UK: Ford keeping Volvo "smart" - analyst

By just-auto.com editorial team | 9 November 2007

Keeping Volvo is a smart idea, Global Insight auto analyst Aaron Bragman reckons, but Ford should let Jaguar and Land Rover go.

"Some would argue that keeping Jaguar and Land Rover would also be a good idea, given that Land Rover is performing very well (last quarter it achieved the highest third-quarter sales in the brand's history) and Jaguar is poised to introduce a car that will redefine the brand and has received very solid reviews," he said in a research not on Friday.

"However, with Ford continuing to bleed cash and market share in its critical home market, structural shrinkage to more sustainable levels means fewer engineers to spread around, and more need for development cash to revitalise the core brands. Divesting Jaguar and Land Rover frees up development cash and even provides additional funds from the sale proceeds.

"Jaguar may have one car on deck that will help reverse the brand's fortunes, but far more money will be needed to redevelop the rest of the luxury brand, for volumes that come nowhere near those of rivals Mercedes-Benz, Lexus, or BMW.

"Land Rover will be facing a similarly costly challenge over the next decade - while its offerings are thoroughly modern and very well received, none of them will meet super-stringent upcoming European greenhouse gas emissions or US fuel economy standards without significant re-engineering and development.

"Ford would be better served to use the cash for that effort on a new mainstream Taurus sedan for North America, and to let new owners worry about how to make Range Rover emissions compliant."

Bragman said that, though Ford chief Alan Mulally has stated that he feels Ford may break even this year and is on track to profitability in 2009, the driving factors behind Ford's improving performance are somewhat misleading.

"One can look at the improved numbers and conclude that Ford is on the right track to profitability. However, looking beyond the numbers to the profit generators, the product itself, and the picture become more troubling. The company has thus far shrunk its way to improving fortunes; in order to be considered [on] a successful turnaround path, growth and successful products must be forthcoming."

According to Bragman, Global Insight has bucked many industry watchers by continuing to take the view that General Motors (GM) is in a decent position to weather next year's anticipated difficult market, as it will have a new line-up of fresh, desirable products, from the mainstream Chevy Malibu [getting great reviews from consumer writers there] to the popular new cross-utility vehicles (CUVs).

Next year is likely to be a highly competitive one in the North American market and as has been seen for 2007 thus far; the companies performing best in the retail arena are those with fresh, in-demand products.

Ford's North American division, however, gives cause for concern in this regard, Bragman wrote. The mainstream Taurus is not selling as the company hoped it would despite a recent freshening, possibly because it still resembles the outgoing Five Hundred too much and is overshadowed by the all-new Honda Accord and Malibu.

Ford's crossovers are selling quite well but Ford's main profit machines, its full-size pick-ups, are still experiencing difficulties in the market. The new Flex large CUV will arrive next year, but not until the end of the third quarter, and a new Fusion sedan will feature a mild freshening.

"Ford's new North American products are coming, but slowly, and whether or not they will arrive in time to fend off a resurgent GM and an indomitable Toyota in a market about to become even more competitive remains to be seen," Bragman wrote in a research note on Friday.

He noted that Ford yesterday posted a much smaller-than-expected loss than Wall Street had forecast - a global $US380m loss for the quarter, a significant improvement from the $5.2bn loss seen in Q3 2006, while revenue was up from $37.1bn to $41.1bn as global vehicle sales rose from 1.467m to 1.487m year-on-year while currency, pricing and product mix improved. Automotive revenue grew to $36.3bn from $32.5bn.

Bragman said Ford continues to struggle with North America, but has begun to show signs of strengthening performance there. The company reported a $1.02bn loss on automotive operations for the region in the third quarter of 2007, a noted improvement from the $2.07bn loss seen the prior year. To date, Ford has posted a $1.91bn loss for the first nine months of 2007, a notable improvement from the $3.30bn loss seen in the first three quarters of 2006.

South America continues to grow, and the European region is showing marked strength as well, with a pre-tax profit of $293m in the most recent quarter, versus the $13m loss seen last year, the sixth straight quarter of y/y profit improvements at Ford of Europe, thanks in part to a 5% increase in sales to the end of September 2007. The company's Premier Auto Group, consisting of Land Rover, Jaguar, and Volvo brands, posted an improvement as well thanks to Land Rover's best sales quarter ever, though the Asian regions were not as favourable for Ford.

"Ford chief executive officer (CEO) Alan Mulally has had just a little over a year on the job and has enacted significant structural changes within the company. Over 44,000 employees have left the company through either buyouts or lay-offs, and the structural levels of management have largely been broken down between the top and bottom layers," wrote Bragman.

"According to reports, the operation as multiple fiefdoms is so endemic (given how it was created) that they have started to be brought together under the aegis of what Mulally refers to as 'One Ford'.

"The most recent quarter saw better-than-expected numbers, as the company continues to weather a devastating year of deliberately reduced fleet sales and a retail public that is choosing in large numbers to delay the purchase of new vehicles. The company is performing well in other parts of the world, especially in Europe, where striking design is helping to revitalise the line-up yet again. Even the Premier Auto Group is ironically posting better numbers, driven lower by the continuing fall of Jaguar sales globally; ironic because of the fact that Ford is set to sell both Jaguar and Land Rover brands before the end of the year.

"Ford has stated that, for now, it intends to keep and to expand the Volvo brand, helping it to become more like an independent company than a division of Ford, and to attain a position more prominent in the global luxury market."