What's behind Ford Motor Co.'s (NYSE:F) decision to make a big push to revive its Lincoln luxury brand?
Former CEO Alan Mulally was skeptical of the idea of making Lincoln a global contender -- in fact, he considered shutting it down altogether. But new CEO Mark Fields has made a sizable bet on the old brand, committing over $2.5 billion to Lincoln over the next five years and promoting former Ford chief engineer Kumar Galhotra to a new position as president of the brand.
What's behind this decision? Does Fields think that Lincoln can beat the German luxury giants at their own game?
Lincoln has a trump card that the German luxury giants don't
The answer to that question turns out to be: Yes and no.
No, a car like the Lincoln MKZ isn't really a direct competitor to something like a BMW 5-Series. Lincoln's sedans aren't directly targeting the Germans, although Galhotra says that his brand is winning some customers from BMW.
But yes, Fields and Galhotra do think that Lincoln has a very good chance of winning global market share from the German giants -- good enough that they're willing to spend billions to make it happen.
Why? Because Lincoln has a big trump card: Chinese customers think very highly of the Lincoln brand.
During a presentation at Barclays Global Automotive Conference on Wednesday, Galhotra said that Ford's market research discovered a few years ago that Chinese customers rank the prestige of the Lincoln brand higher than Audi's -- and rank its quality on par with Toyota's Lexus.
That's true even though Ford had never officially sold Lincolns in China. The Chinese, Galhotra said, associate the Lincoln brand with U.S. presidents and Hollywood stars, and hold it in high esteem.
As Fields and Galhotra saw it, that finding presented Ford with a big opportunity: to launch the already-well-regarded Lincoln brand in the world's largest automotive market.
Why China makes the Lincoln investment worthwhile
It's no secret that China's luxury-vehicle market is booming -- and that boom is widely expected to continue for the next several years. Ford estimates that luxury-vehicle sales will rise from 7.5 million last year to 10.7 million by 2020, with China driving much of that change -- and the U.S. and China together representing about half of the total luxury-vehicle market.
That's why Ford thinks that China is a huge opportunity for Lincoln. If it can capture a significant piece of China's luxury market, and modestly expand its market share in the U.S., that adds up to a very nice business.
It should also add up to a very nice profit stream, as luxury cars carry much higher profit margins than mainstream products. Luxury vehicles accounted for 9% of the industry's total global sales in 2013 -- but Ford estimates that luxury generated about a third of the industry's total profits.
And Ford is hoping to grab a significant share of that profit pie. As you can see in this slide from his presentation, Galhotra's plan calls for Lincoln's sales to triple from about 100,000 last year to about 300,000 by 2020, with much -- but not all -- of the growth expected to come from China.
Can Lincoln succeed by selling fancy Fords?
As I've said over and over when talking about rival General Motors' (NYSE:GM) efforts to revitalize its own luxury brand, Cadillac, any successful luxury-vehicle brand starts with great products.
Galhotra cited the MKZ sedan and MKC crossover as the first examples of the kinds of vehicles he wants Lincoln to produce. The MKZ, launched early last year, has sold well (up 10% this year) and received good reviews.
Consumer Reports praised the MKZ's "luxurious, quiet interior" and said "its ride and handling rival some high-end European sports sedans." A tight backseat cost it a top ranking, but it still made the magazine's "Recommended" list.
But in its reviews of both the MKZ and MKC, the magazine notes up front that the two Lincolns are closely based on mainstream Ford models -- the Fusion and Escape, respectively.
Basing Lincolns on existing Ford models has been the brand's practice for decades. It's a practice that seems likely to continue: The upcoming all-new MKX (pictured above) will be based on the next-generation Ford Edge. But to many observers, Ford's unwillingness to invest in unique models for Lincoln has seemed likely to limit the brand's prospects.
Contrast that with Cadillac, whose ATS and CTS are built on a rear-wheel-drive architecture that GM developed specifically to challenge BMW and the other German luxury brands -- and which match (and in some ways beat) the German rivals head-to-head.
Like Lincolns and Fords, Volkswagen Group's (NASDAQOTH:VLKAY) Audi brand shares lots of parts with more mundane VWs -- but Audi has gone to great lengths to separate itself from VW's mass-market offerings. Audis are built on different platforms with unique features -- and Audi even has its own headquarters, separate from VW's, a move that GM is emulating with Cadillac's relocation to New York.
Meanwhile, Ford's Fusion is a very nice mainstream car, and a good base for a premium sedan -- but it's not really a match for a BMW 5-Series or Mercedes-Benz E Class, at least not by the standards the German brands have set.
How will Lincoln overcome that?
How Ford will make Lincoln a contender in China
Galhotra thinks that Lincoln can build a significant presence in China -- and continue to grow in the U.S. -- if it combines products along the lines of the MKC and MKZ with exceptional service. (The MKC and MKZ are the first two Lincolns to go on sale in China.)
The first three Lincoln dealerships in China opened earlier this month. Galhotra said that Ford studied luxury hotels and high-end Chinese retailers before designing the dealerships, which feature comfortable spaces for low-pressure discussions over tea.
Advanced technology is carefully integrated to provide a cosseting experience. For instance, a license-plate-recognition system is positioned at the entrance to the dealer's lot, and all employees are immediately notified when customers arrive, with information that allows them to welcome the customers by name and guide them to their appointments.
That level of service will help build and reinforce the brand, Galhotra says, and that in turn will give Lincoln's products lasting prestige. (One interesting note: Unlike GM and the Germans, Ford isn't planning to build Lincolns in China. They'll all be imported from North America.)
Will it work?
Ford's history since 2006 suggests that betting against the Blue Oval's management team isn't usually a good idea. Like Mulally before him, Fields and his lieutenants can be expected to move aggressively when they know they hold good cards -- but they don't make truly risky bets, and most of their moves have worked out quite well.
Over five years, $2.5 billion is almost certainly a lot less than GM will spend on Cadillac over that same period. But Ford isn't expecting Cadillac-like results for Lincoln: Instead, it's hoping to see incremental growth here in the U.S. as it launches more improved products, and it's looking to establish a solid niche presence in China.
If it all works, it'll mean a nice boost for Ford's bottom line. Stay tuned.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends BMW, Ford, and General Motors. 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.