The cynics were out in full force after Ford Motor Company's (NYSE:F) recent announcement to reassess its fuel economy ratings on six vehicles. Some cynics suggested that if these recent adjustments in fuel economy made by multiple automakers were honest mistakes, then why is it that no automaker has been pleasantly surprised to find that its vehicles actually got a higher miles-per-gallon rating after recalculating? After all, errors happen on both sides of the equation, right?
I suppose that's fair, but let's take a look at the details and decide how big an effect that this will have on financials and brand image for Ford and its investors.
Make no mistake, there is potential downside to Ford lowering its fuel-economy ratings on certain models -- especially as it did so to a significant degree.
The biggest error was found on Lincoln's MKZ Hybrid, which despite representing only a fraction of the MKZ's overall 15,986 sales through May, has been a more popular option than Ford had anticipated. Part of that popularity is no doubt because its combined highway and city miles-per-gallon rating checked in at 45. That dropped to 38 after Ford corrected its fuel-economy rating.
As an example of how that could effect Ford's claims about this vehicle, consider that a previous commercial had claimed the MKZ Hybrid has the best fuel economy of any luxury hybrid in the U.S. market -- a statement that is now false, as it fails to top the Lexus ES 300h Hybrid, according to Automotive News.
Ford's 2013 Fusion Hybrid model, made more popular with the automaker's Super Bowl ad, also had its combined mpg rating dip from 47 to 42. Another model is actually suffering a second correction of its fuel-economy rating -- Ford's 2013-2014 C-Max Hybrid was adjusted from 43 to 40.
Considering that J.D. Power and Associates rates fuel economy as the most important reason consumers purchased a Ford hybrid model last year, these miles-per-gallon corrections could negatively impact sales. In fact, sales of Ford's C-Max Hybrid are down nearly 40% through May compared to last year, after its miles-per-gallon rating was corrected last year for the first time.
Will Ford's other vehicles now suffer the same issue? Perhaps, but in the grand scheme of things, it won't matter.
The vehicles affected by overstated fuel-economy are niche vehicles, except the 2014 Fiesta, and if sales of these models decline significantly, it still won't move the needle on overall sales. Furthermore, the only non-hybrid with a downgraded mpg rating, the Fiesta, didn't experience nearly as drastic a change. Of the four powertrains the Fiesta is sold with, two of them have been revised only one mile per gallon lower in combined mpg. Another powertrain was revised downward by two mpg, and the last powertrain wasn't affected in combined mpg because the corrected calculation caused a gain in its city rating, which offset its highway rating decline.
Of the six Ford vehicles with corrected miles per gallon ratings, the best-selling vehicle on the list by far was affected the least. Furthermore, the biggest potential damage that could come from this looks to be a negative reflection on Ford's brand image. However, Ford's brand has a lot going for it in terms of improved fuel economy, and that will outweigh the negative headlines surrounding this recent mishap.
Consider that a decade ago, Ford's cars had the lowest average fuel-economy ratings among the six largest automakers in the U.S. market at a combined miles-per-gallon rating of 21, well behind Toyota's and Honda's 26 combined miles-per-gallon. Fast-forward to today, Ford's passenger cars combine for a 29 mpg rating, helping it jump two competitors in the rankings and narrowing the gap between the leading automaker to just a three mpg difference.
Sure, Ford overstated a handful of its Hybrid models' fuel efficiency, but Ford has made substantial progress on mainstream models' fuel economy.
Also, investors should consider that Ford's massively successful marketing concerning its EcoBoost engines and fuel economy is very effective. Ford's EcoBoost engines have been a huge hit with consumers, and the take rate for its turbocharged engines on three of its most popular vehicles are a whopping 89%, 52%, and 42% on its Escape, Fusion, and F-150, respectively.
The financial implications for Ford and its investors are also negligible. Ford is beginning to write out its "goodwill" checks to owners of the estimated 200,000 vehicles affected by these miles-per-gallon adjustments. The maximum possible cost that Ford would pay is approximately $210 million (assuming that every customer owns an MKZ Hybrid and is owed $1,050).
Since the MKZ Hybrid will not account for all 200,000 models, or even close, the total amount Ford will end up paying out to consumers in its "goodwill" checks will be far less than $210 million. Considering that Ford's 2013 pre-tax result was $8.6 billion, it's not going to be a problem for the company.
Ultimately, with no major financial or sales impacts, as well as Ford's overall image being well supported by its mainstream vehicles and EcoBoost engines, the cynics can take a hike -- this isn't a big deal.
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Daniel Miller 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.