Another fine mess

The decision to look for a buyer for Jaguar and Land Rover is the latest sign that the turnaround at the world's third-biggest carmaker is not going well

AFTER some huffing and puffing Alan Mulally, the chief executive brought in from Boeing to rescue Ford, has decided to get what he can for the firm's two British premium brands, Jaguar and Land Rover. The news trickled out this week after a meeting between Ford executives and British politicians. Although Ford's official position remains that it is simply exploring all its options, it has appointed three banks, Goldman Sachs, Morgan Stanley and HSBC, to flush out potential buyers. Fiat, an Italian car group, was tempted by Land Rover but pulled out of negotiations last month when it was warned how such a purchase would sully its credit rating.

The disposal of Jaguar and Land Rover, following Ford's sale of Aston Martin in March for $848m, would mean that of the premium brands bought by Jacques Nasser, Ford's boss in the late 1990s, only Volvo would remain. Ford's willingness to sell speaks volumes about its predicament. Its plan for restoring itself to profitability in North America by 2009, known as “The Way Forward”, was conceived 18 months ago and then accelerated by Mr Mulally after his arrival last September. But it has been slow to show results.

Last year Ford lost $12.6 billion, as sales in North America plunged by $11 billion. Sales there are still falling—by $1.6 billion in the first quarter—and efforts to cut costs are behind schedule. Although 18,000 jobs have gone, Ford's aim is to squeeze out a total of 30,000 hourly workers and 14,000 salaried positions by next year. It is also hoping to strike a deal with the powerful United Auto Workers union this summer to alleviate its crippling pension and health-care liabilities. Profitability by 2009 depends both on cutting $5 billion in costs and regaining at least one percentage point of American retail-market share from the dismal 9.7% Ford recorded in April.

Ford's main domestic rival, General Motors (GM), is at last showing signs of having turned the corner and, shorn of its unhappy relationship with Daimler-Benz, Chrysler is enjoying a new mood of optimism—even if that is not necessarily well founded. But Ford seems bogged down in a mire of its own. Even more dependent than its competitors on thirsty pick-up trucks, such as the F-150, and sport-utility vehicles, such as the Explorer, Ford was badly positioned to cope with last year's rapid rise in oil prices.

Many of its models had also been around for too long. Ford's North American product pipeline still looks weak, especially next to the new models coming from GM. Ford's hopes for a sales boost perilously rest on a new version of the F-150 due next year. Nobody suggests that America's love affair with light trucks is over but, having cooled, the passion may never be quite as strong again.

Ford raised $18 billion in loans last year to see it through to 2009. It is not clear how much of this the company can risk on bringing some much-needed sparkle to its line-up of models. One option Ford does have, however, and which Mr Mulally is said to be keen on, is to be a bit braver about making more of Ford's successful European products in North America. The Focus is a class-leading bestseller, the S-Max is the European Car of the Year and the new Mondeo has won rave reviews.

But wherever Ford's salvation lies, it is unlikely that the sale of Jaguar and Land Rover will make much difference other than to free senior managers from the distraction of worrying about what to do with them. One analyst this week suggested that they could fetch $8 billion, but this may prove to be optimistic. Though both brands genuinely deserve that over-used adjective “iconic”, gauging their attraction to potential buyers is hard.

Land Rover has a decent record of making money and it produces outstandingly capable vehicles that now have the quality to go with their high prices. But if fears about global warming increasingly make the owners of SUVs feel like social pariahs, its long-term health may suffer. Given that Jaguar and Land Rover share factories, they may also be difficult to split apart, especially for a buyer (such as a private-equity group) that is not already a carmaker.

And anyone taking on Jaguar would need good reason to believe that the future will be different from the recent past. For Ford, Jaguar has been a glamorous money pit. Having splashed out $2.5 billion to buy Jaguar in 1989, an incredible figure to industry-watchers aware of the marque's precarious history and geriatric factories, Ford has been hosing it with cash ever since. It refuses to say how much, but the cost of creating modern manufacturing facilities and developing new models, nearly all of which have sold less well than hoped, must be many times the original purchase price.

For that, Ford itself must take much of the blame. Hoping to quadruple annual production to over 200,000, Ford signed off on two cars, the S-Type and the X-Type (respectively, competitors for the BMW 5 series and 3 series) that were not good enough. The S-Type suffered from clumsily executed retro styling, and the X-Type looked like a squashed XJ saloon. Jaguar compounded the error with its new XJ saloon in 2004. Technologically highly sophisticated, with its light aluminium chassis, the car handled as well as its rivals. But once again, frumpy “heritage” styling, apparently dictated by car clinics packed with elderly American owners, led to lacklustre sales.

The irony for Ford is that Jaguar finally seems to have learned its lesson. The new XK sports car, launched in early 2006, has been a critical success and the S-Type replacement, the XF, due out in December, is as modern on the outside as it is on the inside. Were it not for the weak dollar and Jaguar's history of snatching defeat from the jaws of victory, it might almost be possible to be optimistic about its future.

But do not expect a herd of carmakers to stampede to buy Jaguar and Land Rover. A private-equity buyer is more likely. Cerberus Capital probably has more than enough on its plate with Chrysler, but Apollo, Blackstone and particularly Alchemy Partners, which once tried to buy MG Rover from BMW, are all rumoured to be interested. Does the private-equity model fit a cash-hungry business in which it takes several years to bring a critical new model to market? Wanting the best price for Jaguar and Land Rover, Mr Mulally will be hoping that it does. His shareholders will also be watching closely—because the way things are going, it may not be long before Ford has to find a buyer for itself.
Jun 14th 2007 From The Economist