Ford Bets Big on Small Cars


The new Fiesta will be the first subcompact Ford has built in North America since the Pinto, and a test of whether it can make money on small cars

By Keith Naughton

(Bloomberg) -- Ford Motor Co., betting that U.S. drivers will embrace small cars with the amenities of larger models, is preparing to resume building subcompacts in North America for the first time since ending the Pinto in 1980.

The domestic version of Ford's (F) new Fiesta was unveiled at the Los Angeles Auto Show on Tuesday, Dec. 2. It will feature seven air bags and voice-activated audio controls to help win buyers who might snub diminutive cars with substantial prices.

The domestic version of Ford's new Fiesta will be unveiled today in Los Angeles. It will feature seven air bags and voice-activated audio controls to help win buyers who might snub diminutive cars with substantial prices.

Ford's venture is an attempt to buck decades of history at U.S. automakers, which made little or no money on small cars and focused on light trucks. With the U.S. market share of small cars surging, the domestic manufacturers are trying to develop autos that meet consumer tastes and are profitable.

"It's going to be a huge challenge, but it's something Ford has to accomplish," said John Wolkonowicz, an analyst with IHS Global Insight of Lexington, Massachusetts. "The future profitability of the entire industry is riding on this car."

The collapse of the sport-utility vehicle market led Dearborn, Michigan-based Ford to lose $30 billion from 2006 to 2008 and helped drag General Motors Co. and Chrysler Group LLC into bankruptcy this year. Ford more than tripled in New York Stock Exchange composite trading in 2009 to $8.88 yesterday.

The Fiesta, which debuts in the U.S. in mid-2010, has sold more than 500,000 vehicles in Europe and Asia in the past year. Ford has said it expects the Mexico-built car and its variants to reach 1 million in annual global sales by 2012.

Seeking Growth

"If you don't get into the small-car market, you don't have a growth business," said George Pipas, Ford's sales analyst.

The Fiesta will be priced from about $13,000 to $18,000, Wolkonowicz said. The base model will have standard equipment such as air conditioning, air bags to protect the driver's knees and an LCD screen in the dashboard, Ford said. The top model will have options such as push-button start, heated leather seats and a lighted gearshift knob, Ford said. Honda Motor Co.'s (HMC) Fit starts at $14,900 and GM's Chevrolet Aveo at $11,965.

The Fiesta will get 30 miles per gallon of gasoline in city driving and 40 mpg on the highway, according to Ford. A six-speed automatic transmission will help provide better fuel economy, Ford said. GM said Nov. 30 its Chevy Cruze small car, debuting in mid-2010, will get 40 mpg highway.

Ford will have to win over skeptical consumers burned by U.S. automakers' past offerings of bare-bones economy cars, said Joe Phillippi, president of AutoTrends Consulting in Short Hills, New Jersey.

Adding Refinement

"The Japanese have taught us that no matter how inexpensive the car, the level of fit, finish and refinement gets higher every year," said Phillippi. "That's where Detroit typically fell apart. On this car, it will come down to all those little details that go way beyond good fuel economy."

Brian Johnson, an analyst for Barclays Capital in Chicago, said the Ford's aim with Fiesta "is to offer something priced less than a Honda Fit, but with a lot of electronics and European specs and styling."

Johnson, who has a neutral rating on Ford, said, "the question is, will the customer go for it?" He said the profit on each Fiesta probably would be less than the $3,000 Ford makes on the Focus compact in Europe, while adding he didn't have an estimate.

U.S. sales may reach 70,000 a year, making it the fourth-best selling subcompact behind Nissan Motor Co.'s Versa, the Fit and Toyota Motor Corp.'s (TM) Yaris, said Jeff Schuster, auto analyst at researcher J.D. Power & Associates in Southfield, Michigan.

Overcoming Consumer Attitudes

The subcompact market in the U.S. will climb to 750,000 cars, or 5 percent of total auto sales, in 2012, from 470,000 vehicles, or 3.5 percent of sales last year, Schuster said.

The biggest obstacle Fiesta faces is overcoming the U.S. attitude that bigger is better and smaller should be cheaper, Wolkonowicz said.

U.S. drivers are ready to pay more as long as small cars come equipped with the same extra safety and convenience features as SUVs, said Chantel Lenard, the car's marketing manager.

Ford's most formidable marketing challenge may be persuading consumers to consider a subcompact from an automaker whose top-selling model has been the F-Series pickup for more than two decades, Lenard said in an interview.

"We aren't naturally on consumers' shopping list for cars because we're known for trucks and SUVs," Lenard said.

To contact the reporter on this story: Keith Naughton in Southfield, Michigan at Knaughton3@bloomberg.net


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