Can Premier Automotive Group Answer the Call to Save Ford?

Cue the cheesy theme music and hammy narrator …

Deep inside the bowels of Ford Motor Co.'s world headquarters, the storied automaker's sharpest minds are in a dither. For with each passing day, the news is increasingly dreary. And every dispatch arrives like a punch from an arch nemesis.

Dwindling market share. Wham!
Declining truck profits. Biff!
Waning consumer confidence. Thwump!

Desperate, the brain trust summon their most formidable, albeit untested, weapon — the Premier Automotive Group (PAG).

Can these one-time low-volume brands rescue the flagging Ford empire? Or is it too late?

There's nothing comical about these questions. Just ask Merrill Lynch analyst John Casesa who was so intrigued by Ford's aggressive foray into the luxury vehicle market he co-authored an exhaustive report for would-be investors subtitled, “Ford's biggest idea.”

“I got very interested in this strategy,” Mr. Casesa says of PAG. “It is a big, big deal.”

And he's not alone in his thinking. Says Jim Gillette, auto analyst with IRN Inc.: “Normally, I'm pretty negative on the Big Three. But I've got to tell you, the best strategy that's going out there among the Big Three is that Premier Automotive Group. … Each individual brand has a very clear definition of what they're trying to do and the target audience they're going after.”

And together, PAG brands Aston Martin, Jaguar, Land Rover, Lincoln and Volvo have the potential — by 2005 — to increase Ford's automotive pre-tax margins by 13%, says the Merrill Lynch report. That's an estimated $2.5 billion.

Consequently, Mr. Casesa says, PAG is more important than any other single Ford endeavor. More than cost-cutting. More than e-business.

“It's more visible to us as investors. More quantifiable. … And it is related to what Ford knows how to do.”

Which is, he says, making cars and trucks.

But in an increasingly difficult climate marked by fuel price worries and general penny-pinching, is it reasonable to expect any brand to perform heroic deeds in the luxury market? Especially a tired champion such as Lincoln, a PAG stalwart?

During the first eight months of the year, luxury car sales declined 7.8% compared to the same period in 2000 — underperforming the overall car market by nearly a percentage point.

And swirling about in this vortex are PAG members Jaguar, Land Rover and Lincoln.

Volvo and Aston Martin have, so far, escaped the downward trend.

Compared to the first eight months of last year, Lincoln sales are down 16.7%. Jaguar, arguably PAG's shiniest star, is down 10.1%.

And Land Rover is mired in a 7% slide.

Buoyed by introductions of its S60 sedan and V70 XC, Volvo sales are up 3.6%. And while Aston Martin's models are sold out, its low volumes — fewer than 1,500 units scheduled for 2002, worldwide — won't significantly bolster PAG's bottom line.

(Just how little the latter affects the books is evident when an Aston Martin insider offers a proverb in place of financial information. “A gentleman never counts his change in public,” he says.)

While this year's declines are measured against the best year in industry history and, month-over-month, Jaguar, Volvo and Land Rover have posted brand-best performances more than once, PAG's arch-rivals continue to pull away.

Mercedes-Benz USA is maintaining 2000's record pace with a January-through-August sales hike of 0.6%. Lexus is up 11.3% and, continuing a month-to-month course of improvement that harkens back to 1998, BMW's year-to-date sales are up 10.7%.

In the comics, this is where the protagonist's fate seems grimly certain.

The fight seems over. But suddenly, a chink is discovered in the competition's armor.

And in this case, it's big enough to drive a sport/utility vehicle (SUV) through. Or at least a crossover/utility vehicle (CUV).

From January to September, luxury CUV sales climbed 69.5% compared to same period last year — 126,747 units from 74,768. Lexus RX 300 leads the pack, pushed hard by BMW's X5, despite the latter's nine recalls.

But PAG is poised to rush the utilitarian luxury segments with at least three products — one each from Lincoln, Volvo and Land Rover. They are Aviator, V90 and Freelander, respectively.

Of Aviator, Lincoln Brand Manager Mike Crowley says: “It's very important because, right now, Navigator has attracted a lot of customers to the segment.”

Due out next year as an '03 model, Aviator — smaller than Lincoln Navigator — will come off Ford's U152 platform — source of Ford Explorer and Mercury Mountaineer.

“There's a lot of opportunity,” Mr. Crowley adds. “As when Navigator first came in, there's kind of a sweet spot (in the market.)”

Noting the introduction of Blackwood, praised for its ride though mocked for its lack of utility, Mr. Casesa confesses skepticism about Lincoln's passenger car business. “Maybe they should be an American luxury truck brand, or something,” he says.

Bunk, Mr. Crowley says.

“Yes, we've got some strengths in trucks … but I wouldn't say that's the total scope of the package for Lincoln. We've got Town Car as well. I think you're going to see Lincoln continue to grow around the LS.”

However, Continental is expected to vanish, or at least take a hiatus.

Meanwhile, Volvo — having punched a hole in the CUV segment with this year's launch of Cross Country — readies the second wave of its 1-2 combination. The V90 is based on Volvo's Adventure Concept Car (ACC).

“Whether they're fast enough, that's another story,” Mr. Casesa says.

Of the luxury CUV market, PAG Executive Director Victor Doolan says: “I'd like to think Freelander started the whole thing.”

Launched in Europe four years ago, the car-based “baby” Land Rover overcame quality doubts to become that continent's top-selling utility vehicle. Stickered under $25,000, it is scheduled to debut here in December (see p.70) with predicted annual sales of 20,000 units.

Where does this leave luxury cars? Incredibly, still in the running according to long-term trends.

“People are getting older and richer,” the Merrill Lynch report says.

Census bureau statistics show the number of people between the ages of 45 and 64 — “prime range” for luxury vehicle purchases, according to the investment house — is expected to approach 80 million by 2010, a 33% increase from today's total.

And historically, Merrill Lynch says, the luxury market is more resistant to economic swings than the overall market.

“In the U.S. the luxury market was less cyclical in both the 1980s and 1990s downturns,” the report says. “Luxury sales grew despite an 8% decline in the total market from 1980 to 1982. In the early 1990s, luxury again outperformed with flat sales in a declining overall market.”

Land Rover Chairman and CEO Robert Dover begs to differ. He was at Jaguar then and recalls when sales there fell by half when the last decade began.

“What you can say is, when there is a recession, the premium products tend to go into the recession late, and come late out of the recession,” Mr. Dover says.

Notably, the Gulf War occurred during the second downturn. Reluctant to make predictions, industry watchers are adopting a wait-and-see attitude with regard to whatever actions arise from last month's terrorist attacks in the U.S.

One thing is certain, however. Jaguar will stick with cars because PAG already has a Jag-caliber SUV. “It's called Land Rover,” says spokesman Jeremy Barnes.

Product diversity in sufficient numbers — without overlap — is the source of PAG's power, says Dr. Wolfgang Reitzle, group vice-president. “A fleet that is united, instead of a battle ship,” he says.

And the fleet's numbers have been growing steadily. Ford's total luxury volume went from about 200,000 vehicles in 1997 to more than 800,000 last year. Projections call for totals approaching 1.4 million before 2005.

Jaguar should have a significant share of that total, says Mr. Gillette, adding the pending introduction of F-Type bodes particularly well.

“I think it's going to take 5 to 10 years before they can approach the level of a BMW or a Mercedes,” he says.

And while Mr. Gillette acknowledges Jaguar might never catch up, he claims Jaguar X-Type already has BMW worried. The Germany-based automaker will make many 3-series options standard equipment next year, he says.

“That kind of irks me because I have a 2001 3-series, and I paid for the steering wheel and everything.”

Market forces are likely the most formidable foes PAG members face as they roll out new product in a bid to boost Ford's fortunes and challenge Mercedes as the world's top luxury auto producer. Worldwide, PAG capacity trails that of Mercedes by about 200,000 units. But it leads BMW, albeit by fewer than 70,000.

Internally, Ford's will to see PAG succeed appears unshakable. As Ford President and Chief Executive Jacques Nasser formulates a new global cost-cutting plan that could result in plant closures, a source tells Ward's PAG is not believed to be on the table. Not surprising because Mr. Nasser is to PAG what Jor-El is to Superman — a father figure and visionary.

Meanwhile, Mr. Reitzle has been the Man of Steel in Dearborn where he's been busting down doors to ensure PAG gets the resources its needs. Lincoln, for example, has, for the first time in 50 years, its own designers and engineers.

“Before, we were usually grouped in vehicle teams that had Ford and Mercury and Lincoln in the same groups,” he says.

“With the sharing of ideas and experiences with somebody like Wolfgang Reitzle at the head,” Mr. Crowley adds, “he keeps us dedicated to the issues of how to build the brand, long-term — the products, process, distribution, all that stuff. He's done it, knows it and is extremely passionate.”

The word “uncompromising” is also heard whenever the former BMW executive's name is raised. But in what context?

Says one insider: “Uncompromising in terms of quality. That's all I'm going to say.”

Today, Mr. Reitzle says, PAG brands carry “completely different weight within the company.” Aston Martin, for example, “was barely visible on company diagrams.”

Ford's flow chart was recently redrawn, uniting the North American operations of Jaguar, Land Rover and Aston Martin — arguably PAG's superheroes. But executives deny the move relegates Lincoln and Volvo to sidekick status.

“It's to have three very clear businesses within PAG, as opposed to disparate brands,” says Mr. Doolan, who's also acting president of Volvo Cars North America (VCNA) until the January arrival of Dan Werbin, successor to new Cadillac General Manager Mark La Neve.

“What you've got is American luxury, which is Lincoln. Volvo is our Swedish brand and can stand on its own two feet. And Jaguar, Land Rover, Aston Martin — also powerful brands, but totally complementary — represent British at its best. Three very clearly distinct corporations within PAG. Over and above that we have an umbrella which facilitates further synergies.”

Volvo, in particular, is no second banana. In addition to being the volume leader with annual production exceeding 400,000 units worldwide, it is a prime source of cutting-edge systems.

Mr. Dover hints that a future Land Rover product will feature Volvo engine management technology. And it already supplies Aston Martin with safety systems.

“If you buy Aston Martin, you expect it's a safe car,” says its CEO Dr. Ulrich Bez. “But it's not a different safety. Safety is safety.”

Says Hans-Olov Olsson, president and CEO of Volvo Cars: “Since we are the biggest brand within PAG, the success of PAG is very much dependent on the success of Volvo.”

However, there have been growing pains. Establishing the British triumvirate, led by former Jaguar North America President Mike O'Driscoll, has prompted some talent to move on.

“We're really working very hard to try to keep as many people as we can because we need them,” says Mr. Dover. “They've got special product skills.”

It's arguable that Mr. Dover's organization suffered the most egregious loss with the pending departure of Land Rover North America President Howard Mosher. Though he has agreed to stay on to assist with the transition, Mr. Mosher — who also worked for Renault — has opted “for now” to retire early next year.

Meanwhile, PAG has consolidated its members' North American sales and marketing operations in Irvine, CA — a source of additional turmoil as hundreds of employees formerly based in New Jersey, Maryland and elsewhere have relocated.

The four Europe-based brands will retain downsized offices in the East. But in the case of Volvo, about 40 vacancies remain unfilled because of Ford's hiring freeze.

Roger Ormisher, vice president of public relations for VCNA, says the company always planned to keep its parts, vehicle logistics, service, customer relations and regulatory and government affairs departments in New Jersey.

“Those people need daytime overlap with Sweden, which is six hours ahead in time. But our marketing is a North American issue and can function well in California.”

Jaguar lost only a handful of top employees. All but one of them found other positions within the Ford family.

“We'll have to settle into a new rhythm, but it won't delay any new models,” says Simon Sproule, public relations director for the combined British group. “The whole organization is new.”

One new face belongs to former journalist, Susan Calloway. Her promotion from PAG marketing director to general manager Jaguar-North America caused a stir in the media but no discernable buzz among Jaguar's rank and file.

Leadership, says Mr. Casesa, is just one more PAG strong point. He credits Mr. Reitzle with attracting “great people from great companies.”

The joiners include Mr. Doolan and Mr. Bez, both of whom had roots at BMW. Most recently, former BMW designer Henrik Fisker has been named Aston Martin's new design director.

What could hurt PAG?

“Losing Reitzle right now would be a real problem because he's a huge factor in developing the business model and the brand cultures,” Mr. Casesa says.

And riddle me this: What about PAG's “synergies”? Will component-sharing weaken its products the way Kryptonite renders Superman helpless?

“In truth, the whole industry is component sharing,” reminds Mr. Doolan. “We all have, basically, the same suppliers. … As long as (component sharing) does not infringe upon the character of the car, then I don't see an issue with that.

“Lexus and Toyota have done that very successfully for a long, long time. The ES 300 is undoubtedly a Camry but,” he says with a chuckle, “they've managed to position them separately at a premium price. … So efficiently the media hardly picks up on it.”

Adds Mr. Reitzle, with equal indignation: “The air-conditioning systems of the Denso company, for example, are installed in the BMW, the Audi and the Jaguar as well. … The air does not know that it rushes through the interior of a Jaguar. It makes no sense to develop one's own core component.”

As they say in the comic books, “to be continued …”

The Fantastic Five

With apologies to Marvel Comics, meet the Premier Automotive Group:

The Hulk (Land Rover) — Intrepid and brawny. Acquired by Ford in March of last year. An institution in Europe, particularly the U.K., for 50 years. Recently sold its 200,000^th vehicle in North America. Key product: Freelander. Weakness: Quality.

Thor (Volvo) — Master of self-defence … and a Scandinavian. Acquired in 1999. Undisputed world leader in safety engineering and PAG's high-volume brand with an objective of 200,000 unit sales in the U.S. Key products: S60, XC. Weakness: Emotionless styling challenges categorization as a true luxury car.

Black Panther (Jaguar) — Sleek, strong … and the only relevant superhero with a feline persona. Acquired in 1989. Considered PAG's brightest potential star because of dramatic quality improvements and volume increases. Key product: X-Type. Weakness: Trend toward CUVs could hurt sales.

The Human Torch (Aston Martin) — Muscular and sexy. Acquired in 1987. Considered Ford's technology innovator. Key product: V12 Vanquish. Weakness: Exclusivity results in low public profile. … OK, no real weakness.

Captain America (Lincoln) — Stylish guardian of “American luxury.” Acquired in 1922. Emerging as top luxury truck brand. Key product: Aviator. Weakness: Stodgy image.

Baby Boom

What's with the youth movement in today's luxury vehicle segment?

The qualifer “baby” is to auto-speak what “son of” is to Hollywood sequels. Consider these:

Baby Jag (Jaguar X-Type); Baby Navigator (Lincoln Aviator); Baby Land Rover (Freelander).

There's talk of a Baby Benz based on the A-Class, and two Baby Beemers — the 1-series beneath BMW's 3-series and the X3 under the brand's X5 sport/utility vehicle.

There are even plans for a Baby Bentley in 2003 and a Baby Aston Martin in 2004. But based on expected prices, would-be buyers may need to be born with silver spoons in their mouths.

The all-new Bentley will sell in the $140,000 range while the proposed V-8 Aston Martin roadster — competition for Porsche 911 and Ferrari 360 Modena — will be just under $100,000.

Most baby products, however, are priced further down. Some, like Freelander and X-Type, are under $30,000.

Why are automakers aiming so low? Because, says one auto analyst, it's like taking candy from a baby. “In economics there's a term called ‘contestable markets,’” says Jim Gillette, vice president of IRN Inc. “I don't think you're going to have anybody real soon say, ‘Oh, we're going to take away the S-Class market from Mercedes.’ Or, ‘We're going to take the 7-series market away from BMW.’

“As a matter of fact, the Big Three always have ceded that to the Europeans. It was only the Japanese that said, ‘We're going to take a shot at it.’”

And with gusto. Entry-level luxury cars feature five Japan-based brands, two from Toyota's Lexus division — ES 300 and IS 300.

Automakers covet this segment, says a J.D. Power study, because it's growing — to 3.8 points of market share from 1.7 in 1991.

But more importantly, the entry-luxury segment helps automakers grow. Nearly 70% of ES 300 buyers buy a second Lexus, says Denny Clements, the brand's group vice president and general manager.

And as buyers move up the ladder, profit margins increase.

Entry-luxury models also increase brand volumes, suggests Robert Dover, Land Rover chairman and chief executive officer. “Wherever Freelander's been launched, it's doubled the size of our business,” he says.

Such verticality bodes well for positioning strategies. Consider this European scenario set out in a Merrill Lynch study:

“Volvo can sell successfully into the upscale family and executive car segments that Ford brand cars were unable to penetrate,” the report says of the Sweden-based automaker, one of PAG's five brands. “For example, while the Ford Scorpio was not a credible executive segment entry, the new Volvo S60 is, and in this scenario a buyer would move up to a PAG brand rather than leave the Ford family.”

While this appears to be cannibalization, the report notes, it's really not. It's a win-win scenario in which Ford receives a “more defendable role in the middle of the market, while PAG fills in the upper end.”
— Eric Mayne