ANALYSIS : Ford Paying Dearly to Catch Up With the Japanese
Nissan, Japan’s second-largest car company, spent $500 million over five years to develop its own European-style luxury sedan, the Infiniti Q-45, which goes on sale next week.
Ford, America’s second-largest car company, unwilling to commit to developing European-style luxury products of its own, spent $2.5 billion Thursday on Jaguar of Britain, which isn’t likely to sell many more cars in the future than Infiniti.
The contrast between the strategies followed by Nissan and Ford not only raises disturbing questions about the price of Ford’s acquisition of Jaguar, but also provides some insight into the weakened competitive position of the American and European auto makers.
Facing the prospect of frighteningly rapid advances by the Japanese, Ford and Jaguar seem to be acknowledging that they couldn’t go it alone in the upscale market that the Japanese have just begun to invade.
While Ford has remained a leader in the market for big, traditional American luxury cars, it has failed to mount any serious effort to develop import-style performance luxury sedans of its own.
Its one attempt--the Merkur line of sports sedans built in Germany by Ford of Europe--died a quiet death this year, after the poor quality of Merkur’s two models turned off import-oriented luxury buyers. And, while Ford officials often argue that the newly redesigned Lincoln Continental has won over import customers, the main goal of the Lincoln line remains what it has always been--to steal customers from Cadillac.
Like General Motors, Ford failed to fight back against the wave of European imports that began eroding its share of the luxury market in the early 1980s. Now, analysts believe, it is too late; the Japanese have arrived in the market, and the only way to get in is to buy in.
So Detroit has lately been buying up specialty European nameplates like Jaguar at a feverish pace. Ford, for example, already owns Aston Martin and tried to buy Alfa Romeo--which eventually went to Fiat. GM, meanwhile, owns Lotus and has been rumored to be interested in BMW; Chrysler has Lamborghini and a small stake in Maserati, which now builds a two-seater under a Chrysler nameplate.
But buying up Europe’s elite can be expensive--in the case of Ford’s purchase of Jaguar, maybe too expensive, analysts believe. Especially when the Japanese are doing it for far less.
“You’re talking about $2.5 billion, plus what Ford will have to pay to modernize some very outmoded plants at Jaguar, so the price could easily get up to $4 billion,” observed David Cole, director of the Center for the Study of Automotive Transportation at the University of Michigan.
“Is the return from Jaguar going to be enough?” he asked, “I don’t know.”
GM executives, who dropped out of the bidding for Jaguar when the price got too rich, seemed to agree. In an unusual statement, the company went out of its way Thursday to publicly criticize Ford’s purchase. GM, stung in the past by criticism that it often pays too much for its acquisitions, said that Jaguar was worth “very significantly below” the $2.5-billion purchase price. Yet some analysts note that the excessive price Ford is paying for Jaguar reflects the fact that none of Detroit’s auto makers have learned how to reduce costs enough to compete effectively with the Japanese. All product programs in Detroit still cost too much, so why should this purchase be any different? wondered Maryann Keller, automotive analyst with Furman Selz in New York.
“It is costing Ford $2 billion to develop the replacement for the Escort (due out next year),” Keller said.
“If Ford is spending that much money on a small car, imagine what it would cost them to develop their own line of European luxury cars. They could never do it as cheaply as the Japanese. So from that perspective, maybe $2.5 billion isn’t such a bad price for them to pay for Jaguar,” she said.
For Jaguar, meanwhile, the Ford takeover represents a boon for a tiny company facing competition from the giants of Japan for the first time.
The company badly needs Ford’s financial and engineering resources to shorten its product development cycle; it takes Jaguar 15 to 18 years to develop a new model, compared to four or five years for the Japanese, noted Chris Cedergren, an analyst with J. D. Power & Associates, an automotive market research firm in Agoura Hills.
And some of Jaguar’s new cars lie stillborn on the drawing board for lack of money. A replacement for the XJ6, the XJ-80, a top-of-the-line car to compete with the larger Mercedes and the new Japanese luxury models, has been planned for years, waiting for the funding needed to get built. Now under Ford, Jaguar could have the XJ-80 out by the mid-1990s, analysts believe.
Jaguar also has plans ready for smaller, less expensive models that could compete against cars in the $25,000 to $30,000 price range.
But with sales of European luxury cars plunging in the United States because of sticker shock and Japanese competition, some analysts still questioned the timing of Ford’s purchase.
Did Ford executives--many of whom have strong ties to Europe--pay too much for an image? Did they make an emotional purchase?
“They (Ford executives) do see a halo effect from Jaguar benefiting Ford,” Cole noted. “But part of it could be that they all just love Jaguars, and now it will be legit for them to drive one.”
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