By Justin Hyde
DEARBORN, Mich., Jan 23 (Reuters) - The Ford Motor Co. executive in charge of the company's drive to keep its North American prices firm said U.S. incentives are so high that any further increases would likely hurt profits more than boost sales.
Lloyd Hansen, Ford's vice president of revenue management who helps direct the $13 billion a year Ford spends annually on incentives and marketing, said the company will not roll over and surrender to General Motors Corp.'s incentive-driven push for sales although Ford lost 1.6 points of U.S. market share in 2002.
"We're finding out that our (revenue) model is screaming at us to avoid taking incentives up further, and when the market starts to soften, let the production go down a little bit," Hansen told Reuters in an interview.
But "If you have competitors who don't have a model like that and keep discounting and discounting, am I willing to give up market share to make money in the short term? The answer is no," he said. "Share is something we're concerned about. We use the model then to say what's the least costly way to keep our share at some level we want to be at."
Hansen's work, applying techniques borrowed from hotels and airlines, is unique in the auto industry. His group has been trumpeted by Ford Chairman and Chief Executive Bill Ford Jr. for giving the company "maximum share for the dollar" and has won praise from Wall Street analysts.
"Ford is at least matching GM on (price) increases but looks to be more adept at setting marketing costs and has ceded some share to the more aggressive GM," said Banc of America analyst Ron Tadross.
But those same analysts have so far rejected Ford's targets for flat net pricing and steady market share for 2003 -- both key to its earnings outlook and both based on revenue management -- as unrealistic. GM expects another year of price erosion as foreign automakers ramp up new capacity in North America.
"We've set a very stretch target of zero percent (or no change in net pricing) for this year, and it will be tough," Hansen said. "It will be much tougher especially in the first half of the year," when Ford's domestic divisions have no new products.
"Those are tough objectives, but what kind of company would go out with an objective to lose share?" he asked. "Market share is important to us, but it will be led by great product and the way we treat our customers. We don't want to go out and buy a lot of share."
THEORY AND PRACTICE
Hansen's revenue management has been a bright spot in Ford's North American auto operations, which are expected to lose money again this year. After reviving revenue management in Nov. 2001 as part of its turnaround plan, Ford's revenues per vehicle in North America rose throughout 2002, hitting $21,745 in the fourth quarter, an $869 improvement from the same period a year before. While GM's net pricing fell 3.2 percent in the fourth quarter, Ford's net pricing rose 1.8 percent.
Thanks to its models, Hansen said Ford has a better understanding of the true cost of chasing market share. Custom-designed software models take a thick flow of data from dealers about vehicle sales and prices, then allow Ford to adjust prices, incentives, production and options and project how the changes would affect revenues and profits.
Conventional wisdom in the auto industry says domestic automakers have to keep factories running full-tilt to cover their high fixed costs, such as pension and health care benefits for union workers. But Hansen said the models show that's often the wrong strategy.
"The tricky part comes in that in order to sell ... more units, you have to collapse the revenue on all the units you sell anyway; and when you take the cost of doing that and the profits from (the extra) units, it says pass the unit and don't build it," Hansen said.
Had Ford suffered the same pricing decline as GM in the fourth quarter, Hansen said its revenues might have been reduced by $1 billion, while another percentage point of market share might have generated $240 million.
PENNY ON THE DOLLAR
Hansen said the benefits of revenue management can be huge because the auto industry usually has a return on sales of just 3 percent. "If you could figure out how to make another penny on every dollar out there, just one more penny, the three goes to four, and your profit increases 33 percent," Hansen said.
In addition to projecting prices, the models can also suggest which incentives work best for each vehicle -- loan deals on the Explorer, for example, or cash rebates on the Focus.
And revenue management has also been called on to figure out what mix of models and options are most in demand -- information that's not always clear to automakers. Hansen said as a result of Detroit's poor inventory controls, 40 percent of the vehicles on domestic dealers' lots were 90 days old.
"That's a terrible number," Hansen said. "What happens today is something moves fast or it moves slow -- there's not a lot in the middle. If we could save $500 a unit in marketing on the slow-moving, that would be worth over $1 billion."