Often times the best way to do something is to do it right the first time. That statement holds especially true for Ford (F 3.07%) and its relaunch of its luxury Lincoln brand. As Ford hoped, the MKZ sedan has been the most highly anticipated model from Lincoln since the Navigator in the '90s. It was expected to hit dealerships in December and now, nearly three months later, is only beginning to roll into dealerships. That has forced management to offer multiple cash incentives on other Lincoln models, as well as lump sums, to aid dealerships that are financially hurting from the sedan's delay. Let's take a look at how large the incentives are and how it will affect Ford and its investors.
Cause for delay
The MKZ delay began at the quality-inspection plant in Hermosillo, Mexico, where they implemented a new inspection process. Simply put, the plant couldn't keep up with the cars coming off the line and forced management to ship about five weeks of production to a Michigan plant to help reduce the sedan's delay. With the Lincoln relaunch gaining momentum from marketing campaigns, including a Super Bowl commercial, it was obvious the three-month delay would hurt dealerships with pre-orders. This put Ford between a rock and a hard place.
On one hand, a hiccup like this could hinder what pre-order momentum the MKZ had going early in its launch. On the other hand, if Ford pushed the sedan out too fast it would risk following the Fusion and Escape, which combined for six recalls. It's important that Lincoln's vehicle launches have no recalls, even if it pushes back the release dates. To try and make the situation right, Ford/Lincoln has announced cash incentives to help dealerships during the delay.
Cash incentives
As an investor in Ford and General Motors (GM 1.57%) my heart skips a beat when I hear the term "cash incentives." I automatically think back to the recession when automakers dished out insane incentives to compete for what little demand was available. Those huge incentives, in combination with terrible operation efficiency, made the automakers incredibly unprofitable. Eventually leading to the government bailout of GM and Chrysler, and causing Ford to take a substantial loan on its own to stay afloat. When I heard that Ford would be forced to give cash incentives for the Lincoln delay, I was nervous. Let's take a look at the details, and explain why investors can breathe a sigh of relief.
Ford/Lincoln dealerships will get $500 for the first MKT or MKS sold in February and March. If an additional model is sold the number increases to $750. For any model after that they'll receive $1,000 in cash. These incentives don't worry me in the slightest. The volume of Lincoln sales won't allow these cash incentives to make a noticeable impact on Ford's bottom line.
The next round of incentives could cost the company a little more. It will hand out a one-time cash lump sum to dealerships based on a formula that considers average monthly MKZ sales, and the percentage that represents in total sales. "For example, a dealer who averaged 10 MKZs a month last year and for whom the MKZ counted as 27 percent of sales would get a lump sum of $40,000," according to Matt VanDyke, global director of Lincoln.
If you take that example, and apply it to the roughly 300 Lincoln dealers, it equals $12 million in cash payments to dealers. That's still a drop in the bucket for Ford, and investors should be glad if this is all it takes to correct the frustrations and financial implications from the delayed MKZ. If consumers are willing to give Lincoln a second chance during its rebranding and vehicle launches, Lincoln's No. 1 goal needs to be rolling out a quality product. Even if this means taking extra time to get it right the first time.
"Clearly the changeover at the plant has not gone as smoothly as we had planned," Van Dyke said in the broadcast. "That being said, Lincoln's No. 1 priority is to deliver world-class craftsmanship and quality. We get the chance to relaunch the Lincoln brand once, and we have to get it right."
Bottom line
It seems the good news keeps coming for Ford during the U.S. automotive market rebound. Its January and February sales were great, and investors should expect the company to post solid first-quarter numbers. Management is confident enough in sales and operating efficiencies that it doubled its dividend. Ford is still dependent on the F-Series for much of its profits, but that is expected to slowly change as new mid-size vehicles gain in popularity. Expect the Fusion, Focus, Escape, and Explorer to help expand Ford's market share and revenue.
The next step is to take that success and incorporate it with Lincoln's revival, which I believe can be done. Ford has learned lessons from its past; I think management will put Lincoln in a position for success, and these incentives aren't enough to change my mind. Not even close. I expect Ford to get it right the first time -- this time around.
