Is the 2014 Ford Fusion's Popularity Already Fading?

Just a few months ago, Ford's popular Fusion midsize car seemed to be gearing up for a monster 2014. The 2013 Ford Fusion had a great start this year, with deliveries up more than 20% year over year between January and May. However, inventory constraints held back sales over the summer.

Ford opened a second production line for the Fusion in preparation for the 2014 model year. This expanded production capacity by 30%, and was supposed to drive even stronger sales growth for the 2014 Ford Fusion.

Ford boosted Fusion production for the 2014 model year. Photo: Ford.

Instead, Ford has had to cut back Fusion production almost as soon as the new assembly line was up and running. Aggressive discounting by competitors, particularly Toyota Motor , and a shift in demand from cars to small SUVs now threaten to undermine the Fusion's momentum.

Sales keep growing, but not enough
Make no mistake: The 2014 Ford Fusion has generated big sales gains this fall. Last month, sales were up 51% year over year to 22,839. That comes on top of a 71% increase in October (to 21,740 units) and a 62% jump in September (to 19,972 units). These gains may seem impressive, but sales were unusually low last fall, when production of the new Fusion was just ramping up and supplies were very tight.

By contrast, Ford sold more than 30,000 Fusions in March, and nearly as many in May, which caused this summer's inventory shortages. (Ford's Hermosillo plant can produce roughly 25,000 Fusions per month.) The Flat Rock assembly line added 10,000 units of monthly production capacity, which hasn't been needed so far. Even with ample supply, Ford Fusion sales have not come close to the 30,000 per month pace seen earlier this year.

As a result, dealer inventories of the Fusion have skyrocketed this fall. In the middle of the year, dealers only had 39 days' supply of the Fusion, well below normal levels. By contrast, Fusion inventory had grown to 88 days of supply recently, which is uncomfortably high.

Ford will try to address the excess inventory by producing fewer Fusions for the time being. The company plans an extra week of downtime during the holiday season and as many as four weeks of downtime next quarter. This is part of a broader plan to decrease car production by 4% year over year in Q1 2014.

Toyota goes for market share
One of the main factors impacting Fusion sales has been a shift in customer demand toward small SUVs instead of sedans. However, aggressive discounting by Toyota may also be partly to blame.

The Toyota Camry has been the best selling midsize car in the U.S. for many years, but its lead has been shrinking. The devaluation of the yen this year has provided an opportunity for Toyota -- and other Japanese automakers -- to regain market share by lowering prices and boosting incentive spending.

Toyota has used aggressive discounts to keep the Camry on top. Photo: Toyota.

Ford officials claim that Toyota did just that in November, supporting the Camry with big incentives. (Not surprisingly, Toyota denies that it is doing anything out of the ordinary.) The 2014 Ford Fusion has the highest average transaction price in the midsize car segment, and Ford does not want to compromise margins by getting caught up in a price war. The only alternative is to scale back production.

Despite the heavy incentive spending, Toyota only posted a modest 5.6% increase in U.S. Camry deliveries last month. Still, now that the midsize car segment has essentially stopped growing, the only way for Ford to boost Fusion sales is for other automakers to see sales declines. If Toyota is willing to do whatever it takes to keep the Camry safely in its top market share spot, Ford could have trouble utilizing all of its Fusion production capacity.

Foolish bottom line
While the 2014 Ford Fusion is still driving year-over-year sales gains, dealers are not selling the car fast enough to justify the extra production capacity Ford recently brought online. Between the shift in demand from cars to SUVs and Toyota's renewed efforts to keep the Camry on top, the 2014 Ford Fusion may not hit the sales goals that recently seemed within reach.

Ford investors should keep a close eye on the Fusion's performance next month, as December tends to be a seasonally strong month for car sales. Ford representatives repeatedly stated on the company's recent conference call that Q1 production plans could be increased if the sales pace picks up this month. A strong December could quickly put the 2014 Ford Fusion back on track.