Ford never made money on the Escort, despite having sold something like 10-12 million of the cars worldwide.
Why didn’t they make money?
As I understand it, when you first start making a product, as an example, lets say you make CD’s, the cost of production is fairly high at first, but as you churn out more and more the cost of production goes down.
If that was the case with the Escort, why did Ford lose money on the cars?
They may have simply been an unprofitable car to sell. I once talked to a Ford insider who claimed that the CEO would have liked to sell nothing except Continentals and Escorts because they needed the Escorts to meet CAFE requirements but they made the most money on the Continentals. (He was clearly exaggerating to make a point, but the point he exaggerated is true: each car maker must sell a large number of fuel efficient cars to meet the Federal fleet efficiency fuel standards. If the only car that you can build to get the fuel numbers up is unprofitable, you are stuck selling it until you can replace it with a new model that will have better mileage and better return on investment.)
Of course, we are assuming that your original statement that Ford never made money on the Escort is correct. While I am sure that an Escort was far less profitable than a Continental or a Town Car, I have never seen the reports that they lost money on the Escort.
Personally, I have a ton of complaints about Ford Escorts because I used to own one of them (I called her Christine.) It broke down constantly and I must have paid a fortune in mystery repairs–stuff that’s wrong but not the thing that’s causing the breakdown. I also received at least a dozen recall notices over the few years I had the thing–again, none of them fixed what was actually wrong with the car. But I found this site that may explain things more clearly for you.
I did end up finding out a couple of years after I got rid of the car that there was a design defect in the fuel pumps on the 1985 1/2 Ford Escorts and that was what was causing my mysterious problem. But I continued to receive recall notices on the thing for a long time after I’d ditched it. There is a reason for that little joke:
Found
On
Road
Dead
The Escort was never a loss-leader. This is widely spread urban legend (similarly said about the old Omnis and/or Cavalier). While true that CAFE is helped by selling smaller cars, Fords largest cars meet CAFE standards on an individual basis (yeah, it’s not really just a corporate average). Of course, light trucks are excluded. Light trucks, particularly the F150, has been Ford’s bread-and-butter for 20 years.
Stripped vehicles are very low margin. The purchase of a stripped vehicle coupled with heavy incentive programs can result in a car being sold at a loss. Luckily most people aren’t satisfied with a stripped vehicle and happily pay $600-$2000 for an air conditioner, or $500 for power windows, and so on. The margins for options are significantly higher than for the base vehicle.
Finally, the Escort had been made for years in both Michigan and in Sonora, Mexico. It would have made a lot of sense to just drop the Michigan production if costs were the largest concern, and make a more profitable vehicle. In fact, the Escort was profitable enough that the Michigan plant was given Focus business.
I haven’t seen any figures on the Escort in particular, but there’s countless examples of particular models not being profitable.
To produce a car (or anything else) you have a fixed cost and a variable cost. The fixed cost includes the design and tooling. The variable cost is the cost of making each car.
Let’s say that the variable cost is $10,000 per car and that the fixed cost is $100,000,000.
If you can sell 100,000 cars at $11,000, then you break even. If you sell more than that, you make a profit.
If a competitor starts selling similar cars at $9,000, then you’re fucked. You may keep making the cars anyway, in the hope that magic pixies will restore your profitability, or that the shareholders won’t find out before you get your bonus, but in the end, someone gets fucked.
I don’t know about the Escort but the Acura NSX reputedly cost more to build than what it sold for.
Some good ideas here. I’ll offer another; one I heard from a friend who tried selling cars years ago: an auto manufacturer offers a small car with a very low profit margin because doing so makes it possible to get people into dealerships, where they can be upsold to more profitable models.
It works this way: you want a small car. You don’t want a Ford Taurus or Explorer; you want something small. You wouldn’t look at Ford, unless they had a small car–well, Ford offers Escorts. So you go to look at Escorts.
While at the dealership, you re-examine your needs. You’re guided in your thoughts by the helpful salesperson, who points out that if you regularly travel freeways, you might want a bigger car–for safety reasons, of course. And the kids might be more comfortable in the back of a bigger car–they’re growing, and might appreciate the legroom. And something like, say, the Taurus can be just as affordable, using our easy payment plans…
You get the idea. You wouldn’t have gone to Ford at all, except they had the small Escort that you wanted to see; but once there, a Taurus seemed a much better idea. It’s not exactly bait-and-switch, but it’s close. Of course, if you insist on getting an Escort, they will sell you one. They’re not fools; a small profit is better than none.
They may not make much money on the Escort, but by having them, they can try to upsell potential buyers to a more profitable model. (This is where my friend did not succeed as an auto salesman; he didn’t like this approach.) Anyway, whether it’s a small car or a supermarket door-crasher special, a “loss leader” is designed to get you in the door; once there, you are at the mercy of the merchant who will use the opportunity to sell you things that they can make more money on.
Just to amplify on what Desmostylus noted, fixed costs also include labor.
It takes approximately as many workers to design a small car as a large one.
It takes approximately as many to engineer a small car.
It takes approximately as many to assemble the car on the line, etc., etc.
Let’s say it takes a a total of 50 man-hours to assemble a small car and 55 to assemble a large one. At $20/hr for wages and another $15/hr for benefits and taxes, the difference in labor costs is only $225 per car. But the large car can easily cost twice what the smaller car does.
Granted the manufacturer can load up the small car with a lot of options, etc., but then it faces push back from the customers who refuse to pay more than $X for a small car (I don’t know if that’s a problem in other countries, but certainly in the U.S. there’s a strong feeling among auto buyers that small cars should cost less than large ones.)
And while eventually the manufacturer will have amortized the cost of design and tooling and begin to profit from the economies of scale, the assembly costs will never drop by a significant cost, unless production is moved to a lower-cost assembly point (Mexico.)