Ford's late arrival to U.S. subcompact crossover market symbolic of CEO's need to overhaul

DETROIT -- To understand why CEO Jim Hackett is urgently overhauling Ford Motor Co., look no further than the surging subcompact crossover segment.

The U.S. market for diminutive models including the Subaru Crosstrek, Jeep Renegade, Honda HR-V and Chevrolet Trax has grown more than sixfold since the start of the decade and will surpass 1 million units for the first time this year, according to LMC Automotive. Ford is just showing up with the EcoSport hitting showrooms this month.

Hackett took over as CEO of Ford in May partly because the automaker had been flat-footed bringing small crossovers, midsize pickups and electric vehicles to market. Late arrivals to these segments cost the company customers as industrywide demand shrank last year for the first time since the recession.

"Just by having an offering, we're already going to grow our business by maintaining our own customer base," Michael O'Brien, group marketing manager of Ford SUVs, said in an interview. About 10 percent of rivals companies' subcompact crossover sales have been to U.S. consumers who owned Ford vehicles, he said.

Ford probably will begin this year with another down month, with analysts projecting a 1.5 percent decline in light-vehicle sales, according to a Bloomberg News survey. While F-series pickups remain dominant, the EcoSport is a newcomer and the midsize Ranger truck shown at the Detroit auto show earlier in January won't start selling until 2019.

These absences help explain why Ford has been struggling to cope with the rapid consumer shift to crossovers, SUVs and pickups as well as some of its rivals. Industry sales of light trucks, which include crossovers and SUVs, probably will jump about 5 percent this month while car deliveries drop by 3 percent, Goldman Sachs analysts estimated in a report last week.

The annualized pace of total sales last month probably slowed to about 17.1 million cars and light trucks, the average estimate of 11 analysts.

"We expect strong mix to at the very least hold in for 2018, and more likely to further improve," Brian Johnson, an analyst with Barclays, said in a note to clients Tuesday. This will keep boosting average selling prices and automakers' profit margins, he wrote.

Ford has been missing out on the fatter margins that rivals including General Motors Co., Fiat Chrysler Automobiles and Honda Motor Co. are earning from small crossovers. Subcompact crossovers sold for an average of almost $25,000 last year, about $7,500 more than subcompact cars and $4,150 more than compact cars, according to Kelley Blue Book.

"This is something we really have needed," Charlie Gilchrist, the president of SouthWest Ford, a dealership near Fort Worth, Texas, said of the EcoSport. "We'll see customers that were looking at the Chevrolet Trax that we've never seen before. We didn't have anything for them."

Hackett, 62, warned this month that profit will decline in 2018 as he overhauls operations, including by cutting $14 billion in costs over five years. Moody's Investors Service changed its outlook for Ford's credit rating to "negative" on Tuesday, citing its expectation for the CEO to face challenges implementing initiatives to improve Ford's " fitness."

Ford counts on profits from the F series, crossovers and SUVs to underwrite costly efforts to bring electric vehicles and self-driving cars to market. It's rolling out an ad campaign for EcoSport during the upcoming Winter Olympics. The company has been selling the spritely crossover outside the U.S. since 2004 and will import the model into its home market from India.

The EcoSport is one of 23 new model introductions Hackett has promised for this year to reverse Ford's fortunes. He's also shifting $7 billion in engineering spending away from traditional cars and into SUVs. Even without the EcoSport, Ford's U.S. utility-vehicle sales climbed to a record last year.

"Small SUVs are becoming the new starter vehicle, replacing compact and subcompact cars," Jeff Schuster, auto analyst for LMC Automotive, said in an interview. "These vehicles do command a price premium over their car counterparts, so profitability is better than it is on the car side of the business."

Ford will look to entice EcoSport buyers to pay well over its $19,995 starting price with an array of connectivity options, including Amazon Alexa, Sync 3 voice-activated controls and an 8-inch touchscreen.

And while the vehicle will be marketed at millennials, Ford expects half its buyers will actually be deep-pocketed baby boomers who are downsizing after their children have grown and left home.

"The greater consumption will be the empty-nesting baby boomers," O'Brien said. "As customers downsize, we actually think they're upgrading."

Outside the U.S., EcoSport has proven popular. Sales have quadrupled since 2012 to more than 240,000 units last year as Ford moved beyond initial markets in South America and offered the model in Europe, India and Asia.

"They're joining the party in the U.S. with a lot of established players and a lot of newcomers, so they're coming in at a challenging time," Schuster said. "They certainly could have been earlier."