Ford Doesn’t Have a Better Idea

© 2018 Steve Feinstein. All rights reserved.

Remember many years ago when Ford’s marketing tagline was, “Ford: We Have a Better Idea.”? Well, Ford Motor Company—the second-largest automotive company in America—just made a stunning announcement the other day: They announced that a tall hatchback version of the compact Focus and the iconic muscle car Mustang will be the only two cars it offers for sale in the North American market in the future. It will drop its slow-selling sedans like the Fusion and Taurus and concentrate primarily on the lucrative pickup and SUV categories. The Ford F-Series pickup trucks have been the country’s best-selling vehicles for decades. Ford will also be bringing back a new version of the mid-sized Ranger pickup.

Is this a brilliant, ahead-of-the-curve move that will leave its competitors flat-footed and unable to respond or is it a reactionary knee-jerk response based on today’s transitory conditions?

The automotive market has undergone a fundamental transformation in recent years as SUVs have supplanted the traditional passenger sedan as the vehicle of choice in almost every demographic buying group. SUVs alone now garner more than 40% of the vehicle market, compared to the near total dominance of the traditional passenger car only a few decades before. The buyers’ perception of the SUV’s greater passenger/parcel-carrying versatility coupled with the much-improved fuel economy of the newer compact SUVs has rendered the traditional sedan obsolete in many people’s eyes. Add to that the near-universal availability of AWD on virtually every SUV and their undeniably higher, more commanding driver’s position and it’s easy to see their growing appeal.

Ford’s decision to curtail its participation in the sedan sector mirrors that of Chrysler. Chrysler ended production of its mainstream but slow-selling compact Dodge Dart and mid-sized Chrysler 200 in 2016, concentrating instead on growing its ever-popular Jeep brand and launching its new, cutting-edge Pacifica minivan to universal critical acclaim.

Even stalwart passenger car brands like Honda are not immune to the shifting tastes and buying preferences of the newest generation of automotive customers. The excellent all-new 2018 Honda Accord—a mainstay of Honda’s line-up and arguably the cornerstone of the Honda brand—is languishing on dealers’ lots, missing sales projections, as prospective buyers pass it over in favor of Honda’s expanded line-up of SUVs such as the best-selling CR-V, the new-for-2017 compact HR-V and the recently re-styled Pilot.

One interesting unintended consequence of the shift from the popularity of passenger cars to SUVs is that SUVs (as well as pickup trucks and minivans) are considered “light trucks” for purposes of CAFE (Corporate Average Fuel Economy) calculations. As of 2010, the minimum average passenger fuel economy had to be 27.5 MPG weighted average in a given brand’s sales mix. For every gas-guzzling 18 mpg luxo-sedan a carmaker sold, they had to offset that with the sale of a 36 mpg gas-sipping carette in order to achieve the 27.5 mpg average.

But light trucks are held to a far lower fuel economy standard. In 2010, it was only 23.5 mpg. And with the lower-economy light truck category grabbing an ever-larger share of sales, the actual total combined average economy of all new vehicles sold is lower because a higher portion of those sales are low-mileage trucks instead of higher-mileage cars. The Government’s attempt to legislate higher fuel economy (for the ecological good of lower CO2 emissions and less need for environmentally-intrusive oil exploration and extraction) has run afoul of the real-world laws of consumerism and market choice. If they have the freedom to do so, people will buy the product or service that best suits their needs, which is not necessarily the one that Governmental central planners had in mind.

Ford may well find that it’s new “less-car” line-up decision is premature and ill-advised. The oil/gasoline market is subject to chaotic variances and disparate influences. While relatively linear factors such as long-range market-based supply/demand trends and improving exploration/extraction technology can be thought of as somewhat predictable, there is no way to foresee or prepare for a market-changing event such as extreme Mid-East geo/political unrest or a cataclysmic weather event that interrupts supply. A quick look back at the history of retail gasoline pricing in the U.S just in the past few decades will show repeated wild swings from well under $2.00/gallon to over $4.00/gallon, back and forth several times. Just when it seems as if pricing will never be low again, the bottom drops out. Just when consumers start feeling over-confident that high gasoline pricing is behind them forever, it shoots back towards $4.00.

Given the very long lead-time for designing and producing an all-new car, Ford is certainly taking quite a gamble by announcing the elimination of their high-mpg sedans in favor of lower-mpg SUVs, should the gasoline market reverse into high-price territory.  And it seems to be doing just that: The improving world economy has spurred the demand for oil and the price of crude oil (and hence gasoline pricing) has shot up dramatically in the last twelve months.

The takeaway is this: Under the old rules, where the purchase of individual cars and trucks comprised a huge segment of the U.S economy and those cars and trucks were powered by oil-based fuels, large and small vehicles would fall into and out of favor, depending on the arbitrary whims of the world’s oil markets. During times of $1.75/gallon gasoline, the bigger the SUV, the better. When gas is $3.85/gallon, the Civics of the world sell for $5000 above sticker.

But we’re not playing under the old rules anymore. As ride-sharing, “calling an Uber” and self-driving cars (available for hire as needed on a per-trip basis) continue to become more prevalent, individual car ownership will decline and lose its position as a visible, conspicuous symbol of a person’s economic standing. This shift in consumer spending will have a major impact on the economy. People will not desire to own the car that transports them from Point A to Point B any more than they would want to own the train they ride on from Boston to NYC. Not being tied into permanent ownership, people will simply hire what they need at that particular time: a mid-sized SUV to pick up Johnny and the team from Little League practice; an elegant quiet luxury sedan when two couples are going out to a nice restaurant on Saturday night.

The other rule that Ford is ignoring is that oil-based fuels will not likely be the predominant personal transportation fuel for much longer. If Ford thinks that because current gasoline pricing is moderate then consumers will show a strong preference for SUVs over sedans, they’re already betting on the wrong horse, given oil’s upward direction.

A gutsier—but actually more defensible—move would be for Ford to have announced that they were discontinuing their gasoline-powered sedans in favor of a new lineup of hybrid and electric SUVs and pickups, with available optional self-driving capability. Although Ford has made vague statements about making a “full commitment” to alternative propulsion vehicles, they’ve given essentially no specifics or timetable.

I’ve been wrong before, but it seems to me that Ford is charting their course with faulty maps. Perhaps it would be more accurate to say that Ford’s maps are actually fine—they just need people who can read them properly.

 

 

 

Comments