Car of the year?

Automotive Manufacturing & Production, Feb, 1997 by Brett C. Smith

For the fifth straight year the Ford Taurus was the passenger car sales leader in 1996, with a final tally of 401,049 units sold. A major marketing push, lead by significant sales incentives, sealed the "victory" over the Honda Accord, which checked in with 382,298 units for the year. Ford is to be congratulated for its ability to maintain the sales leadership, however, its willingness to spend considerable marketing resources may have severe costs for the company in the long run.

Traditionally, the mid-size segment has served a critical function for automotive manufacturers. For each mid-size car sold, a manufacturer earns an estimated $2,000 to $4,000. When the volumes for the entire segment are added, there is a considerable amount of profit. However, Ford's strategy to offer significant rebates and outstanding lease rates to secure the sales leadership for the Taurus has a direct effect on that profit, not only for Ford, but for the entire industry.

By offering customers discounts on Taurus, the company encouraged Ford Contour intenders to move-up from the compact car to the Taurus. By doing so, Ford was forced to sell a mid-size vehicle at what equates to a profit that previously would have been expected for a compact. The ripple effect not only effected the Contour, it also had a direct effect on the price of the Ford Escort. By the end of the year, Ford was getting a reduced profit on all its vehicles in order to win the title of sales leader for the Taurus. Beyond the ripple effect on the profitability of the other cars, Ford continued to rely heavily on low profit fleet sales to reach the 400,000 mark in sales. Some suggest that as much as 55% of sales were to fleets.

Although all companies were relying on incentives to move cars, only Ford and Chrysler had rebates on their subcompact, compact and mid-size cars. Chrysler's line-up included an aging LH platform, and the three-year-old Neon. Conversely, Ford's three nameplates were relatively new. If Ford needs $1,000 incentives to move new models, it may bode ill for future years when the Escort, Contour and Taurus have grown a bit long in the tooth and must compete against new cars.

While it is undeniable that the marketing push to gain leadership had an effect on profitability, it also had implications for Corporate Average Fuel Economy (CAFE). Each manufacturer is required by Federal law to maintain a CAFE of 27.5 mpg or higher for their passenger car fleet. Mid-size cars achieve approximately 20-24 mpg. Although it is an extreme over-simplification, for every Taurus sold, Ford must sell an Escort to keep its CAFE near 27.5 mpg. In order to balance their CAFE requirements companies must subsidize the sale of high mileage-low profit cars with profits from low mileage-high profit large cars. As Ford pushes hard to sell the Taurus, CAFE puts even greater pressure on the company to reduce the price - and profit - of Escorts.

Yes, Taurus did earn the title of top sales volume, but Ford paid a high price for the title. Maybe too high of a price for a company struggling to increase lackluster profitability. Though all companies are finding it difficult to make a profit on the car side of the market, Ford may be making it more difficult than it has to be. Through Ford 2000, the manufacturer has been attempting to gain efficiencies through global restructuring. Those gains have been slow and painful. Maybe it is time Ford Motor Company reassess the importance the Ford marketers place on the nameplate sales race and look at the implications for overall corporate profit. Those changes may be just as painful, but might just move the company closer to their desired industry leadership position.