Ford’s Worries Get Worse
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The European economy has been the biggest bone of contention for the automakers lately. Whether a restructuring plan for a company’s European operations will help is a big question that needs to be answered. The entire industry has experienced the hardest hit in the last few quarters. The biggest problem with Europe is the strength of labor unions, which scare the industry players to cut down on jobs or decide on plant closures. The situation has worsened with the news of weakness in Spain, which may further hurt automakers’ performance with restrained consumer demands.
The gruesome importance of these problems has been truly highlighted in the recent second quarter results posted by Ford Motors (NYSE: F), worring investors so much that the stock plunged to a three year low. Let’s analyze it deeply.
Into The Quarter
Ford lost 6% of its total revenue compared to the same period last year. Hence, revenue stood at $33.3 billion at the end of the quarter. A very important point to note here is that if we ignore Europe’s contribution, which stands at 25% of the entire revenue number, the picture would have been a lot better, with revenue almost flat. Sales in Europe fell 21% to $7.1 billion. Though losses from the region stood at $404 million, they are expected to widen to $1 billion for the year.
Ford’s peer, General Motors (NYSE: GM), has also been trying to fight similar problems with extremely low demand in Europe. But the difference lies in the approach. General Motors has been trying to revive the segment by entering into partnerships with European players. This is affirmed by its move of acquiring a 7% stake in PSA Peugeot Citroen, which is expected to help in a turnaround. Even Volkswagen has been trying its hands to increase its market share by giving discounts to customers. Ford tried to do so recently and spent $189 million to provide incentives to customers but was not of much use. In spite of this initiative its market share dropped to 7.7% from 8.3% in Europe.
Another peer, Toyota Motor (NYSE: TM) has been trying to fight for more market share in Europe as the situation there is hampering all industry players. It has recently entered into a partnership with Peugeot, a French automaker, to produce light commercial delivery vans for Europe since the strengthening yen has made Toyota pull out its production from there. With this move, Toyota seems poised to capture more market in the region.
Europe has been the focal point of all problems but other regions are not immune. Ford experienced losses from China too, which went into the red after posting $1 million of profit last year. Even other segments, such as the financing division of Ford reported lower profits for the period.
Earnings in the domestic market were healthy, with a decent 5.3% increase to $2 billion. The credit goes to its new cars, especially the Ford Escape, which is said to be loved by customers in North America. Ford’s trucks have been doing well, especially the Explorer and Focus. In fact, new product launches with significant demand generation are likely to be a savior for Ford.
This is because some years back in 2006, Ford used a similar strategy to revive its North American operations, the results of which were mind blowing. The strategy was plain and simple – Reduce costs to the minimum and innovate on designs so that it sells itself easily. It is said that Ford might use the same to save its European operations. Along with cost cutting measures (cutting down on temporary staff, marketing spend and the like), the automaker is planning to roll out its new Mondeo sedan, which is expected to boost sales.
Ford has been a decent performer till now with positive results from Europe till last year. This is an indication of true strength in the company. But now, with disheartening results, the company has sparked fear in the minds of investors. What should be of utmost importance is the staging of a comeback. Ford has not given up on Europe and expects to grow there by formulating the right strategy.
A smart way of minimizing costs and maximizing the potential benefits of its new products might help the company come back to its normal mode. Currently, it is rather difficult to say how things will turn out and what restructuring efforts will beget. Hence, it is better to be on the sidelines and wait for an indication of a turnaround.
justhimanshu has no positions in the stocks mentioned above. 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.