Why Ford Should Cut its Losses on Lincoln

For decades, Ford Motor Company has been struggling through its business cycle.

When business is booming, Ford spends precious capital on investments instead of paying off debt and pension liabilities, the result of which is one of the worst balance sheets in the auto industry. The longstanding struggle between management and unions has also taken its toll over the decades.

Poor capital investment decisions are often the result of poor strategy. First Ford should aim to become the dominate automaker in its domestic market for the middle class, with a full lineup of quality cars attractive to younger consumers. With the recent successes of its Fusion and Fiesta cars, it has made inroads in this regard. It also needs to clean up and strengthen its balance sheet, and devote money to fund its increasingly large unfunded pension liabilities ($9.7 billion as of Dec. 30, 2012).

Ford is in the midst of reviving its luxury brand?Lincoln. In our opinion, given the current market conditions and stiff competition, Ford should give it the same treatment as it gave Mercury years ago?that is, shutter the brand.

In order to succeed in the luxury car segment with meaningful volume in the long term, the manufacturer must be a dominate player in the mass car market in terms of quality, and to achieve that, it must have one of the best workforces and strongest balance sheets in the industry. Right now, none of the U.S. Big Three automakers (Ford, General Motors, and Chrysler) have that.

There was a time when American autoworkers were the best in the world. But after the Vietnam War, U.S. manufacturing began to decline just as Japan and Germany finally recovered from the ruins of World War II. Japan and Germany have traditionally boasted strong manufacturing bases and today have better workforces than the U.S. automakers in terms of perceived quality.

The U.S. economy has become a service-based economy. While it has attracted the top talent from across the world, the get-rich quick culture in the past few decades exemplified by Wall Street and Hollywood movies has wreaked havoc on its workforce. The most talented young people choose to become lawyers, bankers, and doctors. Vocational education, which is essential for manufacturing, has become very weak.

General Motors has done an admirable job in uplifting Cadillac in recent years, culminating in this year?s accolades among the automotive press for its ATS compact luxury sedan. Lincoln, as recently as the 1990s, was a leading luxury car brand in terms of sales in the American market. However, a lack of innovation and focus has contributed to its inability to compete with German and Japanese luxury alternatives.

If a luxury automaker doesn?t resonate with consumers in terms of quality and innovation, it will be almost impossible to generate enough sales to warrant the relatively large associated R&D costs. That is why Ford will have difficulty consistently getting a reasonable return on capital from its luxury car division. Lincoln is a drain on shareholder value.

The right strategy for Ford should be to divert its resources and attention to its U.S. operations by scaling back in Europe (where perception of its vehicles is lackluster at best), reduce capacity in developing countries where there is big potential for overcapacity, and sell off or close down its luxury division.

Warren Song and Frank Yu are contributors to the Epoch Times.

Source: http://www.theepochtimes.com/n3/222158-why-ford-should-cut-its-losses-on-lincoln/

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