Detroit: An American Comeback
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Detroit is a symbol of American pride and has a long history of global economic dominance. Detroit boasts three of the top automotive manufacturers in the world, as the rest of the globe marvels with envy. Ford Motor Company (NYSE: F), General Motors (NYSE: GM) and Dodge/Chrysler are the backbone of the U.S economy and are as strong as ever. Detroit produces the most innovative cars of the highest quality and is second to none. Detroit's Big 3 have never needed help from anyone, especially the government.
OK, that blew my cover… Of course the last paragraph is a complete joke. Hopefully you haven’t skipped to the comments to start flaming my apparent ignorance. It’s been a rough few years for our automakers, however, there is hope. One company is making a Detroit style comeback! Here’s how.
I’m sure if you’re reading this article, you’re aware that the average age of cars on the road is at a high of 11 years. I know you understand the Japanese automakers Honda Motor Company (NYSE: HMC) and Toyota Motor Corporation (NYSE: TM) had setbacks due to the 8.9 magnitude Tsunami/Earthquake but are now regaining their market share. There’s a few standard topics every Ford/GM article covers, including the former's recent 1.9% dividend reinstatement, and other financials that emphasize Ford stock as undervalued. I’m going to try to skip those and cover different angles.
Ode to Alan Mulally
You know who Alan Mulally is, and if you don’t you need to minimize this article and go do a little research. Google or Wikipedia will suffice. You might not know where he came from. Alan previously worked at Boeing (NYSE: BA) from 1969 to 2006. He was given massive amounts of credit in the early 2000’s for helping Boeing prevail over its rival Airbus. When Alan arrived at Ford he had one heck of a mess on his hands. Regions of Ford weren’t cooperating with one another, not communicating or sharing designs. There were too many brands, too many factories and zero synergy. Alan and Fields developed a plan to bring Ford named “One Ford.” Alan cleaned out the executives who didn’t share his vision, cut inefficient waste and product lines. He created synergy and cooperation in a company that had long since lost that notion. Here are a couple of graphs that will let me highlight some examples during Mulally’s reign.
The above graph serves one sole purpose. To show you how directly related expenses are to margins, net income and earnings per share. You can see the drastic drop in expenses for 2012 and how it directly relates to bottom line increases. Expense is a focus of Mulally’s, above all others. With the One Ford plan the company will build 85 percent of vehicle volume off of nine core platforms. That is amazing for manufacturing and will provide a lean, flexible yet standardized production process. This is KEY to controlling expenses, yet the vehicles still deliver on quality, efficiency and most importantly profitability. That’s a great intro to the next chart.
Looking at the above graph, you can see during the recession that margins took a hit as dealerships had to give massive amounts of incentives to sell cars, and that comes right off the bottom line. Since then, Mulally’s One Ford plan has been able to shrink expenses on all levels and return to profitability. Look at the increase in operating margin 7.18%! Almost as much as GM and Toyota combined, 3.38% and 4% respectively.
I did this last graph with the timeline exactly matching Mulally’s tenure at Ford. You can see the initial uptick in debt. This was due to Mulally taking out a large loan prior to the financial collapse to help restructure the company and give a padding in case a recession took place. This led to Ford being the only Detroit auto company not to receive government help. Since then, Ford has been diligent and paid down their debts and pensions without reducing cash flow levels! As soon as Ford's debt is lowered enough to be investment grade, I expect the stock to gain value.
Mike Rowe Works
Marketing is making a product connect with end users and is easier said than done. If you can’t make consumers connect with your product emotionally, you fail as a business. Ford has done an amazing job with their marketing campaigns. The idea of Mike Rowe doing Dirty Jobs represents the exact target market Ford is chasing. Ford is most known for being #1 in truck sales. Mike’s persona fits the bill perfectly and has been entertaining and successful.
This month new advertisements for the Ford Escape will be launched on TV. The commercials use actual employees who went all out on innovative features to make even the smallest things better. The first commercial highlights the Hands-Free liftgate. The campaign will hit its mark as the Escape is one of the fastest turning vehicle on Ford lots this year.
Over the next four years, Ford's goal is to have the freshest lineup in the world with every product line being upgraded at least once. The plan also includes 15 new fuel efficient vehicles in China and eight in India. That venture will be huge in making up ground lost to competitors and will provide massive growth opportunities.
Steve Jobs said “Innovation distinguishes between a leader and a follower.” That statement couldn’t be said any better, nor could it be more true. Ford has focused it’s innovation on fuel efficiency and it has resulted in an advantage over its Detroit competitors. Surveys show that 8 out of 10 Americans are willing to pay for green products that save money down the road. Almost as many, 7 out of 10, have taken steps to conserve fuel by changing driving habits. The demand for fuel efficiency is there, and is growing every time someone spends $60 to fill the tank. Ford's EcoBoost engine has a new innovation, Auto Start-Stop. It saves 10% on overall fuel efficiency. For a $295 option, that provides real world benefits at an affordable price. Is Ford's investment in fuel efficiency and innovation paying off? Definitely.
This year, the Ford Focus is the best selling car model in the world. The Fusion is a part of the fastest-growing segment in the U.S, midsize Sedans. The fusion has been very successful, grabbing 12% market share. Innovation no doubt plays a role in it’s success due to offerings of Active Park Assist, Adaptive Cruise Control, MyFord Touch and many more.
Ford had a rough second quarter, with losses in Europe eclipsing $400 million, although this is a drop in the bucket compared to GM’s $12 billion loss over the last decade. There’s a lot of ground to make up internationally but Ford is making the right decisions to put itself in a profitable position with immense growth potential. Ford sill has an uphill battle to fight and plenty of challenges to overcome. There’s hope though. Ford is making a better product than it did a decade ago. Their marketing campaigns are working an is evident through increasing sales. They’ve created synergy in the company, leading to increased operating margins. They innovate, have a solid vision and sport the industry's best CEO. At the end of the day I’m still an American, and Ford gives me a company in Detroit worth rooting for.
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dmiller5350 owns shares of Ford. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.