In its heyday, Ford Motor Co.'s Michigan Truck plant generated up to $3.7 billion a year in profits building sports utility vehicles. On Wednesday, the auto maker will detail plans to convert the plant to produce a compact car that never made a nickel in the U.S.
Building a profitable Ford Focus small-car line will require huge changes in how the vehicles are equipped and assembled. By one estimate, the earlier-model Ford Focus lost as much as $1 billion a year. But Ford believes it now has a new formula to turn those losses into steady profits.
Among the changes planned: Ford will build the same vehicle here as in Asia and Europe -- allowing for greater economies of scale. It is also counting on new union work rules to reduce labor costs. The Dearborn, Mich., auto maker aims to revive the car's reputation by producing a battery-powered Focus model, its first all-electric passenger car.
Of course, higher gasoline prices also factor in its outlook. Sales of the Focus and other small cars have tracked gasoline prices.
"We do need more price certainty in the marketplace," Bill Ford Jr., Ford's executive chairman said in an interview Tuesday. He previously has called for a gas tax to stabilize price fluctuations.
Meanwhile, Mr. Ford said he opposed attempts to increase federal fuel-economy standards while gas prices remain low. The Obama administration is considering such a move.
"In the United States, clearly we had been focused on our bigger trucks and SUVs and made a few small cars but without a consistency of purpose," added Ford Chief Executive Alan Mulally. "We all came to the consensus that we needed to do more work on that business case because we absolutely wanted to serve the U.S. customers for smaller vehicles," he said.
Mr. Mulally said as a result of the world-wide production and expected labor-cost savings, the Focus in the U.S. will be "profitable from initial production" starting next year.
At the heart of the plant's transformation is a flexible body shop operation that will allow multiple models to be assembled in the same plant. Since 2006, one of Ford's priorities has been the development of vehicles that use the same architecture.
Ford still must finalize an agreement with the plant's United Auto Workers local to achieve the cost savings needed. Those talks are in addition to wage and benefit concessions the company won in February negotiations with the UAW. The work-rule changes would allow the plant to operate similar to Toyota Motor Co.'s U.S. plants.
The UAW local and Ford are near an agreement to limit job classifications from more than 20 down to a handful, according to Joe Hinrichs, Ford's global vice president for labor and manufacturing. New self-directed work teams will include both skilled and production employees working together, a model first advanced by Japanese auto makers.
For all of Detroit's automakers, the challenge of earning profits on small cars instead of trucks and SUVs is enormous. They earned an average $7,000 profit per vehicle on trucks and SUVs, but little or nothing on small cars. U.S. consumers also have been reluctant to buy small cars from Ford, General Motors Corp. or Chrysler LLC because of the reputation of Japanese competitors for higher quality cars.
"They could always justify the lack of profitability because they were making so much money on trucks and SUVs," said Rebecca Lindland, director of automotive research for North and South America at IHS Global Insight.
Key to Ford's new formula is leveraging its global reach to build small cars from the same architecture in every part of the world. It will make several different models from that same set of common platforms. Similar to its plan for the new Ford Fiesta subcompact, Ford will make the same Focus-based cars in Europe and Asia, giving the company global economies of scale.
Over time, the basic architecture for the new Focus will serve as the foundation for more than two million cars annually around the world, including derivatives. In the U.S., sales of the Focus peaked at some 286,000 vehicles in 2000.
In the past, the U.S.-manufactured Focus bore little resemblance to its European cousin. A U.S. Focus retails today for about $17,000 compared to about $30,000 for a fully loaded European Focus in Germany, according to John Wolkonowicz, an IHS Global Insight auto analyst.
A major issue for the new models is pricing. Ford will need to raise the car's average price to generate a profit. Mr. Mulally said he's confident that Ford's new models will allow it to price its cars higher as U.S. consumers come to view its small cars on par with its competitors. Ford has not disclosed pricing for the new model Focus.
First launched in 2000 in the U.S., Ford initially aimed the Focus at young urban hipsters. But the marketing alienated much of Ford's core customers. When the Focus arrived from Europe, early models were stripped of features to reduce their price, resulting in a less desirable vehicle.
High sales incentives and bulk sales to commercial and government buyers led to low resale values and further damaged the model's reputation with consumers. Ford purposely limited production in recent years to minimize losses after fuel-economy regulatory requirements were met. It even explored the idea of moving Focus production to Mexico during union negotiations two years ago, said Bob King, a UAW vice president.
The Focus's fortunes have improved recently. Last year, as gas prices approached $4 a gallon in the U.S., demand for the Focus spiked sharply in May. The financial performance of the model also improved after Ford outfitted the budget model with its $300, advanced in-car media system called Sync -- inspiring a tech-savvy younger generation to think more positively about Ford's small cars.
More recently, Ford has been buoyed by its ability to secure a new operating agreement with its union to save up to $500 million this year and a new deal with lenders to reduce its debt by $9.9 billion -- two issues that continue to vex its struggling cross-town rivals.
Ford will spend $550 million and reap $160 million in local and state tax incentives to transform the Michigan plant. The new model could also be built at Ford's Louisville, Ky., plant, which will be converted to produce vehicles from Ford's new Focus platform. Ford hasn't said where the new Focus will be built in Europe or Asia.
It will bring six new small cars to the American market by the end of 2012 based on projected growth of the U.S. car market.
source:online.wsj
