Ford Warns of a Weaker Second Quarter
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Ford Motor (NYSE: F), the second largest US automaker, forecasts a lower second quarter profit resulting from huge losses from the European economy and other regions outside North America. North America is actually acting as the savior helping the company to report a profitable quarter, though it will be lower than the year ago quarter’s profit.
The Michigan-based automaker expects the second quarter pre-tax loss from Europe, South America, Asia-Pacific and Africa to triple the $190 million loss in the previous quarter and be as high as $570 million. For an international company, robust sales in its home country may not be sufficient to make huge profits, as dependency on foreign markets count too.
Corroding profit margins outside home country
Things are getting uglier in international markets for Ford. Let’s check what’s happening where.
The market condition in the European economy is deteriorating further. The stubborn debt crisis has weakened consumer demand which has hit auto sales. Vehicles sales in this debt ridden region have been shrinking since 2007 and are estimated to fall further by 7 percent or more this year. Automakers including General Motors (NYSE: GM) are witnessing poor demand for vehicles. The capacity utilization of Ford stands at 63 percent which is lower than major competitors, including that of GM with its capacity utilization of 66 percent. However, Fiat’s is the lowest at 57 percent.
A number of factories are lying idle but closing these factories isn’t easy as there is government resistance along with powerful labor unions. This is adding to the operational cost and chipping away profits. Margins are also narrowing as automakers like Volkswagen and GM are offering huge incentive to encourage sales. Caught in this quagmire, Ford is not only facing intensified competition in the region, but is also witnessing a depressive environment in terms of feeble demand, clubbed with the burden of maintaining unutilized capacity.
Ford, ‘for the foreseeable future’, does not see an improvement in Europe’s economic condition. The next in line is South America.
What happened to curb margins here? The increasing competition that Ford’s older model is facing is putting pricing pressure and that in turn is affecting sales. Other than this, the weakening currencies and adverse changes in government policies are adding to the trouble. Cutting vehicle imports from Mexico and other regions have also hampered the sales figure.
However, Ford isn’t the only automaker suffering from currency fluctuation, carmakers such as Toyota Motor (NYSE: TM), Nissan Motor and Honda Motor (NYSE: HMC) are also becoming victims to the strengthening yen due to which these companies are losing money on vehicles that they export from their domestic country.
The European and South American markets have eroded profits. What went against it in the Asian market?
Ford wishes to expand its offerings in this part of the world and is therefore investing in building plants to expanding operations and catch up with other auto companies in the Asian market. The company has plans of spending roughly $4.9 billion to build 9 factories in the continent and launch as many as 15 new models by 2015 in China which accounted for 2.8 percent market share in the previous year.
All this is leaving Ford with losses. However, the company’s North American sales are enough to pull it out of this mess.
North America: the Savior
Ford North America and Ford credit is expected to post strong results for the quarter. In the earlier quarter North America reported a pretax profit of $2.1 billion covering the company’s $190 million loss from the other region. This time the loss is projected to be threefold and therefore hiding this substantial amount with the profits in North America would be challenging.
For the entire fiscal year, the automaker expects to post solid profit numbers being backed by robust sales in North America with the Ford Credit lending operations. Also, Ford is preparing to address the problems outside the home country, though the company hasn’t revealed its course of action. However, the dull European outlook raises some questions. The European market is badly hurting the healthiest of the companies and forcing them to decide on a quick mode of action.
The detail of how Europe’s problems are going to be fixed is still vague. The bailout funds are to be used for bailing out the EU banks that are in acute need of funds. This cash injection will improve consumer spending, but the effect of improved consumer spending takes time to positively impact the auto industry. Ford might therefore have to be prepared for another round of a poor quarter three months from now, before tasting the success of a recovery in the fourth quarter.
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