Automakers offer incentives for plenty of reasons, some bad, some good. At lot of their motivation is psychological: well-times incentives can juice sales for a quarter and raise market share. There's a price to be paid however, in terms of profits. So why did Ford (F) raise incentives for March when most other carmakers cut them?
Maybe because Ford smelled blood. General Motors (GM) offered major incentives at the beginning of the year, but dropped them in March (although it's still spending the second most per vehicle, $3,109, just behind Chrysler's $3,181). Ford spent $2,749 per vehicle, the heftiest increase from February of any of the major automakers. It's doing this to grab market share while the grabbing is good.
But doesn't this go against everything that Ford stands for?
Just because Ford didn't take the government bailout money in 2009 and looks to the public like the hero of Detroit, that doesn't mean the company can't act like GM when it needs to. A minor price war has broken out among the (former) Big Three: all are outdoing the incentives offered by their Japanese and Korean competition, although incentive spending for March "is the lowest since January 2007," according to my source for these numbers, auto advisory site TrueCar.com.
Ford's current lineup of cars and trucks should be good enough to compete on its merits -- and it is. The discounts the carmaker is funding aren't about lending an assist to the new Focus or F-150 pickup -- they're about picking up market share on Toyota and Honda, both of which are seeing their slice of the U.S. market decline.
Alan Mulally is an opportunist
There's an historic opportunity here for Ford to get a few points of market share up on Toyota, which has seen it's share plummet from, 17.5% in March 2010 to a projected 14.6% In March 2011. Ford, meanwhile, has picked up almost a whole point since February, taking it to 16.8%, a whisper ahead of where it was last year, before GM began its climb back to the top and as Toyota's Great Recall precipitated its steady fall.
Ford CEO Alan Mulally knows a golden opportunity when he sees one. If he can get three points up on Toyota and almost seven up on Honda, Ford will be a solid number two in the U.S. for the foreseeable future. Both Toyota and Honda will be forced to discount deeply if they want to catch up.
But what about the profits?
You could say that Ford is chasing a short-term gain at risk of a long-term loss. Namely, the profits it foregoes now in exchange for market share would be mighty useful when some of the payments on its multi-billion-dollar debt come due. However, the company's calculus probably suggests that if it discounts now to stay close to GM and separate itself from the Japanese, it will be able to reap the benefits of the investment later, when the overall economy is more robust.
As rolls of the dice go, it's not that dangerous. Ford can always slash incentives later, if it decides that the strategy isn't working. For the moment, it's simply engaged in an aggressive business practice -- and staying somewhat under the radar. When GM starts pulling out all the incentives stops, people go ballistic because they see the company reverting to its old, pre-bailput ways. When Ford does it, you have to ponder the numbers to figure out what's (probably) up.
So now we know what Ford's game is. The next question is, How much money is Toyota going to have to spend to revive itself in North America? Maybe it will elect to be happy with 15% market share -- and steady profits that it can use to battle GM in Asia.