This was the message from
Ford of Europe Chairman Nick Scheele at the Paris launch of the new Ford Mondeo.
Ford hopes to avoid discounting the Mondeo’s yet unannounced prices in order to
keep margins up. It is even happy to reduce its sales targets to achieve this
aim. Why ?
To understand the novelty
of seeing a company chairman gleefully announcing reduced sales targets we need
to look back at the history of the first Mondeo.
Go deeper with GlobalData
Global
It is important to remember
the Mondeo was conceived as a global car from the outset. This meant that, excluding
some interior and exterior trim items, the specification was to be the same
wherever the vehicle was sold. Global contracts were to be awarded to suppliers,
who would deliver parts and systems to both the main production sites in Europe
and the U.S. These high volume contracts were designed to attract keen prices
from suppliers, thereby increasing Ford’s margin on Mondeo sales.
This was not Ford’s first
crack at a global vehicle. The Escort was also intended as a global vehicle
but disagreements between Europe and the US over the vehicle specification meant
that, in the end, the vehicles that were sold on the two continents were very
different. Cost savings from intended synergies disappeared.
With the Mondeo, Ford allowed
itself a longer product development time in order that:
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By GlobalData- It would achieve a genuinely
global design; - The product would set
a new standard for a D segment family saloon; - The global synergies
would not be lost.
In effect, the Mondeo was
to set a new design paradigm for Ford; an example which could be copied for
future product development. However, what it actually meant was that Ford never
made a penny out of the first Mondeo.
Development time & programme
management
The target date for the
launch of the Mondeo was 1993 and this was met. However, work was well underway
by 1986 meaning the development time was in fact 8 years. This is almost unimaginable
today when manufacturers boast of development times of three years or much less.
These claims have to taken with a pinch of salt. The time quoted usually refers
to the time between design freeze and production. Of course, most of the work
goes into creating the design and this is ignored in statements to the automotive
press.
Because the Mondeo was conceived
as a global vehicle it inevitably involved both European and North American
engineers. The European work was divided between the UK and Germany, with the
former mainly responsible for chassis and the latter for power-train and body.
In addition, because the vehicle was destined for the American market, the US
also had a say. The cultures of the three countries were different and are summed
up in the table below:
Exhibit
1: Differences in management style within Ford
| Country | Attitude | Explanation | Focus |
| UK | Get it out the door |
The application of good engineering, but at the end of the day the schedule is king |
Time |
| USA | Get the cost down |
Every component has to cost less than the last Taurus. |
Cost |
| Germany | Get it right |
We work a thirty-five hour week and it will be ready when it’s ready. |
Quality |
Developing a product with
three different cultures involved was no doubt a contributory factor in the
cost of the CDW27 programme. (CDW27 was the name of the Mondeo programme.) This
is what we now call a platform, but this was an unheard of concept in the 1980s.
Sales history
Belgian production of the
Mondeo exceeded 400,000 units in 1994. The new vehicle was well received by
the press particularly for its ride and handling characteristics. This is not
surprising given the involvement of Jackie Stewart and Ford’s Richard Parry-Jones
in the development. It is fair to say the vehicle did set a new standard for
a family D segment vehicle. However, Ford had imagined greater volumes for its
Gent production unit, which meant that it had built in a higher cost of production
than necessary. Unfortunately, this is a failing of most vehicle producers.
Renault has provided a recent exception when it vastly underestimated demand
and production capacity for the Scenic.
 |
1 – Data
source: national associations, DRI
The problem
of managing capacity is only too clearly illustrated by the exhibit above. If
we assume installed capacity of 500,000 units for the Mondeo, what Ford got
was five years of production between 400,000 and 300,000 followed by a typical
dip as the old model bows out. It is not possible to run a plant profitably
at such low average utilisation rates. Ford has been criticised for mismanaging
its new model introduction programme and on this analysis this would seem to
be justified.
Forecast
We must not forget the global
nature of the old Mondeo programme. In 1995 and 1996 over 250,000 Mondeos were
produced in North America as Mercury Mystiques and Ford Contours. The Cougar
was based on the same CDW27 platform. However, the success of the model in America
was constrained by the perceived lack of interior space. Nevertheless, from
1995 to 1998 the Mondeo platform achieved production of around 600,000 globally.
The new CDW132 platform
is now in production and is destined for volumes of around 400,000 units. To
reach these levels it will rely on not only Mondeo sales but those of the new
Galaxy and the new baby Jaguar.
 |
2 – Data
source: G Beecroft analysis, national associations, DRI
The forecasts below show
how the world has changed since the Mondeo was conceived in the mid 1980s. The
new platform will be shared between a family saloon, an executive saloon and
an MPV. Yet, because there will be no direct replacement for the Contour and
Mystique in the States, overall volumes for the platform will be lower.
 |
3 – Data
source: G Beecroft analysis, DRI
So is Ford mad? A new platform
is being introduced which has no global pretensions, will sell in lower volumes
and supposedly at higher average margins? Isn’t this the opposite of platform
engineering? Let’s introduce the concept of discounted cash flow.
DCF
Imagine you are the Mondeo
project manager sitting in your office in 1993, the year of the Mondeo launch.
You want to know if the project is going to earn any money for your shareholders.
The table below shows how you might do it.
The first line shows the
project cost, which is 6 billion dollars. This figure includes some power-train
development and research that will benefit other models, but what the hell;
we have to start somewhere. The next line shows the production of the CDW27
platform, which, in 1993, you would have to forecast. The third line shows the
assumed margin on each vehicle sold, which is estimated at $2,000 dollars.
Exhibit
5: Discounted cash flow (DCF) for the CDW27 programme
| $ millions |
1993
|
1994
|
1995
|
1996
|
1997
|
1998
|
1999
|
2000
|
Total
|
| Cost |
$6,000
|
||||||||
| Production |
343,640
|
510,552
|
649,089
|
632,537
|
586,611
|
602,149
|
479,500
|
277,689
|
4,081,767
|
| Margin |
$2,000
|
||||||||
| Income |
$687
|
$1,021
|
$1,298
|
$1,265
|
$1,173
|
$1,204
|
$959
|
$555
|
$8,164
|
| Discount |
10%
|
||||||||
| Factors |
100%
|
110%
|
121%
|
133%
|
146%
|
161%
|
177%
|
195%
|
|
| DCF |
$687
|
$928
|
$1,073
|
$950
|
$801
|
$748
|
$541
|
$285
|
$6,014
|
Multiplying the production
figures by the margin gives us the income in nominal terms for each year. At
a total of over 8 billion it looks good, but we have to discount the money back
to what its worth to the company in 1993 when the investment was made. This
is where things start to get a little bit complicated.
Ford, like other global
multinationals, raises money on the international capital markets by selling
bonds and shares. In return the company pays out interest and dividends on these
instruments. As a result, a billion today is worth a lot more than a billion
in a year’s time. In the example the income from vehicle sales have been discounted
at 10% per annum (the assumed “cost of capital”). The nominal income in each
year has been divided by the discount factor. Now, when we tally up the discounted
cash flow, we find that the income from the project is $6.014 billion.
No-one should invest $6
billion to make $14 million! However, there was a major economic recession in
the early nineties, which means the cost of capital for Ford was probably much
higher than the 10% the example shows. This means Ford almost certainly made
a loss on the first Mondeo. The company required a margin of over $2,000 to
breakeven and over $2,500 to make a good return on investment. The actual margin
on a Mondeo was probably less than $1,000.
Exhibit
6: The margin required on each Mondeo to breakeven or make a 20% return for
various values of cost of capital
| Cost of capital |
10%
|
15%
|
20%
|
| Break-even |
$1,995
|
$2,272
|
$2,554
|
| 20% return |
$2,394
|
$2,726
|
$3,065
|
Guilty or not guilty
Was Ford wrong to launch
the Mondeo? Definitely not: having spent the $6 billion it had to recover at
least some of that money. The Mondeo has always been recognised as a good product
when some of the rest of its European range looked weak. The Ka, Fiesta, Escort
and Scorpio all had rough periods during the Mondeo’s lifetime. The problem
was simply that too much was spent over too long a period for Ford to recover
its investment.
There were benefits to the
programme: Ford has jettisoned the global vehicle concept. The Toyota Corolla
and Honda Civic, which use global, flexible platforms, are customised for each
regional market, including unique vehicle dimensions. This is the recognised
way forward. Several technical innovations were developed during the Mondeo
programme, which have been carried onto the other Ford models.
But to go back to where
we started, why does Ford want to make fewer new Mondeos? Well of course it
doesn’t. But the company is clearly determined not to fall into the margin trap
a second time. If it gets the new Mondeo right it could spearhead Ford’s profit
recovery in Europe.
|
Gary Beecroft Gary Beecroft is |
