This article appeared in the July 26th web-release by the British business magazine The Economist. VehicleVoice commentary is peppered throughout.
Ford: A costly distraction
July 26th 2007: From The Economist print edition
Ford is selling off its premium brands. Who will buy them?
Ford’s High Hopes for the Premier Automotive Group Never Materialized
WHEN Jacques Nasser, Ford’s boss in the late 1990s, bought two premium European car brands, he had high hopes for his new luxury-car division, which came to be known as the Premier Automotive Group (PAG). By 2005, the firm predicted, Aston Martin, Jaguar, Land Rover and Volvo would sell 1m cars a year, earn more than $1 billion annually and account for about one-third of Ford’s profits. But eight years on the PAG is consistently losing money and sells about one-third fewer cars than predicted—and Ford itself is haunted by the spectre of bankruptcy.
New Ford Regime Under Alan Mulally Puts PAG on the Block Piecemeal
After some initial hesitation Alan Mulally, the chief executive brought in from Boeing last September, decided to put bits of the PAG on the block. In March he sold Aston Martin for $848m, and in June he appointed three banks to field potential buyers for Land Rover and Jaguar. The bidding period ended on July 19th with an unexpectedly high number of potential suitors, thought to include Cerberus Capital Management (the private-equity group that bought Chrysler in May), TPG Capital, Ripplewood Holdings and One Equity Partners (a private-equity firm where Mr Nasser now works), along with India’s Tata Motors and the Mahindra Group.
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VehicleVoice Spin: How much of this is circuitous reporting by the international media? Ford has admitted that potential sale of Jaguar and Land Rover is on the horizon, but how accurate is the list of potential bidders The Economist cites? Wouldn’t it be interesting if Cerberus bought Jaguar and Land Rover to be the luxury marques for Chrysler Group?
Ah, Here Comes the Volvo Rumor Again…
Ford is also considering a sale of Volvo, a Swedish maker of premium cars, and the most valuable and profitable bit of the PAG. Last year Volvo is believed to have made a profit, though the PAG as a whole lost $2.3 billion. (Ford does not break out details of the division’s financial results.) But although selling Jaguar and Land Rover would make sense, it is less clear that the same is true of Volvo, says Jonathan Steinmetz, an analyst at Morgan Stanley, an investment bank. Volvo is more integrated into Ford than the two other brands, with several Ford and Volvo vehicles sharing chassis designs and parts. Volvo is also far bigger by units sold—it accounted for 7% of sales in 2006, compared with 3% for Land Rover and 1% for Jaguar—which helps to spread development costs.
Former Chairman of AMC Says Ford Should Unload All of PAG and Tend to Knitting
But Gerald Meyers, a former chairman of the American Motors Corporation, a carmaker bought by Chrysler, thinks Ford should sell all of the PAG and get what cash it can. Since Ford is in the middle of a multi-year turnaround plan, any distraction from rescuing its core American business is counterproductive, he argues. (In a sign that the plan might at last be working, Ford announced a surprise profit of $750m for the second quarter on July 26th.)
Now This One Doesn’t Make Much Sense
BMW of Germany is one possible bidder for Volvo. BMW says it is keeping its eyes open for takeover targets, though it has had its fingers burnt by acquisitions in the past. Volvo and BMW are compatible premium brands, says Marc-René Tonn, an analyst at MM Warburg, an investment bank in Hamburg. But they do not fit technically: Volvos rely on front-wheel drive, BMWs on rear-wheel drive. Renault would be a more logical buyer, says Thierry Huon at Exane, a brokerage in Paris. Renault needs a premium brand, having failed to build one itself. And the Renault and Volvo brands, with their common emphasis on safety, fit together well.
VehicleVoice Spin: BMW tried its hand with “The English Patient” – Rover and Land Rover – in the 1990s. BMW ended up selling Rover to an investment group for £10 and selling Land Rover to Ford for a couple billion dollars. Volvo cars are based on front wheel drive platforms, BMWs are rear wheel drive (with the exception of MINI). There isn’t much synergy here. Much different mindsets as well. This could well be The English Patient all over again if BMW is so anxious to acquire more brands.
Volvo Group Buys Back Volvo… Now That’s an Idea
Another possible buyer is Volvo Group, the lorry-making (heavy trucks, to Americans) parent firm that sold its car unit to Ford in 1999. This would reunite the two divisions, but there are no synergies between carmaking and lorry-making, which is why the cars were spun off. It is more likely that Renault will sell its 21% stake in Volvo Group to help finance its purchase of the carmaker.
Can Ford Recoup Its Investment in Money and Resources in the PAG Units?
Estimates of the proceeds from a sale of the PAG range from $8 billion to $16 billion. Ford could invest the money in its remaining brands—Ford, Lincoln, Mercury and Mazda—or in product development. But it would probably be wisest to restructure its health-care liabilities, which it is currently discussing with the United Auto Workers (UAW), the car industry’s main union. Mr Mulally is pressing the UAW to set up a union-managed trust that would enable Ford to take tens of billions of dollars of retiree health-care liabilities off its balance sheet. Such a trust would need to be funded up front—so cash from the sale of the PAG would come in handy.
VehicleVoice Spin: <Ford’s immediate headache is the 2007 UAW negotiations and indeed medical costs are a major part of the equation. Ford needs concessions to improve its profit picture and help guarantee those UAW workers their jobs. But, this is still the car business and Ford has fallen behind. Not as far behind as Chrysler, but General Motors has certainly taken the lead in product development of late. Ford needs to restructure not only the Company but also its product lineup. If getting rid of PAG – including Volvo – gets their attention back on the ball, so be it.
But think of these things… Many Ford middle managers now have positions with PAG brands either in Europe or headquartered in Irvine, California. Would they go back to the mother ship? Have they learned enough at PAG brands to be an asset to Ford? Would their departure hurt the PAG brands further? On the product sharing side, The Economist article rightly states that Volvo, Ford and Mazda are successfully sharing platforms. How could Volvo continue that in a cost-effective way if they were to be sold? The transfer pricing would be a bitch. Don’t forget either that the new Land Rover Freelander II/LR2 shares its architecture with the upcoming Volvo XC60. Wow, this is complicated.