New Quality Concerns for Ford?

After decades of mismanagement, Ford (NYS: F) has done almost everything right in the past few years. New models are at or near the top of the charts. Profits are solid, and management is investing wisely for long-term growth overseas. There's cash in the bank, an investment-grade credit rating, and even a quarterly dividend.

It's a remarkable story that makes the occasional misstep by Ford seems all the more jarring. And the latest one is an eyebrow-raiser: For the second time in two years, an important new-model launch has been marred by quality glitches -- this time, leading to two safety recalls in the same week.

The second-worst kind of vehicle recall
Ford's new Escape SUV has been a big hit with consumers since its launch in June, but Ford has to be hoping that the two recalls announced this week don't put a damper on buyers' enthusiasm. The first was a relatively minor issue -- a carpet piece that could come lose and interfere with the brake pedal. But the latest was more dramatic. It came on Thursday morning, and it came with a rare plea: Ford asked owners of affected vehicles to stop driving them immediately.

Ford's erring on the side of caution, but that's hard to criticize, with memories of Toyota's (NYS: TM) unintended-acceleration drama still fresh. Still, a recall that comes with a stop-driving-now request is extremely unusual, and probably the second-worst kind from a public-relations perspective. Fortunately for Ford, no injuries have resulted from the defect (a recall following injuries or deaths would be the worst, of course) -- and Ford's quick action makes it likely that none will.

So what's the problem? Ford says that, in Escapes equipped with the 1.6-liter four-cylinder engine, a faulty engine-compartment fuel line could split and lead to fires. This isn't theoretical. There have been three fires so far -- two at the factory and one in a privately owned vehicle in Canada. All happened while the vehicles in question were running -- Escapes that are turned off and parked in a garage should be safe.

Ford halted shipments of Escapes with the problematic engine on July 11, after the third fire, and began an extensive investigation. That was the right thing to do. Indeed, it's hard to fault Ford's approach to this problem.

But the fact that it happened in the first place is a bit of concern -- not least because one of last year's big rollouts also had problems.

Not a big deal, but a note of concern
Rolling out a new vehicle around the world is an immensely complicated process, and something like this problem with a fuel hose could be as simple as one misunderstood communication with one supplier. Every automaker, from little ones like Tesla Motors to huge ones like General Motors, has recalls from time to time. When handled properly -- and as long as nobody has been injured -- they're really no big deal.

But this is the second year in a row where the launch of a critical new Ford product has been marred by parts issues. Last year's launch of the Focus compact was hampered by supply problems early on; no recalls were involved, and Ford never did an official explanation, but rumors suggested that early batches of key parts from suppliers weren't up to snuff.

Should shareholders worry? Probably not too much: Ford appears to be taking exactly the right action here, and with luck it'll be forgotten a month from now. But it's worth keeping an eye on: The Escape is an important new model for Ford that is destined for markets around the world. Any lingering suggestion that its quality is less than top-notch could turn into a major headache for the Blue Oval.

Thanks in part to concerns about Europe, Ford's stock has been under pressure lately, with its stock dropping below $10 a share. But the company is still performing very well at home and is investing heavily for growth abroad. Have these short-term pressures created an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Get instant access to this premium report.

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