Ford (NYSE:F) said last week that it is lowering the fuel-economy ratings for the 2014 Fiesta and all of its hybrids, due to an error in its testing process.
CEO Alan Mulally said in a statement that the company is apologizing to its customers and will provide "goodwill payments" to owners of the cars affected.
But this is a big embarrassment for Ford, which has pushed hard to compete with Toyota (NYSE:TM) as a maker of fuel-efficient and hybrid vehicles. And it leaves some of Ford's greenest models suddenly looking a lot less green.
What happened here? And how is it likely to affect Ford's sales?
An error in a computer model led to some very optimistic ratings
As Ford explained it, there was an error in the engineering model that translates the company's test results into a fuel-economy rating. In other words, the formulas in Ford's engineering software didn't quite match up with the real world -- something that Ford discovered when doing real-world testing of the Fusion Hybrid.
Ford said that it has fixed the errors, retested the affected vehicles, and has improved the "validation tests" it uses to make sure its computer models accurately reflect what goes on with its vehicles. Ford also said that it had notified the U.S. Environmental Protection Agency of the errors, and the EPA said that it conducted its own independent tests to verify Ford's new ratings.
This incident follows another, last August, in which Ford cut its fuel-economy ratings for the C-Max Hybrid by up to seven miles per gallon after a raft of complaints from consumers who weren't getting anywhere near the fuel-economy that Ford had been touting.
This cut is a much bigger deal, though. The affected models include the hybrid and plug-in versions of the 2013 and 2014 Ford C-Max and Ford Fusion, the 2013 and 2014 Lincoln MKZ Hybrid, and one non-hybrid, the 2014 Ford Fiesta.
Ford says that it has sold or leased about 200,000 of the vehicles affected by the changes; owners will receive a "goodwill" payment ranging from $125 to $1,050.
This is bad for Ford, right?
Well, it's not good.
The payments and embarrassing press coverage won't help Ford any. But the impact on sales of its hybrids could end up hurting a lot worse.
Before they were cut last August, Ford's ads for the C-Max made a lot of hay out of the fact that its fuel-economy ratings beat those of its chief competitor, Toyota's big Prius V. But that advantage is now gone: The C-Max is now rated at 42 miles per gallon in the city and 37 on the highway, 40 combined; the Prius V gets 44 city and 40 highway, 42 combined.
That change clobbered Ford's sales of the C-Max Hybrid. In the six months before the cut (February through July of last year), Ford sold 17,738 C-Max Hybrids; in the six months following (September 2013 through February 2014), Ford sold just 7,768.
Will Ford's other hybrids -- including the strong-selling Fusion Hybrid -- now suffer a similar fate?
They might. The changes are pretty dramatic. The Fusion Hybrid goes from 47 mpg city, 47 highway, and 47 combined to a much more mundane 44 city, 41 highway, and 42 combined. The MKZ Hybrid fares even worse: Its combined mileage drops from 45 to 38, below the 40 mpg combined rating boasted by its key rival, the Lexus ES 300h -- another Toyota product.
A whole lot of Ford (and Lincoln) ads just became obsolete -- and with them, a lot of the arguments for these cars over the competition.
Ford isn't the only one, and it won't be the last
Ford isn't the only automaker to have suffered this embarrassment. Hyundai (NASDAQOTH:HYMTF) and Kia (NASDAQOTH:KIMTF) both had to restate fuel-economy claims back in 2012. And most experts agree that this won't be the last time, either.
The problem stems from the way fuel-economy ratings are calculated nowadays. The EPA doesn't test cars and assign a rating; instead, it publishes standards that the automakers use to measure their cars, with a combination of real-world testing and sophisticated computer modeling.
That would seem to leave a lot of room for cheating -- but the EPA does listen to consumer complaints and check automakers' ratings from time to time.
Nobody is suggesting that Ford cheated here. But the procedure also leaves a lot of room for bugs in the computer models -- bugs that can lead to great-looking numbers at first, but a lot of embarrassment later on.
Will it also lead to lost sales for Ford? We'll find out.
Top dividend stocks for the next decade
Automakers like Ford aren't hot growth stocks, but Ford investors do quite well -- thanks to the company's solid dividends. The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. They also know that a well-constructed dividend portfolio creates wealth steadily over time -- while allowing you to sleep comfortably at night. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.
John Rosevear owns shares of Ford. The Motley Fool recommends Ford. 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.