With Ford still mid-way through its ‘Way Forward’ recovery plan rumours of further asset sales are never far from the surface. Following the disposal of Aston Martin for £479m to a consortium of investors, including David Richards of ProDrive, there is once again speculation that Ford’s problem child Jaguar will be discarded along with its
Were the comprehensive divesture to happen it would be a complete reversal of Ford’s strategy of diversifying into the premium end of the market just as it was beginning to bear fruit. PAG has its roots in the purchase by Ford of Jaguar in 1989, subsequently joined by Volvo Cars in 1999 and then Land Rover in 2000.
The PAG portfolio gave Ford a remarkable spread of brands, allowing comprehensive market coverage. The only notable exception was the lack of access to the budget sector. The PAG portfolio therefore provided Ford with two potential benefits: operational and financial. Operational benefits are concerned with synergies and economies of scale, financial benefits are concerned with investments and cash flows. Now that both of these aspects are showing promise, to heave PAG overboard now might be a case of mistaking lifeboats for ballast.
Was Ford always intending selling PAG?
Speculation has been surrounding Ford's ownership of the PAG brands for some years, Jaguar being the one most consistently under the microscope. According to Automotive News, the British sports car manufacturer has been a continual drag on PAG and is said to have been losing between $500m and $1bn a year since 2001. This has pulled PAG down to a pre-tax loss of around $327m last year, although it is thought to be back in the black this year with a first quarter pre-tax profit of $402m. Jaguar, however, is unlikely to make a positive contribution to the group before 2009. To put this into perspective, though, Ford as a whole lost $12.6bn last year.
The purpose of the 'Way Forward' recovery plan was to return Ford to its proper place as one of the world's great car makers. Selling off car-making assets is a dead end to nowhere. While Aston Martin might appear to have been sold in order to bring in much needed cash, the $956m one-time payment was useful but hardly crucial to Ford's long-term survival. The sale, though, did signal to unions and shareholders that Ford was deadly serious about restructuring. Mortgaging the factories also brought in cash and communicated assertiveness, but the fact that the plants were British has little bearing on their ultimate sale. Even the complete sale of PAG only brings a temporary injection of cash while cutting Ford off from future profits in the burgeoning premium car sector. Perhaps Ford is telling its workers and shareholders that it is prepared to do anything to get back on track, even if it means cutting off a limb.
PAG as a financial portfolio
Research by AutoCognition has previously found that the PAG brands had significant potential as financial investments by spreading risk across the group. This is particularly relevant to companies such as Ford that need to maintain their share price in order to obtain funding at reasonable rates. If the share price were to fall too far then the credit rating would also fall and push the cost of debt higher. In order to maintain shareholder confidence and hold down borrowing costs desperate measures have to be taken to return the company to the expected levels of financial returns. This results in the boom-bust cycle that is so damaging to a capital intensive industry such as car manufacturing.
The role of PAG was to smooth out fluctuations in product demand elsewhere in the Ford group in the classic portfolio balancing tactic: as sales fell for one brand, no matter how temporarily, a rise in sales for another brand would compensate. As long as the portfolio was properly balanced then total sales for the Ford group would remain steady and the cost of borrowing would be stable. Analysis of PAG sales show that the three main brands were fairly successful in achieving a balance with each other. Falling sales in the
The problem for Ford was that while the PAG brands were supporting each other, the magnitude of sales was not high enough to bring relief to the Ford brands. Like its Big 3 compatriots in the
PAG as a production portfolio
Although PAG represented a reasonable financial strategy, if not one capable of countering a collapse in the parent company, for Ford it offered additional benefits in production. The industry is ruled by economies of scale so gigantic that the entire global market could be readily served by just a handful of manufacturers. Ford was in at the start of this industrial paradigm and should have understood the benefits of consolidating its facilities in pursuit of scale. Scale does not only affect production but also vehicle research and development (R&D). The tricky part is in establishing as many common processes as possible without endangering the unique characteristics that differentiate one product from another and which in turn feed market demand. Getting the balance right is more art than science so it is no surprise that Ford has faltered on occasion. Perversely, Ford failed in the very area where it might have been expected to be strong: production.
Where Ford was weak was in product design, its lack of premium cachet being the very reason it had been forced to construct PAG. It new acquisitions were historically strong on vehicle design, it was only the extent of the ranges that was lacking. Jaguar, for example, had a saloon and a coupe but needed another two saloons in order to reach critical market weight. The product sharing strategy was intended to save on R&D costs and bring products to the market quicker, giving rise to the S-Type based on the Lincoln LS, and then the X-Type based on the Mondeo. Volvo also shared platforms, taking the small car platform from Ford and supplying the large car platform in return. Land Rover uses the small car platform for the latest Freelander, but otherwise it is mainly engines that it has shared. The three PAG brands have therefore extended their model ranges far beyond their original capabilities, most notably in the case of Volvo. The Swedish company’s range now encompasses small, medium and large car classes along with a popular SUV. Land Rover was also able to explore greater possibilities, establishing a full complement of 4x4 models and a new sports off-roader in the Range Rover Sport. Jaguar, though, was hemmed in by its PAG partners and was inhibited from breaking away from its perceived styling heritage. It was therefore hardly surprising that Jaguar has suffered the most from the constrictions set by Ford.
The web of component sharing spun by Ford should have suggested to the company a parallel production strategy. Ford’s greatest contribution to the automotive industry was in the development of mass production methods. Yet when the company acquired Jaguar it retained the luxury car manufacturer’s home plant of
This tentative mixing of Land Rover and Jaguar production is at least a sign that Ford is beginning to exert influence where its experience matters. At the same time it is allowing Jaguar to express itself in iconoclastic styling developments that have been very well received. To be fair to Ford it would have been a brave company that attempted to push the pace faster than this and risk alienating each brand’s loyal customer base. Nevertheless, it would appear that PAG is now reaching maturity just as Ford looks like throwing in the towel. For any sale to benefit Ford it must find a buyer that can find more value in PAG than Ford does itself, and that is far from certain.
Reasons for bidding
With the usual lack of imagination most commentators are assuming that only car companies are interested in buying car companies. For this to be so then the logic for the deal would have to be the same as that which brought Ford to construct PAG in the first place. It therefore goes almost without saying that PAG is worth as much to any other car company as it does to Ford, and probably less so given the investment that a new buyer would have to put in to integrate PAG with existing functions. Two buyers that have been mooted are Fiat and Renault. The need for complementary products is seen as the attraction for both companies in acquiring Jaguar and Land Rover, although the reverse of this view is that there would be little synergy and therefore the purchase of the brands would be a financial, rather than operational, investment. Perhaps not surprisingly both Fiat and Renault have declined to show much interest.
Companies that would gain synergies by merging with the two British marques would have to be in the premium market already but failing in some way. Japanese manufacturers have consistently pinned their hopes on a move up-market but not with great success. Only Lexus has managed any real progress, but even so it needs to run expensive advertising campaigns. Honda has had negligible impact on the premium segment and perhaps it is time the engineers stopped playing with their robots and jet engines. On the other hand, they might be better advised to stick to what they know since they seem so good at it.
Sticking to your own knitting
This, indeed, seems to be the new logic for the industry, sticking to what you know best. If economies of scale are the defining feature of the industry then distractions with additional brands should be avoided. Two Chinese companies, SAIC and NAC, divided the assets of MG Rover between them and are having trouble swallowing even that size of company. Chrysler, despite a wide range of vehicles and excellent access to the
Interestingly, the one angle that has been overlooked by commentators is one that was a major reason for bringing PAG together in the first place: financial investment. The three brands were working together fairly effectively as in investment portfolio and the indications are that this is due to improve when Jaguar hauls itself out of the mire. For one kind of potential bidder an investment portfolio would be very much a case of sticking to one’s one knitting, that of private equity. The precedent has been set with Aston Martin and Chrysler so it should be no surprise if the deal goes in this direction. Alchemy Partners have denied rumours of interest but at least were kind enough to put a valuation on a deal including Jaguar and Land Rover; around £3bn, according to managing partner Jon Moulton. However, he also added that Ford would probably want something more like £4bn.
If he is right about Ford’s price then it underlines the contention that PAG is worth more to Ford than to anyone else. Since no other car companies appear to be interested, whatever is sold from PAG will become a standalone car manufacturing operation, albeit part of a larger investing group. Since Jaguar and Land Rover are niche producers it might require Volvo to be part of the deal for economies of scale to be accessed in any form. Although Volvo has not been a problem for Ford it remains something of a distraction from the main task of sorting out the North American operations. It is therefore possible that PAG will have to be sold as a single unit. Even then any financial investor would realise that it was undersized in comparison to the competition and so would require continued involvement by Ford on technical issues. Ford already has such a relationship in place with Aston Martin, as does Daimler with Chrysler. This neatly breaks the relationship between Ford and PAG into its constituent parts of financial and operational portfolios. Once Ford has got itself back on track it may then question why it should not be obtaining both these benefits from its erstwhile subsidiaries. Perhaps the only bidder for PAG will be Ford after all.