When the price of gas increases, consumers decrease their spending on nonessentials.Vehicle sales don't necessarily suffer -- consumers often compensate by reducing miles driven or trading in for a more fuel-efficient vehicle. This has led to the trend in popular vehicle segments, like the small and midsize sedan, for improved fuel efficiency. Focusing on improved miles per gallon will pay off for manufacturers when gas prices increase. Ford (NYSE:F) in particular is poised to reap even more rewards than its competitors for one reason -- the EcoBoost. Let's dig into why the popular engine will bring more profits to Ford's bottom line.
Unfortunately for those of us already cringing at the cost to fill up a gas tank, it isn't going to get better anytime soon. Gas prices typically rise as we enter into the peak driving summer months. This is the part auto executives hate -- they have to try and guess how consumer spending will be affected. Will people largely ignore the price hike while shopping at the dealership? Or will it cause even more demand in fuel-efficient vehicles? Recently, Experian Automotive released a study on the segment sales volatility as gas prices increased.
"While higher fuel prices tend to get people talking, actual consumer behavior is affected primarily at the vehicle segment level. What this means for dealers is not necessarily a change in number of vehicles sold, but rather a shift in which vehicles people are buying," said Erik Hjermstad, lead analytic consultant for Experian Automotive. "Smaller cars definitely pick up market share, and full-size pickup trucks and SUVs definitely see a downturn. But, the magnitude of these shifts is also a function of how quickly gas prices increase or decrease."
You can see the changes throughout many segments, but how can manufacturers best plan for this? Simple, either predict consumer behavior exactly or be extremely flexible with fuel-efficient options. If I were a gambling man, I'd say the odds are better by being flexible. Here's where Ford's EcoBoost option comes into play. Ford plans on offering the award-winning engine in more than 90% of its North American nameplates this year. That's a good way to stay flexible, no matter which segment the consumer shifts to when gas prices move higher.
Ford has long dominated truck sales with its F-Series sitting in the No. 1 spot for 36 years. Since that segment could be the hardest hit by gas prices, it leaves a big question mark on how the consumer will react. Will consumers still demand the typical V8 engine? Or will consumers opt for Ford's EcoBoost turbo-charged V6 as the engine of the future? The answer likely lies in a grey area. Consumers who need a durable work truck can buy Ford's Super Duty -- those who don't share the same vehicle requirements will be happy with the EcoBoost V6 option. Ultimately, Ford is flexible enough to meet consumer demand for any need. For investors, the popular engine gives us more to be excited about than just flexibility.
With the EcoBoost gaining in popularity, Ford is expecting to produce 100,000 more engines than its previous estimate of 1.5 million. That's good news because the increased demand has allowed Ford to bring production back to the U.S. An engine is heavy, making it expensive to ship overseas. It makes sense to build it here and Ford believes the money saved on shipping will lower production costs. Ford is making an investment of $200 million into its Cleveland engine plant to make it capable of producing the 2.0-liter engines that were previously produced in Spain. To save shipping costs the Cleveland plant will produce the engine for North America while the Spain plant will continue to produce it for Europe. Investors should keep an eye on European costs -- taking production away could increase overhead since European sales remain dismal. If overhead and production capacity is held in check, this will be an efficiency that could help the bottom line.
What's more, Ford has been able to charge a premium for its popular engine. That alone will help increase margins as it gains momentum in high-volume vehicles. The engine is already a popular option with the Escape and Fusion -- while gaining traction with the Explorer, Edge, and Focus.
The price of gas is likely to continue its climb in the near future. The safe bet for manufacturers is to be flexible since the consumer is difficult to predict. The EcoBoost option gives Ford flexibility to meet consumer demand for fuel efficiency in any segment, while charging a premium for the engine will increase margins. Ford has made a conscious effort to make production more efficient, and as demand for the EcoBoost increases it will bring more cost saving options to the table. Ford is poised for success with future automotive trends, and is in much better financial shape. Ford has excellent marketing campaigns -- expect them to convince consumers of the EcoBoost benefits when the price of gas increases. Ford's management has continued to make great decisions for investors -- expect things only to improve going into the future.