Are Small Cars A Problem At Ford?

Source: Wall Street Journal

By Michael Ramsey

In the next few months, Ford Motor Co. must confront a burgeoning supply of its small cars now piling up on dealer lots. How it handles the problem will give an indication of how much Detroit has really changed.

Ford, General Motors Co. and Chrysler Group LLC used to resort to steep incentives and cut rate sales to rental companies to clear bloated inventories. Each rejected the practice amid the 2008 recession—and have stayed true to their pledge, thus far.

Now, Ford faces its biggest test of that self-discipline. At the end of December, Ford dealers had between 1.5 times and 2 times as many Focus and Fiesta small cars as auto makers typically like to have on lots and in showrooms. Ford executives insist they won’t revert to the old days, and could slow production to drain the excess inventory.

Slowing production would allow Ford to maintain the high prices it has been getting for the Fiesta and Focus. On the other hand, production cutbacks would reduce the revenue generated by its small-car plants. Auto makers book their revenue when they ship cars to dealers.

Bill Ford Jr., executive chairman, said, “It’s a delicate balance and fortunately, so far, we haven’t had to give up one for the other.” He insisted the company won’t “go back to the days of shoving vehicles out the door just to try to get market share.”

Ford and its rivals in Detroit have been enjoying high small-car sales because of better quality and attractive new models, but it has made the competition with GM, Nissan Motor Co. and Hyundai Motor Co. that much tougher.

Ford ended 2011 with enough Focus compacts on dealer lots to last 92 days at the current rate of sales, and enough Fiesta subcompacts to last 126 days. Auto makers generally like a 60-day supply or less.

At the end of December, Chevrolet dealers had a 68-day supply of the Cruze, the GM small car that compete with the Focus. For the Chevy Sonic, GM’s subcompact, dealers have a 61-day supply.

GM and Ford have profited by keeping supplies tight and prices up. In the first three quarters of 2011, GM has earned $7.7 billion, and Ford $6.6 billion.

Mark Fields, Ford’s president of the Americas, said the company will take actions, including slowing production, if sales don’t improve. He said Ford had struggled with getting enough Focuses last year when demand was higher. Mr. Fields said the company is committed to trying to maintain its pricing.

“We always want to monitor our supplies and make adjustments as needed,” he said.

Ford launched a redesigned version of the Focus last year, and the car was met with favorable reviews for its styling and options. In 2011, Ford sold 175,717 Focuses, but that was about 25% less than the GM Cruze’s 231,732. The Focus total was 2% higher than in 2010 even though sales of compact cars increased 8.7% last year, according to Autodata Corp.

Likewise, the Fiesta was feted for its looks and feel, but sales fell 30% in December compared with a year ago. Ford sold a total of 68,574 in 2011, more than double 2010, when the car was on the market for only part of the year.

Both the Focus and Fiesta are critical to Ford’s sales of fuel-efficient vehicles and to meet U.S. fuel-economy requirements.

Jim Farley, Ford’s global marketing chief, insists there is no need to cut Fiesta production.

Bill Willis, owner of Willis Ford in Smyrna, Del., agreed: “I haven’t noticed the inventory being a big problem yet.” He added, “I think we can maintain our pricing because we have a high-quality product.”

GM, faced with an oversupply of pickup trucks last year, slowed production and ended the year with normal truck inventories levels.

Jessica Caldwell, an analyst for car research site Edmunds.com, said Ford has been sticking to its pricing on both the Focus and Fiesta, staying away from large discounts, subsidized leases and other incentives. The result is that the average price customers pay for a Focus, $20,589, is higher than the average prices paid for all other competing models except Volkswagen AG’s Jetta, according to Edmunds. Historically Detroit’s passenger cars have fetched lower prices that import-brand models. The Fiesta’s average price is higher than all rivals except the Honda Motor Co. Fit, Edmunds’s data show.

Ford Motor must confront a burgeoning supply of its small cars now piling up on dealer lots.

“That has led to more profitability for Ford, but it may have been at the expense of having lower sales than they expected,” Ms. Caldwell said.

Profit margins for its North American region averaged 10% last year, boosting Ford’s performance. Mr. Fields said Ford expects to either maintain or grow that 10% margin in 2012.

Ford executives have dismissed criticism that its small car sales are lagging. It suffered production problems in mid-2011, leaving it with fewer cars as demand was spiking because of a shortage of Toyota Motor Corp. and Honda models.

“It does call into question whether Ford can stick to lower sales and higher price point,” said Brian Johnson, an analyst at Barclays Capital.


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