Ford Motor Company (F 2.31%) executives rightly celebrate what they call the company's "pillars of profitability." As they see it, the foundation of the Blue Oval's recent strong profits is three market segments in which Ford has a strong presence: trucks, SUVs, and performance vehicles.
At the same time, they concede that other parts of Ford's business could be more profitable. As CEO Mark Fields recently explained, Ford's lineup of small vehicles is one area where the products have been fairly strong, but the profits could be better.
That's why Fields says that reinventing Ford's small-vehicle business is now a strategic priority.
Making good cars better -- and more profitable
Ford's family of small vehicles includes the familiar Fiesta and Focus sedans, as well as two models that aren't sold in the U.S. at the moment: the tiny Ka sedan and the Fiesta-based EcoSport crossover SUV.
The current Ka is fairly new, and it has been a profitable model for Ford in Latin America. But while the other three are strong sellers and generally well-regarded, Fields thinks Ford could do them better -- and more profitably.
Here's what he said during the company's annual Investor Day presentation last month:
We are intensely working on our small vehicles. And that's not only because small vehicles are literally the largest segment in many regions around the world. It also is the introduction for the first time for customers to the Ford brand.
If you think about our position in small vehicles, we have some real strengths. Fiesta is one of the top B-cars [subcompact cars] in the world, Focus is one of the top compact cars in the world, and EcoSport is one of the top small utilities in the world. But the key is taking that marketplace success and turning it into financial success.
Fields explained that there are five key "elements that drive profitability" in small vehicles (see image above), and said that the next-generation versions of the Focus, Fiesta, and EcoSport will all show "great progress in each one of these areas."
This is part of why Ford decided to move production of the Focus from Michigan to Mexico. But that's not an isolated move: Around the world, Ford is reshuffling its production to build more of its small vehicles in lower-cost areas.
"Within the next two to three years, the majority of our small vehicles will be built in low-cost areas," Fields said. "For example, here in North America, we will have migrated all of our small car production to Mexico and out of the United States."
(Note that the Michigan factory that currently makes the Focus isn't closing. Instead, it will get higher-profit products to build: a new Ford Ranger pickup and an SUV, to be called the Bronco.)
Simplifying products can cut costs and serve customers
An example of something that Ford is doing right now to boost the profitability of the Focus is streamlining the options packages available. Fields noted that they'll be streamlined even further on the next-generation model.
"Back in 2015, we had over 200,000 orderable combinations" on the Focus, he said. "This model year, we have about 300, and the next-generation model that's coming soon has approximately 30. That's a 99.9% reduction in orderable combinations."
The simplification reduces manufacturing complexity, saving a few hundred dollars per vehicle. It also makes it easy for a dealer to keep a large percentage of the possible combinations in inventory.
It may sound like Ford is reducing consumers' ability to choose exactly the car they want, but Fields thinks that simplification helps customers in a different way.
"From a customer standpoint, when they come to one of our dealers and walk on our lots, they're going to have a much higher likelihood that what they want is on that lot and they can buy that day," Fields said.