Why Is Ford Motor Company Falling Behind?

The market is up, but Ford’s U.S. sales are down. What’s the problem?

May 27, 2014 at 3:02PM

Us

Ford's F-150 lost a bit of market share in April. Will it lose ground again in May? Source: Ford Motor Company

Through the first four months of the year, Ford's (NYSE:F) U.S. sales are down 2.1% over year-ago totals. 

The rough winter explains part of that. But so far this year Ford has lagged the overall U.S. market, which is up 3.1% over that same period. 

That has some investors concerned. And at least one leading analyst is predicting that those concerns will be heard again when May's sales totals are reported next week.

Why is Ford falling behind in the U.S.?
TrueCar.com's Larry Dominique says that some automakers are benefiting from rising U.S. demand for new vehicles without resorting to heavy incentives. But Ford doesn't seem to be among them. TrueCar estimates that Ford's U.S. sales will be down 0.8% in May, even as the overall market rises 5.5%.

Meanwhile, Dominique and his team of analysts expect nearly everyone else to show an increase. While Volkswagen (NASDAQOTH:VLKAY) will be down -- its U.S. dealers are eagerly awaiting new products -- nearly all of the other big names will be up around 6%, they say -- including General Motors (NYSE:GM), which is dealing with the ongoing fallout from a huge recall scandal.

The other exception will be Fiat Chrysler (NASDAQOTH:FIATY), which TrueCar expects to report a fat 13.4% year-over-year gain. What's the deal there? 

It isn't the company's all-new 2015 Chrysler 200 sedan, which is just now beginning to arrive at dealers. As we saw last month, the likely difference-maker is the new Jeep Cherokee, which fills a gap in Chrysler's lineup that existed at this time last year, along with continuing strong sales of the company's Ram pickups.

That's great for Chrysler. But what's going on with Ford?

A good reason for sales to be down
We won't know for sure until Ford releases its May sales numbers next week. But if we look at what happened last month, we can make some educated guesses.

Ford says that one big factor is that it has been rolling back some of its fleet sales, specifically its sales to rental-car companies. While Ford has long said that some kinds of fleet business are very good to have, the company has been reducing its rental-fleet sales for a while -- and has been pushing to reduce them further in recent months.

There are a couple of reasons for that. First and foremost, sales to rental-car fleets are profitable, but they're not nearly as profitable as retail sales. When Ford's factories are very busy, as they have been lately, it makes sense to prioritize retail orders over low-margin rental-fleet sales. 

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Sales of Ford's Focus are down this year. Ford says that falling sales to rental-car fleets are partly to blame. Source: Ford Motor Company 

Second, rental-car companies sell off their cars after a few years. Those cars flood wholesale used-car auctions, and those models fall in value, simply because of the huge supply. If Ford sells more cars to rental fleets today, those cars will be worth less -- as used cars -- three years from now.

Why does that matter? It's because the lease rates that Ford can charge today are set in part by estimates of what its new cars will be worth when the leases are up in three years, called the residual value. Automakers can charge less for leases on cars with higher residual values -- or put another way, they can offer you a more competitive lease deal.

Sales to rental-car companies aren't all bad, of course. They are profitable sales, and it's a way to expose potential new buyers to Ford's much-improved products. But too many rental-fleet sales do more harm than good, and Ford is continuing to try to roll them back.

Are Ford's pickups finally faltering?
Another possible reason for Ford's sluggish sales performance has to do with its most important (and most profitable) product line: The F-Series pickups.

Unless you've been living under a rock, you've probably heard that Ford has an all-new F-150 pickup coming later this year. Its current F-150 is the oldest of the Detroit pickups, and it's in its last year of life. (Generally speaking, older vehicle models tend to lose ground in the marketplace to newer ones.)

Meanwhile, GM rolled out all-new pickups last year, and Chrysler's overhauled Rams have been gaining market share in a big way, particularly at the lower end of the market. And while GM and Chrysler have supported their pickups with generous incentives, Ford has held their discounts steady for over a year now. (In fact, they declined a bit in April, even as the other guys' went up.) 

Incentives are extremely important in the pickup market. Not so much for retail customers, who tend to be pretty brand-loyal, as for commercial buyers who are very strongly influenced by price -- and who may be buying several pickups at once. Ford's were lowest among the Detroit Three last month.

I expected Ford to boost its incentives somewhat after April. It's not clear yet whether it did in any significant way, or if that had any impact on its truck sales in May. (We'll know more later this week, and we'll know for sure next week.) 

The upshot: awaiting the final numbers
Right now, this is just an estimate, albeit an informed one by a group of experts.

But if it holds out, we'll have some questions for Ford next week. Among them: Where are you losing ground, and what will you do about it?

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John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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