Toyota and Honda. Rising US sales are good for both producers and their extended supply chain. The challenge will be maintaining profitability if average vehicle sizes trend lower as the industry expects.

–Stuart Burns

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