Ford Adds Much-Needed Production Capacity


On Thursday, Ford Motor reported strong sales for the month of July. Retail sales were up 19%, making it the best July for retail sales since 2005. The results were driven by big sales gains for small cars and full-size trucks. That said, F-Series truck sales were down more than 10% from the strong pace set in May and June. The sequential decline can be explained largely by tighter inventories driven by the high sales rate this spring.

Moreover, the extremely popular Ford Fusion finally hit a wall in terms of capacity constraints, as expected. In some markets, Fusions are sitting on dealer lots for just 10 days, on average! (Cars tend to spend 50-60 days on dealer lots in a normal selling environment.) According to Ford executives, Fusion continued to post strong sales gains in coastal markets, despite very low inventory.

The 2013 Ford Fusion (courtesy of Ford)

However, on a nationwide basis, Fusion sales dropped 12% year over year in July to 20,522. By contrast, Fusion sales eclipsed the 30,000 mark in March and came in just shy of that level in May. Ford is now in the process of adding additional production capacity for the Fusion sedan and F-Series trucks. As supply improves this fall, sales should rebound to the strong pace seen earlier this year, and could potentially move even higher.

Strong demand
Earlier this year, Ford was starting to challenge midsize car segment leaders Toyota , Nissan, and Honda with strong Fusion sales, particularly due to share gains in California and Florida. However, low inventories of the Fusion -- along with a somewhat more competitive pricing environment -- have helped the Japanese automakers to regain some market share this summer.

The situation in the full-size truck segment is similar. This spring, Ford was beginning to pull away from General Motors for the full-size truck sales lead. The recent introduction of GM's new full-size truck architecture had no noticeable effect on Ford's momentum. However, Ford has not been producing enough F-Series trucks to sustain the 70,000 units per month sales pace set in May.

Given the strong customer acceptance of the Fusion and the F-150, Ford has the opportunity to gain share in these two high-volume market segments at the expense of competitors like GM and Toyota. Fortunately for Ford shareholders, the company is planning to do just that by increasing production of these popular vehicles.

Capacity ramping up
For more than a year, Ford has been planning to expand Fusion production capacity this summer by adding a second manufacturing plant (the Flat Rock Assembly Plant). Late last month, Ford introduced a "simulated factory" at Flat Rock where it is training new hires before putting them on the Fusion assembly line next month.

The Flat Rock plant will continue to produce the Mustang in addition to the Fusion, but with two shifts, the plant should be able to expand North American production capacity for the Fusion by at least 10,000 vehicles per month. These vehicles will start arriving in dealer showrooms in the fall, and the additional supply should get the Fusion back to a normal supply and demand balance by the beginning of 2014.

Ford is also increasing production capacity for the F-150 full-size truck due to the very strong demand seen this year. (F-Series truck sales are up 22% year to date.) The company is adding a third shift at its Kansas City Assembly Plant this month. The plant currently produces 1,150 trucks per day with two shifts, and the third shift will significantly increase that production rate.

Sales gains on the way
Ford faces a high-class problem at the moment, with demand outstripping supply for some of its most popular vehicles. The company has delivered fairly impressive sales numbers in the last few months despite the growing supply constraints for Ford's Fusion midsize car and F-Series full-size trucks.

The production capacity increases outlined above should allow Ford to translate the strong demand for the Fusion and F-Series into higher sales this fall and in 2014. The higher capacity is arriving at just the right time, as demand for the new Fusion is still growing, while the next-generation F-150 -- expected in 2014 -- could catalyze even stronger demand for Ford trucks.

Barring a sudden downturn in demand, Ford is poised to maintain its strong North American performance next year. But North America is just one part of the overall market opportunity for Ford. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", names two global giants poised to reap big gains in China. Success could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.

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Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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