Ford: Small Cars, Big Profits

Historically, American auto makes realized bigger profits from bigger cars. As part of its turnaround, Ford has engineered a way to reverse that dynamic. Rising gas prices and the supply chain problems Toyota has suffered as a result of the March earthquake have put customers in a receptive frame of mind. But in a strategy derived from the experience of other consumer goods manufacturers who are having trouble raising prices per se, Ford is charging for add-ons that do not come with the basic model. One might think of them as auto apps. Dale Buss reports in Brand Channel:

"Two events have turned the US auto industry on its head, or at least quite a bit cockeyed: the rise of $4-a-gallon gasoline, and the earthquake and tsunami in Japan. Small cars are enjoying a combination of rising demand and tight supply because of those two still-unfolding developments.

And they are two big reasons why Ford was able to post a robust, $2.6-billion first-quarter profit on Tuesday, even though the US auto market is still operating at volumes several million units below annual sales of just a few years ago.

There were two other contributors as well to quarterly results that had Ford CFO Lewis W.K. Booth “feeling pretty good” on Tuesday.

One was the fact that Ford has been able to reduce manufacturing costs because of labor concessions brought on by the Great Recession.

And the other is that Ford has been able to make even its small cars much more profitable than before by decking them out with amenities such as the Sync infotainment system and heated seats — and then getting American consumers to prefer the “loaded” versions over stripped-down ones. Even for small cars such as Focus and Fusion, customer “take” rates for Sync, for instance, are around two-thirds to three-quarters.

Profitability of small cars is something that domestic auto makers never could count on until now. And now they expect to be selling still-increasing numbers of them, as the specter of $5-a-gallon gasoline haunts American car buyers — and at a time that typically dominant Japanese small-car brands can’t build enough of their own vehicles in the aftermath of the earthquake and tsunami.

Toyota executives on today's earnings call confirmed that they’ve bottomed out at about 50% of their pre-quake production level and don’t expect to get things back to normal until nearly the end of the year.

Of course, there remain huge clouds for Ford and other domestic automakers, including a still-shaky economic recovery, bulging commodity prices that contribute to higher manufacturing costs — and, of course, Americans’ touchiness about paying too much for gasoline.

But at least for today, Ford’s profit picture looks pretty bright.