Ford's New Pick-Me-Up?

The carmaker has a lot riding on its retooled F-150

In Casper, Wyo., Jack Harbison says he can hardly wait for the arrival of his new white 2004 Ford F-150 fully loaded SuperCab pickup truck. The 75-year-old drilling contractor, a Ford customer for 35 years, ordered the $40,000 truck in April, sight unseen. New F-150s have just begun rolling out of Ford Motor Co.'s Norfolk (Va.) factory, and he plans to grab his as soon as it arrives at his dealer, probably in early September. Says dealer Pete Greiner: "He's like a little kid waiting for Christmas."

Die-hard customers such as Harbison should help the latest generation of Ford's biggest-selling vehicle get off to a strong start. That's crucial for the troubled auto maker's bottom line. Profits on the current F-150 average $10,000 per vehicle -- leaving Ford with about $3 billion in profits on the 600,000 vehicles sold per year, after subtracting corporate taxes and money spent on incentives. (Those profits offset only some of the losses in passenger cars and overseas units. Ford lost $980 million overall last year.) Chief Executive William C. Ford began 2003 by telling investors that of all the new-vehicle launches, none is as essential to Ford's success as the F Series.

But despite eager customers and early positive reviews, it's unlikely Bill Ford will get as big a profit kick out of his new pickup as he's hoping for. Sure, early buyers will snap up lucrative top-of-the-line versions with few, if any, rebates. But profits will almost certainly start eroding next year, as General Motors Corp. tightens its pricing pressure and a highly anti-cipated new full-size truck from Nissan Motor Co. (NSANY ) hits the market. To face up to those challenges, Ford loaded the 2004 F-150 with upgrades, from new interiors to more refined engines. But that lifted the F-150's per-vehicle manufacturing cost by $2,000, which was later cut to $1,500. Only a fraction of that is being carried over to the $22,010 base price. That means that the 2004 truck will have a gross profit about 10% less than the 2003 model, figures UBS Securities analyst Saul Rubin.

Earnings could suffer even more as the new F-150s lose their novelty. Ford will continue to sell the older, more profitable version of the F-150 through next summer. But many analysts expect Ford will have to start increasing incentives as early as this winter to meet the rising competition. By next year, those give-backs could top $2,000 on the new truck and $4,000 on the older models. "The truck may provide temporary relief," Rubin writes in a recent report. "But this may change, and quickly."

For years, big pickups and SUVs were exempt from the auto industry's price wars. No longer. For instance, Rubin notes, Ford launched updates of Expedition and Lincoln Navigator last summer with only modest givebacks. Since then, however, it has had to bump up incentives on the big sport-utes to $4,000 and nearly $7,000, respectively. In GM's determination to preserve truck market share, it raised incentives on the Chevy Silverado to about $3,900 in July. That bodes ill for Ford's plans to rein in rebates on the new F-150. "You can bet GM is well aware of the F-150 cost problem and sees an opportunity to take Ford's revenue away," says auto consultant Jim Bulin.

Now even the Japanese are using givebacks to sell trucks. Toyota Motor Corp. (TM ) offers $2,000 off of its Tundra, and Nissan says it will offer incentives on its beefy new Titan, set to launch in December, though it has not said how much. The Titan is being watched closely by the industry -- with a 5.6-liter V-8 engine, it's the first true full-size Japanese pickup geared to American tastes.

Ford has responded by packing more goodies into its new F-150. The company spent lavishly on the F-150's makeover. It developed a more powerful V-8 engine and will drop the V-6 altogether. It gave the truck a stiffer body frame to improve durability, ride, and handling. New F-150s all have four doors, and there are five distinct styles, from sporty off-roader to cushy luxury cruisers, each with top-notch interiors. But even Bill Ford is questioning whether the extras are too much for the market to bear. "We let in a lot of cost that the customer isn't willing to pay for," he says of Ford's spending on many of its vehicles.

Ford admits it will take two to three years to get the new F-150's cost on a par with the outgoing truck, perhaps by tweaking components and materials. Weighing those extra costs against consumers' "let's-make-a-deal" mind-sets, Ford raised prices on the new pickup by a range of only $245 to $635 from comparably equipped 2003 trucks. Yet Ford Div. President Steve Lyons swears the new F-150 will actually earn slightly fatter profits: "We anticipate incentive costs will be substantially lower and the mix will be better."

But even if Ford wrings out all the extra costs, it's difficult to see how it can command much of a premium with all the new trucks coming to market. Toyota is expanding output on its Tundra to 250,000, and Nissan will churn out 100,000 Titans. Meanwhile, growth in the 2.3 million-vehicle-per-year large pickup market has been meager. Says Lincoln Merrihew, auto specialist at researchers Compete Inc.: "We're going to see a battle royal."

Ford needs every dime of profit it can get from the F-150. Ford's new car designs are a year way, and it is still sorting out problems in its luxury-car group. So management can't afford costly delays or quality defects in the F-150. Earlier this year, Bill Ford vowed: "We will nail the launch of this product." But Ford's truck unit is headed down a bumpy road, and competitors will be eager to see it stall out.

By Kathleen Kerwin in Detroit

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