Dubbed "Little Jewel" by Lee Iacocca himself, the Mustang II was a project spearheaded by the Mustang's original creator. Iacocca believed that the Mustang had strayed too far from its original concept, so a completely redesigned Mustang was in order for 1974. Like the car that preceded it, the Mustang II had its roots in another compact, the Ford Pinto (though less so than the original car was based on the Falcon). The car sold well, with sales of more than 400,000 units the first year. It is worth noting that four of the five years of the Mustang II are on the top-ten list of most-sold Mustangs. The Mustang II featured innovations such as rack-and-pinion steering and a separate engine sub-frame that greatly decreased noise, vibration, and harshness.
The Arab oil embargo, skyrocketing insurance rates, and United States emissions and safety standards destroyed the straight-line performance of virtually every car of the period. In 1974, Chrysler ended production of the Barracuda and its stable mate, the Dodge Challenger. American Motors also discontinued the Javelin at the end of the 1974 model year. GM nearly discontinued the Camaro and Firebird after 1972.
1974
The 1974 introduction of the Mustang II earned Ford Motor Trend magazine's Car of the Year honors and actually returned the car to more than a semblance of its 1964 predecessor in size, shape, and overall styling. Iacocca insisted that the Mustang II be finished to quality standards unheard of in the American auto industry. Unfortunately, the Mustang II suffered from not only being smaller than the original car, but being heavier as well due to new federal emission and safety regulations. Although the car boasted many superior handling and engineering features, its performance could be described as only "mediocre" — no better than other Ford or Detroit products of the day. The Mustang II was positioned to compete head-on with many foreign sports car imports that were hitting the market at that time.
The Toyota Celica and the Datsun 280Z were its main competitors. Thus, the car was downsized to adapt to more fuel efficient standards. Available as a hardtop or three-door hatchback, the new car's base engine was a 140 in³ (2.3 L) SOHC I4, the first fully metric engine built in the U.S. for installation in an American car. A 171 in³ (2.8 L) V6 was the sole optional engine. Mustang II packages ranged from the base hardtop, 2+2 hatchback, a "Ghia" luxury group with vinyl roof, and a top of the line V6-powered Mach 1. The popular V8 option would disappear for the first and only time in 1974 (except in Mexico). Ford was swamped by buyer mail and criticized in the automotive press for it.
1975–1978
Since the car was never meant to have a V8, it became a mad scramble to re-engineer the car in order to reinstate the 302 in³ (4.94 L) V8 option in time for the 1975 model year, but only with a two-barrel carburetor and 140 "net" horsepower. To make the V8 option fit, changes were made to the front fenders, engine bay, and header panel. Since Ford of Mexico never lost the V8, they assisted in the modifications. Although tepid by today's standards, the car's stock 302 performed quite well by 1970s standards. The Mustang II's 302 in³ engine became Ford's first officially designated metric V8 Mustang; it was called the 5.0 L even though its capacity was 4.95 L. Other than the V8, the car underwent minor changes in 1975. The Ghia received opera windows within its vinyl top and a "MPG Stallion" option was offered.
To help boost sales and excitement, other performance options were added. Ford introduced the Shelby inspired Cobra II in 1976, and King Cobra in 1978. The King Cobra was a limited edition Mustang with around 5,000 units produced. It featured a deep air-dam and a Pontiac Trans-Am style cobra hood decal. The King Cobra was only available with the V8 to help bolster the car's performance image. Through 1977 and 1978, several styling changes and color options were added to the Cobra II. On the momentum of the Mustang II's successful sales, a totally new Mustang hit the streets in 1979.