Ford unloading Volvo
These acquisitions were a dumb move in the nineties. They were just feeding CEO's egos at the stockholder's expense.
DEARBORN, Mich., July 16 – It was a big victory at the time.
When Bill Ford Jr. beat out Fiat and Volkswagen eight years ago to buy Volvo, he declared the $6.5 billion acquisition a “meaningful step” to fulfilling the Ford Motor Company’s “21st-century vision” of becoming the world’s leading automaker.
To cosset his new prize — along with Ford’s other luxury foreign automakers: Jaguar, Aston Martin and Land Rover — he built a sprawling headquarters in California two years later, with separate lobbies designed to reflect each of their personalities (Volvo’s was blue with blond Scandinavian wood.)
Mr. Ford and Ford’s chief executive then, Jacques A. Nasser, promised that the new Premier Automotive Group, with Volvo as its centerpiece, would collectively sell a million cars a year by the middle of this decade, and generate at least a billion dollars a year in profits.
But those plans have not worked out. And now, with its recent decision to entertain bids for Volvo, Ford appears to be shifting into reverse on its strategy, dismantling the collection of luxury auto companies, including the Land Rover division it bought in 2000, that it once assembled with such confidence.
Alan R. Mulally, who was named Ford’s chief executive almost a year ago, is pushing the company to climb out of $12.6 billion in losses last year by returning to its roots as a mass-market manufacturer, and the fabled foreign brands are no longer considered pivotal to its turnaround strategy.
Ford has company in its retreat. Plans by Chrysler and General Motors during the 1990s to also use foreign brands to expand their global reach have been largely abandoned.
General Motors has already sold off stakes in foreign companies like Fiat and Fuji Heavy Industries that represented its own global foray, while DaimlerChrysler itself, the most ambitious attempt to dominate the international stage, will soon be broken apart.
The Detroit automakers are now refocusing on their core brands, a strategy they will deploy in hopes of regaining market share they are losing to the likes of Toyota and Honda, which have never strayed from their strategy of investing billions in their basic car business.
“What has really evolved here is that the scenario has changed so dramatically,” said David Cole, chairman of the Center for Automotive Research. “Because of that change, you’re looking at things in a far more pragmatic way, with the thought that if you screw up in labor negotiations, or you screw up in product development, the company may go down.”
In retrospect, Ford’s experience with the Premier group, known as P.A.G., is proof that a car company cannot buy its way to a dominant position in the market, said David E. Davis, founder of Winding Road, an online car magazine, and a longtime observer of the auto industry.
Ford saw its purchases of Volvo and the other brands “as a costly, but not overwhelmingly costly, way to project themselves into parts of the market where they had never been able to move in with their own resources," Mr. Davis said. “It turned out that all they bought was a huge amount of trouble."
Indeed, the group’s collective sales last year were just over 700,000, or one-third less than the sales goal Ford set for P.A.G. when the group was founded in 1999.
Moreover, the group has lost money in four of the past five years, versus the $1 billion a year in profits that Ford had proclaimed the brands would contribute. (The group, however, did earn a pretax profit of $402 million in the first quarter.)
Ford’s purchase of Volvo occurred at a time when the American auto industry had reason to feel bullish.
It came only 28 days after Mr. Ford and Mr. Nasser took charge of the company, and was part of a decade-long buying spree that enveloped nearly every global auto company. Daimler-Benz and the Chrysler Corporation linked up in November 1998 to form DaimlerChrysler, while the French automaker Renault and the Japanese automaker Nissan announced their alliance only a few months after Ford bought Volvo.
The deal making culminated in 2000 when G.M. took a stake in Fiat, a deal that came together virtually over a weekend, but which cost G.M. $2 billion to unwind in 2005.
Jaguar, which Ford bought for $2.5 billion in 1990 in another bidding war, had trouble making the leap to the contemporary luxury market, which grew increasingly crowded with new offerings from Lexus, Mercedes-Benz and BMW.
Purists complained that Ford, which used common underpinnings for Jaguar and Lincoln models, made its cars look more like Ford Tauruses than English classics.
Ford also poured management time and billions of dollars into fixing Jaguar, claiming as recently as this year’s Detroit auto show that the brand would remain in the company fold, when many industry analysts were saying that it was well past time for Ford to cut its losses.
“The Ford guys just threw restraint to the wind,” Mr. Davis said,
“and spent way more money than Jaguar would ever recoup for them.”
Volvo has been a different story. It has generated profits of $800 million to $1 billion a year, provided Ford with expertise in safety development, and ranks as one of Ford’s best-selling brands.
But even it has failed to live up to the promises that Mr. Ford and others made. Volvo sold 430,000 vehicles worldwide last year, versus the 650,000 target that Ford predicted. And its profits have not been enough to offset losses elsewhere in P.A.G.One problem for Volvo has been that the impact of its primary selling point has been diluted as other companies have made safety advances with their own cars.
Honda, for example, has declared that it wants its cars to be known as the industry’s safest, at thousands of dollars less than Volvo models.
Indeed, analysts say that if Ford were in better financial shape, it might be able to make a case for keeping Volvo — leaving at least one resident in the 300,000-square-foot P.A.G. headquarters in Orange County, with its coffee bar and roof planted with more than 30 types of vegetation.
Mr. Cole of the Center for Automotive Research said of Ford’s decision to break up the Premier group: “They’re faced with no choice but to do that. You could have phenomenal operating performance at a Volvo, but it’s not going to offset a catastrophe at the home Ford Motor Company.”
"You can think of Volvo as a pretty important accessory and Aston Martin, Land Rover and Jaguar as fringe sort of things,” but none are more important than the main auto company, he added. With Ford auto sales dropping in the United States, "I think they’re looking at contingencies because revenues are falling short of forecasts," Mr. Cole said.
Jonathan Steinmetz, an auto industry analyst with Morgan Stanley, said in a research report: “Ford does not have the resources, from both a financial or a managerial perspective, to keep plowing time and money into all its brands,"
He noted that Ford had mortgaged virtually all its assets, including factories, office buildings, and even the trademark on its blue oval logo, to raise $23 billion in cash. So it has good use for the money it can raise by selling the Premier group brands.
“Every bit will help,” Mr. Steinmetz said.
Jaguar, he said, has been “a large cash drain.” Land Rover, while better off than Jaguar, is too small to help the company solve its problems, Mr. Steinmetz said.