Backseat Driver
Rethinking Ford's Move Into Luxury
Jerry Flint, Forbes.com, 11.19.01, 8:00 AM ET

Ford Motor has received a lot of negative press lately but very little has been said about one of its biggest problems, its Premier Automotive Group, under which Ford lumps Jaguar, Aston Martin, Land Rover, Lincoln and Volvo.

Let's start with Volvo. In March 1999, when Ford's (nyse: F - news - people) balance sheet sagged with almost $30 billion in cash, the firm's then Chief Executive Jacques Nasser--who was recently fired--bought Volvo cars (not including the heavy-truck operation) for $6.45 billion. That's one stiff price, considering Volvo had never sold 400,000 cars per year and was only good for $300 million to $400 million annual profit at its peak. Production in Volvo's home country, Sweden, is costly and so expansion there is questionable.

Volvo sales are just holding their own this year:

Volvo Unit Sales	2001	2000
Europe (through September)	172,324	172,908
U.S. (through October)	107,324	104,368

Volvo is not even a true luxury make. In this country, Volvo is a cult car and sells on safety. I think every woman in the Junior League owns one. Anyway, Ford has a worldwide luxury brand, Jaguar, which is now moving new models down to Volvo's price range.

Volvo is a fine car, but it is a true oddball in the Ford lineup. Ford is going to be hard-pressed to expand Volvo and keep it distinct from other Ford vehicles. I also doubt whether Volvo can ever grow enough to earn back its purchase price plus the billions needed for new product.

I figure that right now Ford could sell Volvo for no more than $3 billion to $4 billion, if there were a customer, which there isn't. So Ford is stuck with Volvo unless it is to spin it off to shareholders--not a bad idea, by the way.

Things aren't much better for other parts of the Premier Automotive Group:

Jaguar Unit Sales	2001	2000
Europe (through September)	30,081	27,687
U.S. (through October)	33,970	35,865

Jaguar sales from 2001 merely match last year's purchase rate. This is the first year for the new lower-priced X-type ($30,000 to $40,000), so improvements may yet come. One day Jaguar might be a big moneymaker, but Jaguar probably loses money or makes very little now.

Land Rover Unit Sales	2001	2000
Europe (through September)	60,593	63,197
U.S. (through October)	20,536	22,600

Land Rover is behind last year, but maybe the new (in the U.S.) lower-priced Freelander will help. But Land Rover, which Ford bought for $3 billion, is certainly losing money.

Lincoln Unit Sales	2001	2000
U.S. (through October)	136,730	165,146

Lincoln's Town Car is a great source of revenue, but everything Lincoln sells is down this year. The newest car, the Lincoln LS, which was to be the start of a rebirth, is off 22%. Talk about one-year sensations. Why hasn't Ford spent some money to broaden its Lincoln LS line?

So while BMW, Mercedes, Audi and Lexus sales in the U.S. are ahead of last year, PAG is floundering. Why?

One reason could be PAG's confusing organization. The group is headquartered in London because its head, Wolfgang Reitzle, the ex-BMW executive, prefers London to Dearborn, Mich., where Ford is headquartered. Most of Ford's designers, engineers, marketing specialists and accountants work out of Dearborn. PAG also has headquarters in Orange County, Calif., because at one time Ford thought it wise to get Lincoln in tune with Southern California culture. That was before Wolfgang took over.

PAG headquarters, Orange County, Calif.

Lincoln was part of Lincoln-Mercury within Ford, and still is. Lincoln is also part of PAG, but Mercury has been lost in the shuffle. If anyone can find a significant new Mercury model anywhere in the pipeline, let me know. The company is losing more sales by mishandling Mercury that it is gaining through PAG.

And it's clear that Reitzle, a great car guy, knows nothing about the American market for Lincoln. Lincoln has been a success because lots of old guys like that big rear-wheel-drive car with lots of seat room, a huge trunk for golf clubs and a sofa ride for the snowbird run from Cleveland to Florida. At times, Ford even acts as if it were ashamed of making money by selling Lincolns to old men.

Ford executives talk as if the company's survival depends on PAG. I say, rubbish.

Two-thirds of Ford's vehicle sales come from North America and about all the profit comes from those big American pickup trucks and SUVs--vehicles that Ford neglected as it poured money and resources into PAG.

Between $15 billion and $20 billion has gone into PAG, without counting what Ford has spent on Lincoln in the last few years And there is darn little return. The key to Ford success is not PAG, but hot cars and trucks for the American market.

Ford is rushing more executives to London to help. But maybe the entire grand scheme is wrong. Maybe Jaguar should be Jaguar and Lincoln should be Lincoln, without a huge superimposed PAG superstructure. Maybe it would be better to break up PAG before it topples over on its own.

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