What Does $4 Gas Mean for Ford?

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As they seem to do every spring, gas prices are rising: Here in the Northeast, prices for unleaded premium are already close to $4, and regular unleaded isn't far behind.

Some parts of the country are already paying more than $4 a gallon. So far, though, it doesn't seem to be hurting the overall economy much, according to my Foolish colleague Morgan Housel.

But whether it's likely to hurt Ford (NYS: F) and the other automakers is a somewhat different question.

Is Ford ready for $4 gas?
Not long ago, periods of rising gas prices spelled trouble for Ford and its Detroit-based competitors. Like General Motors (NYS: GM) , Ford invested heavily in trucks and SUVs, because they made (and make) for high-margin profits. Putting their best resources into the big vehicles and leaving the low-margin small-car categories to competitors like Toyota (NYS: TM) and Honda (NYS: HMC) seemed to make good business sense -- at least to the folks running the companies back then.

It might seem stupid in retrospect, but it really did make sense at the time, even if it didn't seem that way to outsiders. Ford and GM (and Chrysler) had higher fixed costs than their overseas competitors, thanks to decades of generous UAW contracts and a manufacturing base scaled for the days when Ford and GM and Chrysler were the U.S. market.

Those high fixed costs made it hard for Detroit to make small cars that could compete on price and quality with Toyota, Honda, and the other imports. So it focused its efforts on trucks and SUVs, and took its lumps when gas prices rose and sales of big vehicles slumped.

That has all changed. Ford's big F-series pickup is still the company's (and America's) best-selling vehicle, and it and GM still produce plenty of SUVs -- and still make big money on them. But thanks to several different factors, Ford (like GM) now has small cars that can compete with anybody, as well as more fuel-efficient big vehicles -- and should continue to prosper as gas prices rise.

The slow rise of the Ford Focus
Under the "One Ford" plan, a key part of Ford's global turnaround strategy, the company aims to sell the same basic lineup of cars and trucks (with a few variations) in all parts of the world. The latest Ford Focus perfectly illustrates the advantages of the approach: Engineered in Germany (by Ford's top small-car experts), the car is produced in factories in several different parts of the world, giving Ford economies of scale that help keep costs down -- and ensure that the Focus is profitable wherever it is sold.

While the Focus is the best compact car Ford has ever sold in the U.S., it took a while to catch on here - but catch on it did. Sales have been very strong in recent months, so strong, in fact, that Ford is preparing to add workers to enable its Focus factory near Detroit to run around the clock.

An end-to-end approach
Ford has taken lots of other steps to prepare for high gas prices. Its popular Explorer SUV, introduced last year, is built on a car-based platform rather than the heavier truck-based platform of its predecessors. That saves weight, gives better handling, and allows for more-fuel-efficient engines -- attributes that have proven popular with buyers.

Even its big trucks are greener than they used to be, thanks to an innovative turbocharged V6 engine that has won over V8 loyalists by offering similar power but significantly better fuel economy. Ford said that 57% of the F-150 pickups it sold in February had V6 power, another sign that the Blue Oval and its customers are adapting with the times.

The upshot: Profits should continue
This doesn't necessarily mean that rising gas prices will be good for Ford's profits, of course. While the Focus and Ford's other fuel-efficient cars are profitable, it's true that larger vehicles are still more so. As more consumers choose to replace larger vehicles with smaller ones, Ford's profits may well shrink a bit, though the company's strategy of offering compelling (and very profitable) options packages on all its models may help make up the difference.

Still, that's a much better scenario than we saw a few years ago, when a Ford fan who wanted a good small car had to put up with the company's second-rate offerings ... or head to a Honda dealer instead. Now Ford, like GM with its strong Chevy Cruze compact, can keep those buyers on the lot -- and send them home in a good car that adds to the company's bottom line.

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At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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