Ford’s nouveau niche

Eighteen months after buying Land Rover from BMW, Ford’s vision of the future for Solihull’s dedicated four-wheel-drive producer is beginning to emerge. Unusually in the current economic climate, it appears to be good news for the manufacturing sector in the UK.

For Ford the venture represents further confirmation of an unspoken strategy that will alter its standing in the UK. The group has already transferred the Halewood factory on Merseyside, former home of the Escort, to its Jaguar subsidiary. The group will shortly cease car production at Dagenham, where the Fiesta was made.

Despite these actions, Ford will soon be making more cars in this country than it has in decades. The difference is that they will not be low-margin Ford brand cars. They will be Aston Martins, Jaguars and Land Rovers that carry – or have the potential to carry – much higher profit margins. In the UK at least Ford’s upmarket Premier Automotive Group – which as well as these three UK brands also includes Lincoln in the US and Volvo – has eclipsed its mass-market operations.

However, the ambitious and costly Land Rover restructuring looks like an enormous financial gamble at the moment. Ford’s new top management in Dearborn is only too familiar with the scenario. Ford agreed to buy Land Rover for £1.9bn, though a third of the payment will be deferred until 2005. Now Ford has promised to invest a further £2.5bn on new products and plants over the next four years to turn Solihull into one of the country’s largest vehicle-manufacturing sites. This is in addition to the £1bn that had already been spent on the new-generation Range Rover, due on sale in mid-February.

That will be a total bill of £5.4bn spent on a company that is still said to be losing large amounts of money each week. Land Rover will have to sell an awful lot of vehicles to recoup the investment. And that is the plan – probably as many as 300,000 a year.

But with much of the developed world now technically in recession, this is a critical period for the whole motor industry, which relies on high volumes for profitability.There is something familiar about the Land Rover strategy. Ford bosses remember only too well the painful Jaguar experience: having paid £1.9bn for Jaguar in 1989, it then had to pour untold additional billions into the firm to improve quality and efficiency, and renew and expand the range.

The company’s prospects initially looked grim when a worldwide slump in demand shortly after the purchase halved Jaguar’s annual sales to around 25,000. But, under the guidance of new chief operating officer Nick Scheele, sales fully recovered, thanks to additional models such as the XKR, S-Type and X-Type.

Now, though some lay-offs are expected over the next few weeks at Halewood as sales stabilise after the launch last year of the new X-Type, Jaguar is well on its way to selling 200,000 units a year, or four times as many as its record before the Ford acquisition. Ford kept faith through the bad times because it knew what it had to achieve with Jaguar.

Long sighted

The example of Aston Martin, the smallest of Ford’s PAG brands, is another precedent that suggests Ford will take the long view over Land Rover.

Aston Martin was a lossmaker for most of its long history until Ford took financial control in 1987. But Ford was preoccupied with bigger problems at Jaguar, and it was not until the DB7 went on sale in 1994 that Aston Martin began to turn round. It now regularly makes over 1,000 cars a year, compared to under 100 in the early 1990s.

The mega-money Vanquish, a Ferrari-level showcase of Ford technology, went on sale late last year, and plans are well advanced to add a cheaper third model in 2004. The result will be a niche manufacturer that in four years will be capable of making up to 5,000 cars a year.

Ford’s commitment to PAG is underlined by its recruitment of ex-BMW director Wolfgang Rietzle, who was instrumental in creating the BMW model line-up as we know it today.

Now Ford has pulled Aston Martin, Jaguar and Land Rover together to create a UK subgroup within PAG. On the face of it there is little in common between a Vanquish, an X-Type and a Defender, but the subgroup creates plenty of opportunities for sharing systems, purchasing, logistics and distribution. Provided that PAG maintains the integrity of the brands – and there is little evidence to suggest it will not – cost reductions will come in everything from the purchase of paper clips to steel coils, from ash-trays and door catches to steering racks and brakes.

Eventually the brands will make an attractive and complementary trio at retail level. Ford is in the early stages of putting them together in the US, the world’s largest market for premium brands. Certain dealerships in the UK are already selling the three brands from the same site with adjacent but separate showrooms.

The underlying belief is that models from Aston Martin, Jaguar and Land Rover will be more attractive to potential customers than Ford’s past endeavours. The Ford Scorpio, the company’s latest offering in the executive car market, suffered in the executive market as alternatives from BMW and Mercedes-Benz became more accessible. Not that Ford was alone: other mass producers such as Vauxhall (General Motors), Renault, Peugeot-Citroën and Fiat also took a beating at the hands of the premium brands.

The commercial failure of the volume producers’ flagship models such as Scorpio was part of a fundamental market shift. The Scorpio was technically competent, well equipped and competitively priced, but it lacked a Mercedes star or one of BMW’s stylised propellers on its bonnet. The experience represents a triumph of branding over engineering.

Falling demand for the Scorpio – and for the Renault Safrane, Peugeot 605, Vauxhall Omega and so on – had the inevitable impact on the factories that made them. Erratic and falling sales patterns contributed to the uncertainty and over-capacity in Europe suffered by mass producers. Meanwhile, premium producers slowly, steadily and methodically expanded sales.

Neither is the evolution complete. Having lost the battle for the large car segment, mass producers are under attack by premium products, such as the Mercedes A-class, Audi A2 and BMW’s Mini and forthcoming 1-series, in sectors that were historically the domain of Mondeos and Focuses, Vectras and Astras.

The demise of the Scorpio and the establishment of PAG under Reitzle indicates that Ford has learned the lesson: premium brands enjoy premium margins and more stable demand patterns. The knock-on benefits are felt everywhere from a company’s balance sheet to its industrial structure.

So now the group is establishing an industrial structure that will enable the UK trio to produce over half a million vehicles a year. By contrast, Ford car output in the UK over the past decade seldom moved above 300,000 a year, and it is necessary to go back to the late 1980s to find annual figures of over 400,000.

So the business case makes a lot of sense. Through PAG Ford will make higher-margin models in the UK – and more of them. That, then, is what is behind the huge investment in Land Rover and its positioning within PAG. The strategy looks sound, but it has cost Ford dear – and not just in financial terms.

Away from the glamorous end of the market, something was seriously wrong at Ford. As then-president Jacques Nasser went empire-building – in addition to Land Rover, he snapped up Volvo for $6.45bn and the Kwik-Fit tyres and exhaust for a further $1.6bn – the market performance of the Ford brand globally deteriorated.

Lost opportunities

In Europe Ford missed two highly significant market trends. It tried to fob off buyers with uncompetitive old diesel engines at a time when rivals were transforming customer expectations with new common rail and pump injector technology. Today diesels account for a third of European car sales and are forecast to reach 40 per cent over the next three years.

Ford also failed to produce a competitor in the booming compact people-carrier segment epitomised by the Renault Scenic, Citroën Picasso and Vauxhall Zafira. Ford’s remedies are in place, but the result of poor product planning in the past means its market share in western Europe is below nine per cent today – a fifth lower than only four years ago.

And it failed to take advantage of the collapse of communism in central Europe, where its share is well behind that of its chief rivals. It was slow to move into India and China as demand in these huge markets gathered pace.

Indeed, the brand steadily lost share globally. The Firestone/Explorer controversy contributed to losses in the US in 2001. In Canada Ford’s share is 17 per cent compared with 23 per cent five years ago. It has under nine per cent in Brazil compared with 17 per cent a decade ago. In Australia its share is 17 per cent, sufficient only for second place in a country where it was until recently market leader.

All these contributed to Ford chairman Bill Ford’s decision to fire Nasser. Coping with the problems at Jaguar while at the same time establishing PAG as a commercially successful operation proved excellent training for at least two Ford people who were promoted after Nasser’s departure. Nick Scheele oversaw the transformation of Jaguar as chairman, and Jim Padilla, now vice president of Ford’s North American operations, did more than anyone to improve quality and efficiency at Jaguar when he was manufacturing director.

Under this new leadership, then, Ford has tremendous ground to make up globally. With vehicle demand slowing in the wake of weakening economies, these are major challenges for any car maker.

Range Rover: the shape of things to come

The new Range Rover is symptomatic of the all-new thinking at Ford’s Land Rover subsidiary. The changes go to the roots of the products and to the sprawling Solihull site where they are made. The Range Rover confirms the firm’s commitment to unitary body construction, coil spring, all-independent suspension and rack-and-pinion steering – specifications that would have been unthinkable at Land Rover 10 years ago. The entry-level Freelander has similar specifications, and so will the replacement for the Discovery (scheduled to go into production in 2004).

The exception will probably be the next-generation Defender. The vehicle’s widespread use by the military, utility companies and aid agencies necessitates extra ruggedness and a wide variety of body styles. So the next Defender is likely to retain a live rear axle (for very heavy loads) and a separate ladder frame chassis on which several body types can be built.

The Range Rover’s BMW engines are a legacy of its initial development under German ownership. Longterm, it seems certain that Land Rover power units will be sourced from within the Ford group, as its Bridgend plant gears up to make more petrol V8s and V6s and Dagenham begins to make V6 diesels.

Land Rover spent £200m on facilities and £230m on tools to manufacture the new Range Rover. One of the more radical departures is the firm’s first press shop (which supplies body panels for Minis made at Oxford by BMW as well).

The Range Rover’s body assembly shop is new, while the paint shop was built only four years ago to accommodate the then-new Freelander.

Final assembly – at 10 an hour, or 35,000 a year – is at Solihull’s south works. One of the oldest facilities on the site, it was given a new floor and roof, better defined walkways, proper rest areas and – another first at Land Rover – Andon cords, which allow operators to stop the line when a problem arises. Land Rover made around 156,200 vehicles last year, an 11 per cent fall on 2000 to reduce stocks.

This year, says director of manufacturing Marin Burela, the company will produce around 196,000.

But, he points out, Land Rover’s facilities are capable of making 300,000 a year, with only the paint shop as a bottleneck. ‘We really have to fill that capacity,’ he says.

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