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How Smart Mobility Will Help Ford Motor Company Battle 1 Major Concern

By Daniel Miller – Sep 20, 2016 at 11:44AM

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Sure, a longer purchase cycle is troubling, but Ford has a strategy to help offset this potential issue.

Image source: Ford Motor Company's Sept. 14 Investor Day presentation.

Consumers are a fickle and often wildly unpredictable bunch. For instance, some consumers will purchase a new vehicle every three years on the dot, as if crossing a 50,000-mile threshold were akin to driving off a cliff. On the flip side, some consumers will buy a new vehicle and drive it until it's towed into the salvage yard.

One major concern for auto investors is, what happens if the purchase cycle lengthens? Because of that risk, it makes a lot of sense for companies like Ford Motor Company (F 1.21%) to expand their business model, and quickly.

Why might this happen?

There could be any number of reasons behind a lengthening new-vehicle-purchase cycle, and it's almost certain that a combination of factors is at play. Investors have to consider that car quality across the board has come a long, long way in recent decades. Four decades ago, the average age of vehicles on the road was less than half of today's 11.5 years. With cars lasting longer, consumers simply might not need to replace their vehicles as often.

Because of that improved quality -- as well as increasing spending on interior technology and connectivity, and rising regulation and safety costs -- vehicle prices have moved higher. As prices rise, consumers have turned to longer loan lengths thanks to widely available cheap financing, to minimize the impact of those prices. That could push purchase cycles out for some consumers, as they'll be underwater on their loan longer.

No matter the reason, for a company such as Ford, which makes its business selling you new cars and perhaps financing them, a lengthening purchase cycle would be bad news.

Adapt or die

Ford is really good at designing, producing, and selling you vehicles. That isn't going to change anytime soon, but it's also time for Ford to invest in emerging opportunities. One of those opportunities is broadly defined as "smart mobility." During its recent Investor Day presentation, Ford did a good job of showing how that compared to its core business.

Graphic source: Ford Motor Company's Sept. 14 Investor Day presentation.

One example of how Ford could capitalize on smart mobility projects comes with its recent acquisition of shuttle-van start-up Chariot. Essentially, Chariot offered Bay Area commuters a way to avoid busy mass-transit systems in favor of taking one of 100 Ford Transit 15-seat vans that serve 28 crowdsourced routes.

How exactly does this fit in with Ford?

One of Chariot's Transit Vans. Image source: Ford Motor Company.

Let's take a step back and think through why this makes sense in the future for Ford and its investors. Starting from the top, Ford is already a market leader in vans, and commercial and government fleets. Consider that Ford's Transit and Transit Connect van sales combined to reach nearly 133,000 units in the U.S. this year alone, through August. Only the Fusion, Escape, Explorer, and F-Series have surpassed that figure.

In the future, autonomous vehicles and electrified vehicles will become more and more common, and Ford's recent acquisition will go hand in hand with those two trends. A business such as this shuttle service will be much more profitable once autonomous vehicles can cut out the cost of a driver. That will be easier to do with vehicles running on simple and often preset routes. Electrification comes into play when you consider the amounts of vehicle idling and stop-and-go traffic that would cause fuel costs to rise -- but not if the vans are electric. Charging shouldn't be an issue, as the vans would likely be parked at a depot overnight with ample time to charge the battery.

Quickly after purchasing Chariot, Ford announced plans to expand to five cities in addition to San Francisco. Ultimately, this is but one small example of how Ford is adapting its business model to new technology, increased connectivity, electrification of vehicles, and the drive toward autonomous vehicles. Ford will always sell you vehicles, and help finance them in some cases, but investors should be excited about the emerging opportunities outside its current business model.

Daniel Miller owns shares of Ford. The Motley Fool owns shares of and recommends 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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