Ford plans to pump up incentives

In new twist, it will target regions and older vehicles, and will give dealers more say.

Bryce G. Hoffman / The Detroit News

Ford Motor Co. will sharply increase incentive spending this year to counter aggressive pricing by competitors and ensure that demand for older vehicles like the Ford F-150 and Mercury Milan remains strong as the automaker prepares to launch newer versions later this year.

Senior Ford executives told key dealers about the plan during a meeting in Dearborn earlier this month, according to people who attended the session. Many dealers have chafed at Ford’s push to reduce profit-sapping incentive spending, even at the expense of market share.

The exact cost of the new incentives is not clear, but dealers said it would amount to several hundred million dollars.

Cutting Ford’s reliance on discounts and deals has been an important part of CEO Alan Mulally’s turnaround strategy, which is aimed at transforming Ford into a smaller but profitable company.

Ford sources say the decision to increase incentive spending does not represent a shift in that strategy.

Ford will use the money selectively to support specific models in specific markets, and local dealer organizations will have more say in where and how the money is spent, sources familiar with the plan said. Moreover, instead of across-the-board bonuses designed to lure consumers into showrooms, Ford will target specific areas of the market where it has a chance of stealing share from competitors.

"This is all Jim Farley," said Art Spinella, president of CNW Marketing Research in Bandon, Ore., referring to the new sales and marketing czar Ford recently hired away from arch-rival Toyota Motor Corp. "It’s something that has worked extremely well for Toyota, and there’s no reason it can’t work just as well for Ford."

Officially, Toyota spends substantially less on incentives than Detroit’s Big Three. But Spinella said much of the Japanese automaker’s spending is hidden in other marketing costs. He suggested Farley might take a similar approach at Ford.

Ford would not confirm the plan. "Conversations between Ford and our dealers are private," company spokesman Jim Cain said Wednesday. "We’re not going to give anyone insight into our marketing strategies."

But company sources told The Detroit News that the boost in incentive spending, while significant, will not mark a return to the bad old days. Ford, like other Detroit automakers, was notorious for piling cash on the hoods of cars and trucks nobody wanted in order to maintain market share. That may have helped slow the sales decline, but only at the expense of profits.

Mulally has rejected those tactics in favor of a strategy that calls for vehicle production to match consumer demand. He notes that the most profitable brands, such as Porsche and BMW, are also among the smallest in the industry. While he wants Ford to remain a major player, Mulally insists that market share means nothing if the company continues to lose money. And he has ordered some of the largest production cuts in the history of the company to match Ford’s capacity to the actual demand for its cars and trucks.

As a result, Ford dealers have dramatically reduced their inventories over the past year, allowing the automaker to cut incentive spending even as its competitors increased theirs.

According to sources familiar with Ford’s incentive spending, the automaker was able to reduce its monthly incentives year-over-year consistently throughout 2007, a trend that continued into 2008. They said preliminary data shows Ford has spent an average of $3,182 per unit this month — down $272 from December and $659 from January of 2007.

By comparison, General Motors Corp. spent an average of $3,118 per unit, down $146 from December and up $652 from January of 2007.

Ford’s restraint helped the company increase its net pricing — the actual amount vehicles sell for — by more than $1 billion in 2007.

That pleased Wall Street analysts, but angered many dealers who have lost sales to competitors with richer offers.

Mulally’s strategy to right-size Ford was bound to frustrate dealers, said Tom Libby, senior director of industry analysis at Power Information Network, a unit of J.D. Power and Associates based in Troy.

"You have a distribution network out there that is adjusted to selling a certain number of units," he said. "But, long-term, it’s a sensible policy. It’s the only way to get competitive with the Asians."

Ford is working to consolidate its dealer body in major metropolitan areas to better match its dealer base with its smaller market share, which has been declining steadily for more than a decade and now stands at 15.8 percent. But that process is expected to be both long and difficult, and dealers are eager for near-term help.

"Any money they can give us now can really help," said Dave Knittel, general manager of Charlotte County Lincoln Mercury in Florida.

Dealers are particularly worried about maintaining sales of Ford’s bread-and-butter F-150 pickup as publicity builds around the launch of a redesigned model later this year. The same is true of the Ford Fusion and Mercury Milan sedans, which will see freshened versions released in late 2008.

Libby said incentives are one way to do that.

"Short-term incentives to give a specific market or model a boost are not necessarily bad," he said. "When it becomes an ongoing trend, then it becomes negative. That’s when it starts to erode residual values and net pricing."