Ford's Jaguar Bet: Payoff Isn't Close
21 April 1992
NEW YORK TIMES
COMPANY NEWS; Ford's Jaguar Bet: Payoff Isn't Close
By STEVEN PROKESCH,
Published: Tuesday, April 21, 1992
To Ford Motor Company shareholders wondering when to expect a decent return from Ford's $2.5 billion acquisition of Jaguar, the British luxury car maker, Nicholas Scheele's words will not be comforting.
When asked when that time might come, Mr. Scheele, Jaguar's new chairman, replied: "My boss at Ford said it took us close to 40 years to get any benefit from the acquisition of Lincoln. I hope it doesn't take us 40 years to get any benefit out of Jaguar."
For now, stanching the red ink is Mr. Scheele's main concern. Jaguar lost a total of $431 million in 1990 and 1991, after taxes, a result of sharply lower sales, and it will almost certainly post losses again this year. Smaller, Sporty Sedan
So much for Ford's plan 18 months ago to have Jaguar generating positive cash flow by this year, and to be able to self-finance an ambitious program to develop fresh cars, including a smaller, sporty model that might sell for $25,000 to $45,000. Analysts estimate that the program will cost about $2.5 billion.
Ford's multibillion-dollar bet is that a sporty sedan will attract younger professional buyers who cannot or will not pay $44,500 for today's least costly Jaguars and who turn up their noses at Ford's luxurious Lincolns. Instead, they buy cars like the BMW 5-series, Toyota's Lexus, Nissan's Infiniti and Honda's Acura.
While many dealers insist that Jaguar's distinctive, curvy look continues to give them an edge, several confessed that the new models, especially the sporty sedan, could not arrive soon enough.
"I'd love to have them all here next month," said Norman Gregersen, co-owner of Palm Beach Motor Cars Ltd. in West Palm Beach, Fla. "But from the lessons in the past, I don't want them until everything is absolutely right," in terms of quality. The success of a new, lower-priced model will largely determine whether Ford made a correct bet when it bought Jaguar in late 1989, with money that was badly needed to rejuvenate Ford's own car lines.
Already, Ford has trimmed its Jaguar sales target by a third. The original plan called for Jaguar to produce more than 150,000 cars a year by the end of the decade, including 65,000 units of the sporty sedan. Now the total target is 100,000 cars, about half of which would be the new, lower-priced model; the rest would be new versions of Jaguar's existing models.
Even that goal is ambitious. In 1988, Jaguar's best sales year, it sold just 49,494 cars.
Do Ford executives regret the price they paid? Rather than lament it, they seem to be doing their best to forget it.
"That's past," William J. Hayden, Jaguar's former chairman, said in an interview late last month on the eve of his retirement. "As Henry Ford once said, 'History is bunk.' " Mr. Scheele, who is 48 years old, insists that even with annual sales of 100,000 cars, Jaguar will be able to generate a respectable return. "It really depends on what price you get for the product, which depends on how good the product is," he said. So far, Ford has managed to improve Jaguar quality markedly.
But success also depends on continuing the improvements in efficiency Jaguar has been making since Ford bought it. Productivity has improved by about 35 percent, Mr. Hayden said. He would not say how many hours of labor it now takes Jaguar to paint, weld and assemble a car, but he noted that Jaguar was unquestionably still behind even the relatively unproductive German luxury car makers. The Germans need about 70 hours, experts estimate, and the Japanese about 20.
Jaguar reduced its work force last year by 4,100 people, to 8,000, and another 650 jobs will be eliminated this year. Jaguar's break-even point has been reduced to 34,000 cars, from about 50,000.
But analysts point out that with the intensifying competition, profit margins in the luxury car segment may never go back to where they were before sales began to drop.
"There's no way that Ford will ever get its money back on its investment in Jaguar," predicted Ronald A. Glantz, automotive analyst for Dean Witter Reynolds in San Francisco.
Several analysts say Jaguar will be lucky just to hang on to its current market share in the next few years as it develops replacements for its two existing, and aging, model ranges. Bad Timing
Ford's misfortune is that it bought Jaguar right before the collapse of the American and British luxury car markets, its two biggest. Total Jaguar sales last year plunged 40 percent, to 25,676, from 42,754 in 1990.
Besides the recessions in Britain and the United States, sales have been hurt by an American luxury tax on cars costing more than $30,000.
Jaguar's assembly plant here is still working only three days a week because of slack sales. And the company's executives are not exactly exuding confidence about achieving their modest goal of selling 27,500 cars this year, only about 2,000 more than last year.
Mr. Hayden, the former chairman, said that there had been some recent signs that Jaguar sales in America were beginning to recover. "But really you need another two or three months to determine if it's going to come back or not," he said. To make matters worse for Jaguar, the economies of Germany and Japan, its next-biggest markets, are now in recession or slowing. And the depressed global luxury car market seems to be doing little to deter other car makers, like Mazda and Mitusbishi, from joining the fray.
"Nick's got a huge job on his hands," said Prof. Daniel T. Jones of the Cardiff Business School at the University of Wales. "If he can keep Jaguar going and turn it around he'll be destined for big things at Ford." Professor Jones was a member of the Massachusetts Institute of Technology team that produced a seminal study of the world car industry in 1990. List of Changes
First on the product development list is a replacement for the XJ6 sedan. Next is a new version of the XJ-S grand touring coupe and convertible. British trade publications say they will be introduced in 1994 and 1996, respectively, and the sporty sedan in 1998. Generally confirming these dates, Mr. Scheele said Jaguar had been able to accelerate its development program by about a year.
The replacement for the XJ6 sedan, Jaguar's main model, will not be a totally new car. While it will have restyled body, Mr. Scheele confirmed reports that it will use many structural components of the existing model, as well as its glass, roof and suspension.
Is this a compromise? Jaguar executives say they are only trying to marshal their resources to get all three models out as soon as possible. Ford's Shocking Discoveries
While Ford executives had realized that Jaguar was in a sorry state when they decided to buy the company, they were shocked to discover just how bad product development and manufacturing were. With Ford's help, however, Jaguar has undeniably made great progress in these areas and in lowering component costs.
One reason Jaguar thinks it can accelerate its new car introductions is that Ford is designing the process and making the tools for stamping body panels.
The leadership installed by Ford also won a new union contract that removed archaic work practices like rigid job classifications and a piece-rate system that allowed workers to quit early after producing their quota.
As for quality, long a Jaguar bugaboo, the number of defects per 100 cars coming off the assembly line has plunged to fewer than 500, from 2,500 in early 1990. Mr. Scheele said customers were already noticing the higher quality -- an assertion backed up by dealers in the United States and by consumer research conducted by Auto Pacific Group Inc., a California-based consulting firm.
"Jaguar's quality now is right up there with Infiniti," said Hugh Weidinger, vice president of the Hempstead Auto Company, a big Jaguar and Infiniti dealership in Hempstead, L.I. "But it's probably the best-kept secret in the world."
He and other dealers hope that an imminent marketing campaign will change that. Jaguar has announced that its American advertising account is being reviewed for a possible switch of agencies that might lead to new ads. It is also about to extend the warranty on its cars in the United States to four years, from three. Jaguar executives are confident that productivity and quality will improve much more in coming years, especially when they introduce cars whose designs make them much easier to build than existing models. Legacy of Quality
As president of Ford's Mexican subsidiary, Mr. Scheele was responsible for Ford's plant in Hermosillo that made Escorts for the North American market. Its quality was the highest of any of the high-volume assembly plants examined by the M.I.T. team.
Until they get the new models, Jaguar leaders are counting on improvements in their existing cars to tide them over. With the stiffer competition, Christopher Cedergren, a senior vice president of Auto Pacific, predicted that even if the luxury market rebounded in the United States, Jaguar would continue to struggle there. "They probably are not going to move back to the volume levels they enjoyed in '89 and '90 until they come up with a new generation of products," he said.
In response to critics who wonder whether Ford has the expertise to make Jaguar a success, Mr. Scheele insisted that the skills needed to succeed in the luxury and high-volume segments were not "tremendously different. In both, they are "define the product, define the customer, establish a program, deliver the program and satisfy the customer," he said.
But the way he talks about Jaguar's great products in the past -- like the Mark II sedan of the 1960's -- shows that he knows the process is not really so mundane. He knows the consumer will be the ultimate judge, and the pressure is on.
"To me, the sports sedan is not the all-important model," he said. "Really, the all-important one is the first one we bring out, because it has to be a success from day one."
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