Ford Learns The Lessons Of Luxury

Its deluxe brands have made strides. But buyers are a demanding lot

Mark Fields has the ebullience of a guy who's on a roll. Last year, Fields pulled off a nearly $1 billion profit swing at Ford Motor Co.'s (F ) collection of prestige auto brands. Thanks to a couple of hot new products -- Jaguar's new flagship XJ sedans and Volvo's XC90 SUV -- the Premier Automotive Group (PAG), which also includes Land Rover and Aston Martin, turned a 2002 operating loss of $897 million into a slim 2003 operating profit of $164 million and rang up a 17% gain in global sales. Thanks in large part to PAG, Fields's boss, Ford Chief Executive William C. Ford Jr., is now able to boast that he sells more luxury cars in the U.S. than anyone else.

But Fields, 43, isn't letting this go to his head. "A little success is fine," he quips, "as long as you don't inhale." And he has plenty of reason to be realistic. His boss is counting on him to to squeeze a lot more out of Ford's luxury brands to make good on the CEO's turnaround plan. Yet since arriving two years ago from Ford's Mazda unit, Fields has had to undo mistakes made by his predecessors in the heady early days after Ford combined its luxury makes into PAG. In the process, Fields has learned a valuable lesson -- that mass-market luxury is an oxymoron.

Fields had to change course from early plans to enrich revenues with big volume increases and to boost profits by sharing car chassis with some of Ford's more mundane mass-market models. Instead, he is leveraging car platforms within each luxury family and saving through common electronics and safety equipment. Now Fields will find it much tougher to meet PAG's mid-decade profit goal -- to kick in one-third, or $2.3 billion, of Ford's promised $7 billion annual pretax profit. He still insists he can get there, and the expectation within Ford this year is that PAG will generate operating earnings of $550 million. Even with the changes Fields is making, says Standard & Poor's auto analyst Scott Sprinzen, "they still have pretty ambitious goals."

Fields had little choice but to rein in PAG. The unit was created in 1999 by former Ford CEO Jacques A. Nasser and Wolfgang Reitzle, the ex-BMW exec Nasser recruited to forge Ford's various European car-company acquisitions into a coherent, profitable unit. They wanted to create a money machine by pumping up sales volumes of PAG's high-profit cars while slashing costs by introducing economies of scale. Unfortunately, neither plan worked. Cranking out too many cars of an elite brand such as Jaguar damaged the exclusive image. That's why Fields ratcheted down PAG's unrealistic goal of boosting global sales by almost 50% in five years, to more than a million cars by 2006. Last year, PAG sold only 701,500 vehicles, and Fields no longer divulges sales targets.

PAG's initial platform-sharing plans also went awry. While sharing the basic structure of a car or truck can generate huge savings for most models, Ford discovered that it just won't wash in the luxury market. Most car buyers have no idea what a platform even is. But word quickly gets around when a new model shares its undercarriage with more plebeian cars. And it turns out that someone paying $40,000 for the luxury cachet of his first Jaguar cares a great deal that the car's guts are being shared with something that may cost only $20,000 or so.


PAG learned that lesson the hard way. Although Ford execs had debated for years the merits of sharing platforms in their luxury group, the results became clear when they tried it with the Jaguar X-Type sedan. Introduced in 2002, it offended Jag loyalists who knew from car reviews and press reports that the "Baby Jag" was based on the humble Ford Mondeo. That, plus initial quality woes, seriously tarnished the car's image and led to heavy discounting. Says Jim Bulin, head of Bulin Group, a Northville (Mich.) auto consultant: "This is a prostitution of something customers hold sacred."

Ford isn't alone in its platform-sharing dilemma. Audi is losing European sales as savvy consumers figure they can get a similar but cheaper car from Volkswagen. And much of the $4.3 billion General Motors Corp. (GM ) invested recently in Cadillac went for building a plant, chassis, and engines that will be exclusive to Cadillac models. In Ford's case, the lesson is calculated in profits and prestige: In the U.S., where Jaguar X-type sales fell 19% last year, Ford has lopped $3,000 off the X-Type's $36,000 base price. The car had similar problems in Europe. A diesel version introduced there last fall has caught on, but industry insiders say Ford may phase out the car by decade's end.

Now, in most cases, each of PAG's divisions will have its own exclusive undercarriage. That is a costly choice, since a unique one costs $1 billion or more. "In general, in the auto industry, the Holy Grail is fewer [platforms]," Fields says. "But the customer's perception is what counts." Fields is pushing each PAG brand to derive as many vehicles as possible from each exclusive platform. Jaguar, for instance, may base its next S-Type on the new XJ's underpinnings instead of a Lincoln platform, as it does now. Land Rover, with an assortment of platforms, will take longer to consolidate. The six-figure Aston Martin will get its own chassis, instead of borrowing from Jaguar. Volvo, PAG's not-quite-luxury brand, will still share some platforms. Its entry-level S40 and S50 sedans share with Mazda and Ford of Europe, saving Volvo 10% to 20% on product-development costs, Fields says.

To ensure that the luxury brands' images are protected, Fields will look for other kinds of cost sharing that he believes customers won't detect -- or won't mind. He is planning to share technology among PAG units, reasoning that few customers will care if a Jaguar and a Land Rover have identical navigation and sound systems, or even if they use state-of-the-art Volvo safety gear. The sharing also extends to costly engine development. Fields aims to reduce the number of engines at Jaguar and Land Rover from six to two. PAG divisions will also jointly develop a six-speed transmission.

Beyond that, PAG can choose unseen nuts-and-bolts items -- brake pads, window-lift motors, or fasteners -- from Ford's global parts bin to take advantage of bulk-purchase savings. PAG is also saving money by pooling the individual brands' resources for logistics, information technology, and other back-office expenses. Fields figures he can also cut costs -- after a heavy initial investment -- by bringing PAG's British factories up to snuff with greater quality and productivity, and by incorporating modern, flexible manufacturing equipment to allow side-by-side production of multiple models. Such moves would likely eliminate the need for one of Jag's three British plants. Ford executives decline to comment on that possibility.

Will all this save enough money to make up for abandoning platform sharing and settling for slower sales growth? Fields hasn't given up on the idea that building better Jags and Volvos can boost sales and profits substantially. For the sake of Bill Ford's turnaround plans and shareholders, he had better be right.

By Kathleen Kerwin in Detroit

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