ESSAOUIRA, Morocco - Alan Mulally, new CEO of Ford, would have been delighted at the performance of the new Land Rover Freelander during its media launch on the southwest Atlantic coast of Morocco here.
Maybe the good reception for the new Freelander, to be called the LR2 when it arrives in the U.S. in the spring, will help Mulally as he pores over the Ford and Premier Automotive Group bottom lines and takes life or death decisions for its brands, plants and people.
The LR2 bounded up sand dunes, crept over rocky hillsides and generally ate up tough terrain to the manor born, all accomplished with panache in a bigger, more comfortable iteration of the previous model, with improved engines and transmissions. It remains to be seen whether this crucial new vehicle for Land Rover will do enough to guarantee the British SUV-maker's future, which might depend on factors outside its control.
Ford has lost about $7 billion this year and isn't likely to see black numbers until 2009. One decision which could radically impact future profits is what to do with Ford's Premier Automotive Group (PAG), the European upmarket brands of Land Rover, Volvo, Jaguar and Aston Martin, which were charged with leading a revolution to premium profits.
So far the theory hasn't been working.
Losses again in 2006
PAG has made huge losses in three out of the last four years. Last year it lost $1.6 billion, mainly thanks to Jaguar. This year, which was supposed to mark a return to profitability, will see losses again. Specialist luxury sports car maker and Porsche competitor Aston Martin is already being sold.
Jaguar and Land Rover, and to a minor extent Volvo, are storied names in the automotive world which spur emotions among "car guys", which rise above such sordid concerns as profits. The tug at the heart strings because of their history and tradition has surely saved Jaguar and Land Rover in the past when pure economics would have consigned them to the knacker's yard.
But the intriguing question is, what will Mulally, an outsider and business expert with no preconceived automotive notions and no car brand baggage, see when he inevitably bears down on PAG, its brands and its future? He could see BMW, Mercedes and Porsche style margins leading the way to the broad sunlit uplands of Ford's renewal. Or he might see PAG as a hubris-driven, profit-munching virus which must be exterminated if Ford is to survive.
Volvo most likely to succeed
As is the way with these things, the answer will be somewhere in the middle, although many see no long-term future for Britian's Jaguar, which might have be cut back to its bare essentials and moved to the U.S. to become successful, while Land Rover might also have to divert a large part of its production to the U.S. Sweden's Volvo looks the most likely to succeed, although it might have to move production of its large cars to the U.S.
"Jaguar has become irrelevant in the market place; it probably was before Ford bought it in 1989, but it's become known as an old man's car," said John Wolkonowicz, Global Insight's senior analyst for North America, based in Lexington, Mass.
This week, Jaguar announced the replacement of its mid-range S-Type sedan with the new Jaguar XF. The S-Type shared much of its engineering with the Lincoln LS. Jaguar offered no pictures or details of the new XF, just saying it will make its public debut in the fall of 2007. If the XF doesn't have the "wow" factor in spades, Jaguar's future will be bleak.
"I don't know what to do with it (Jaguar); I'd try to sell it to the Chinese or Koreans to see that they would do. Land Rover is a little different. I think it has a kind of mystique that is very powerful. That's one brand that Ford should be keeping. Volvo is the crown jewel of PAG and that's exciting for Ford because it has fairly high volume that's got a completely different demographic than Ford. It's big on safety - that's a major hot button for baby boomer consumers. It's not premium, but it's not quite mainstream either, kind of in between, not a bad place to be, better than the average and you don't have to break the bank to buy it," said Wolkonowicz.
Why produce at high cost British plants?
Krish Bhaskar, who heads the Motor Industry Research Unit (MIRU) based in Nice, France, said Mulally won't see the logic of producing Jaguars and Land Rovers in high cost British plants.
"Mulally will almost certainly switch some Range Rover, Range Rover Sport and Discovery production to an underused plant in the U.S. or Canada. The big thing is, PAG production will no longer be tied to Europe. Volvo must stay there yes, but larger Volvos could move to the U.S. too," said Bhaskar, who added that he was talking long-term, over a 10-year period.
The fate of Land Rover production, not to mention Jaguar's, won't be helped by the dollar's renewed decline on foreign exchange markets. The British pound accelerated to $1.95 on Nov. 28, its highest for 2 years, as it bore down on $2.00
Bhaskar said Land Rover and Jaguar production in the U.S. would also tie in with Mulally's desire to adopt Toyota style use of more or less identical plants all over the world, which would allow great flexibility, huge cost cuts, and avoid foreign exchange problems. He advocated the embrace of global platforms, which have been sought by Ford in the past, but then died on the vine as local Ford management dug their heels in.
"What happened to Ford 2000? Other global platform initiatives were tried and failed like the Ford Mondeo, the Escort and the Focus too. Local market people got their way and killed it," said Bhaskar.
Poor management
Walt Madeira, British-based Europe Sales Forecast Manager for CSM Worldwide, is another analyst less than impressed by PAG's contribution so far, saying it has been the victim of poor management choices. But Land Rover will benefit from the SUV boom, which will take global demand to 2 million a year in 2012 from 750,000 in 1999.
"Ford would be foolish to back away from Land Rover's challenging future. Volvo is selling more cars and SUVs, has a wider line-up now with the little C30 (arriving in the U.S. in April 2007). Volvo is no longer regarded as a company that makes "square station wagons" but a trendy, curvy and sexy brand, well known for high safety levels. But it does have plants in high cost countries," said Madeira.
"Jaguar is following the path to eventually join Aston Martin on the selling block. It's only a question of deciding the year to sell. Ford has failed in changing the consumer perception of the brand's image and values, and with the failure of the move down market with the X-Type, low volumes and high profit margins per vehicle are the brand's future," Madeira said.
John Wormald, analyst with British automotive consultancy Autopolis, said Jaguar has been a financial black hole for Ford and never saw the reasoning which created PAG in the first place.
Throw dead weight overboard
"The whole assemblage of PAG never made sense to me. If I were Mulally I would be asking rather hard questions about what this was doing for me. The finances, other than Volvo, are pretty horrific. With Ford fighting for its life in America, certain bits of dead weight might have to be thrown overboard. It's sad yes, they make some good products, but that doesn't cut the mustard financially," said Wormald.
"The trouble is, who would want to buy bits of PAG apart from Volvo? I can't see it," added Wormald.
CSM Worldwide's Madeira reckons potential investors in Land Rover will be reassured by its global sales prospects, which will increase towards 225,000 by 2010 from 200,000 expected in 2007. Sales in 2005 were 185,120.
Madeira expects LR2 sales of 70,000 in 2008, slightly down on the last Freelander's peak of 73,000 hit in 2002
All bets off if quality fails
According to MIRU's Bhaskar, any potential buyers will be impressed by Land Rover's new LR2, which, although unlikely to reach its sales target of between 70,000 and 80,000 a year, will comfortably sell between 50,000 and 60,000.
"They've launched it at a very aggressive, high price, but even though the competition has become much stronger since the first Freelander, with the Toyota Rav 4, Honda CR-V and Nisssan X-Trail all moving upmarket too, it will do more than enough to break even. They'll make money, it will work well," said Bhaskar.
All bets are off, though, if quality problems endemic in the first Freelander are not cured. J.D.Power reports on LR2 quality will be crucial reading for LR2 buyers, and potential Land Rover investors.
Neil Winton, European columnist for Autos Insider
