Battling fallout from the Firestone tire crisis, Ford Motor Co. is propping up sales of the 2002 Explorer with heavy incentives.
Determined to remain the segment leader, Ford is adding customer cash on top of discounted lease and financing deals, according to J.D. Power and Associates.
Ford's spending could foster a price war in the hotly contested compact sport-utility segment, says one expert.
The company redesigned the 2002 Explorer, which arrived in showrooms in sizable numbers in April.
The high incentives erode profits, undermine used-vehicle values and tarnish the brand name of the No. 1 selling sport-utility in the United States.
'There is tremendous new competition in that segment,' said Ford spokeswoman Anne Doyle.
'We have led the segment for 10 years, so of course everybody is going to come after the leader,' she said. 'With everybody targeting us, we are going to respond. We have to respond.'
Ford's incentive spending spiked after the company said on May 22 that it would replace 13 million Firestone tires, according to sales transaction data culled from dealers in 21 major metropolitan markets by J.D. Power.
For example, in June and early July, more than 98 percent of those leasing the 2002 Explorer did so at lease rates below 7 percent, the threshold J.D. Power considers a discount rate. By July, one in three leasing customers also received additional incentives averaging $1,563.
'The incentive activity clearly changed in the May-June time period. They are piling the incentives on,' said Tom Libby, a director at J.D. Power.
Automotive News commissioned the information from the Power Information Network, a unit of J.D. Power that derives daily data from approximately 4,500 participating franchises.
Ford reported a June sales record of 42,833 Explorers, 2.5 percent ahead of the year-ago month.
The 2002 model is the first redesign in the Explorer's 11-year history. The timing could not have been worse.
The new-model launch was sandwiched between two Firestone tire replacement campaigns that have linked the Explorer with deadly rollovers. Congressional inquiries made national headlines.
Firestone's first recall of 6.5 million tires occurred last August. Ford's replacement of 13 million more tires began in late May.
'We are concerned about the incentives on the new Explorer,' said Raj Sundaram, vice president of Automotive Lease Guide. 'If they increase incentive spending, it will force competitors to react and create additional price pressure within the segment.'
Industry profits are poised to take a hit due to falling residual values in the North American compact sport-utility segment, a condition the Explorer spending will only aggravate. Automotive Lease Guide, the industry benchmark for used-vehicle values, is forecasting an industrywide decline in compact sport-utility resale values. (See related story.)
But Automotive Lease Guide is not reducing Explorer residuals because of Ford's May 22 Firestone announcement, Sundaram said. Last fall, the guide cut the Explorer residual value by about 2 percentage points solely due to the tire issue.
The Power Information Network data illustrates the extent of Ford's spending to maintain high Explorer sales. The data is based on transactions from Jan. 1 through July 8. They track four-door 2002 Ford Explorer models. Ford began advertising the 2002 model in April, an indication that dealers carried sufficient new-model stock. By July, 90 percent of 2002 Explorer finance transactions carried discount loan rates below 7 percent, the J.D. Power threshold for subvention. From April to May, the number of subsidized loans almost doubled, from 48 percent to 89 percent. In June, 40 percent of customers financing the transaction also received customer cash incentives that averaged $921.
Leasing customers also fared well. In June and early July, 98 percent of those leasing the 2002 models did so with cut-rate lease rates below 7 percent.
By July, more than one-third of customers leasing the new Explorer also received a cash incentive averaging $1,563. In June, the amount averaged $1,341.
Residual values of the four-door 2002 models tracked in the study have fallen. In April, during the early days of introduction and before the May tire announcement, the Explorer carried an average residual value of $16,187 after three years. By July, the three-year residual value had dropped to $15,912.