Ford's failure to understand the luxury market has triggered its sale of Jaguar and Aston Martin. A luxury brand like Louis Vuitton may be a better fit, writes Peter Cooke.
Ford has announced plans to sell its Land Rover – Jaguar operations, a part of the Premier Automotive Group.
A couple of months ago Ford sold Aston Martin for £479 million.
These two divestments mean that PAG – the Ford venture into luxury cars as a major profit earner for the new millennium – has all but ended with Volvo cars as the sole remaining significant element in Europe.
With hindsight, what has Ford done wrong, indeed what has it done right, to arrive at this situation?
Are there lessons for other global manufacturers, suppliers in the West Midlands and potential buyers of the two marques?
Ford bought Jaguar in the 1989 for $2.5 billion and Land Rover much more recently as part of its strategy to create a product portfolio from the smallest Ka to some of the most expensive and exclusive like Aston Martin.
Jac Nasser's vision at the time was to create a global portfolio with the aura of the prestige brands cascading across the range.
Quite simply: "I drive a Ka, but it's closely related to Aston Martin."
One assumption for such a strategy to succeed is that the manufacturer is universally strong, understands each of those diverse market segments and countries and has the requisite cash flows, management depth, skills and time to be able to handle the full portfolio.
Ford may have under estimated growth in competition in the luxury car sector – Lexus, BMW, Mercedes, Audi, Porsche – are all looking to build brand and share.
Luxury car dynamics are different from volume products. The mantra in the volume sector – Ford's traditional market is – 'volume is best'.
In the luxury segment the ethos is 'volume to value added,' a totally different ethos for a management group to embrace for a small part of a business.
Globally in 2006 Ford made 3.5 million units, including Jaguar/Land Rover.
Jaguar produced 69,800 units, down from a peak of 126,121 in 2003, while Land Rover produced 175,714 – a handful of units below the previous year.
Currently Land Rover appears to be riding the crest with new fuel-efficient products being announced, while Jaguar still needs big bucks to recover and reposition despite the billions of Ford investment over the past decade.
Ford has lost enormous amounts of money, in the last year $12.6 billion, and the North American operation saw sales drop by $11 billion, followed by a further $1.6 billion in first quarter 2007.
Ford has relied excessively on ageing SUVs and pickups for sales, two sectors under threat from rising fuel prices.
To put that in context, in a recent study, US manufacturers replaced something like 55-60 per cent of their products in the North American markets each year while Japanese competition replaced 85 per cent.
Despite the Ford billions invested in Jaguar and Land Rover, more is still needed and, perhaps as important, a disproportionate amount of senior management time would be demanded to support those 200,000 units in a 3.5 million unit business.
Management time and focus is also desperately needed to turn round the core North American activity.
Hence, objectively 'sell' is, in global business terms, probably the right decision despite the disquiet it is creating in the West Midlands and Merseyside.
Simple and brutal, but automotive is one of the world's toughest global industries.
Ford has not been able to make a success of the luxury car segment; its strength is volume.
Ford is confident there will be a lot of interest in the sale, but is playing its cards very close.
So who is likely to bid for Jaguar/Land Rover?
My own views are based on more than half a lifetime working in and studying the industry, a little speculation, hopefully tempered with a modicum of strategic rationale, but no inside information.
A North American or European automotive manufacturer? Unlikely in my opinion. General Motors has a major restructuring programme on its hands and would need to release a lot of dollars and management time for any acquisition.
Mercedes-Benz, from Europe, is in the midst of the administration of divorcing Chrysler so an inopportune moment for them to seek to embrace a new partner.
Once upon a time Fiat might have been seen in the frame, but the company has other issues to resolve.
BMW have been there in the past. Volkswagen too might once have been considered an alternative, but there would be brand overlap and they too have 'a little local difficulty.'
Japanese manufacturers? Unlikely; not really their style. They already have their own luxury brands so anything additional could confuse the market.
Perhaps a more likely buyer would be a hedge fund or some form of private equity fund. They would look to buy, to analyse, to reorganise and rationalise and bring to market as a lean, mean independent luxury and 4x4 maker in perhaps three to four years.
Maybe this is a case where non-automotive talent might just hold the key to Jaguar and Land Rover's future success.
The ex-Boeing Aircraft executive Alan Mulally has been brought into Ford in an attempt to return the group to profit, principally in North America.
An interesting speculation is that Cerebrus, the private equity group which recently bought Chrysler for $7.4 billion might be a bidder.
After all, they already have Jeep, the other global 4x4 product, in their portfolio.
Other private equity and hedge funds must also be interested; cash availability is no problem – it is the risk/reward, the vision, strategy and implementation to realise a profit in a foreseeable period that is the real driver.
In the current global merry go round a bid from China cannot be totally ruled out. Chinese automotive industries bought MG Rover, not directly comparable and certainly much smaller but they wanted the experience, understanding, technology and brand.
The source of any such investment might be difficult to ascertain, but if the motivation is there.
A Russian-based bid too could be a long shot. An oligarch's son bought TVR, a UK sports car company, even if it did run into problems.
A further option, already known in the West Midlands, is Middle East funds.
Remember Aston Martin but a few months ago?
That deal is fronted by David Richards the ProDrive chairman, funding has come through an investment trust in the Gulf States.
Any such passive funding could be linked to a niche automotive industry player or, for example, to a global luxury brand such as Louis Vuitton a company that understands "value added luxury" in the same way as Ford understands 'volume'.
Whichever route is pursued to divestment, the new owners will need to be cash rich. Jaguar will absorb a lot of capital to continue to reposition the heritage brand away from its 'retro exterior' to become profitable again in global segments where significantly higher prices might support a projected smaller volume of luxury cars necessary to yield the margins required.
First quarter 2007 European sales figures suggest Land Rover has significantly bucked the declining market, but cannot afford to be complacent.
It has started to metamorphose its 4x4 range to be fuel-efficient and is building margins, but still has to strike a careful balance between utility, luxury, image and market friendliness.
The sensitive issues of almost inevitable short-term downsizing will need to be resolved swiftly and the trade unions will certainly have their price if such steps are required.
One could speculate all day as to who might buy Jaguar/Land Rover and the price.
Ford has declared its intention to sell and has appointed investment bankers to find a suitable buyer, while claiming to be open-minded as to method of disposal and potential buyer.
That is but a first step and it is likely to be several months before a final decision is made and that is before we begin the post mortem.
Making a multi-billion investment in a loss-making company is not a decision to be taken quickly, however impatient unions, suppliers and the press might be.
"Marry in haste, regret at leisure" – neither Ford, the potential buyer, nor the West Midlands can afford to get it wrong.
* Peter Cooke is Professor of Automotive Industries Management at Nottingham Business School.