Could the Bearish Season Be Back For Ford?
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ford (NYSE: F) is one of the bigwig automobile players that has all too familiar turnarounds. Led by CEO Allan Mulally, the automobile heavyweight revived its American operations and greatly improved the outlook of its bottom line some time back. However, woes in the European market have begun compromising the good work that was engineered by Allan Mulally.
Could this be the return of the bearish season? While it may be still too early to raise a red flag, there are some factors that spark a lot of fears; both within and without the troubled European market.
It is an unquestionable fact that Allan Mulally is perhaps one of the best CEOs. Not many have been able to reverse troubled fortunes in the fashion that he has. The 69 year old CEO, who is currently two years ahead of the typical industrial retirement age, has on many occasions been placed under scrutiny for refusing to retire.
Adding the latest twist to this protracted debate, Allan Mulally yet again made it clear that he would not leave Ford. I don’t want to delve in the politics surrounding the story, instead, I want to look at the probable reasons behind his undisguised adamancy.
I believe that Allan wants to leave a legacy. Already, various authors have written books about his famed turnaround in the American market. I am, however, worried that the European situation is way above his head. The European situation has an entirely different twist and Mulally’s success in reviving North American operations could very well blind his focus.
This brings me on to my next point.
Ford needs growth in Europe
In the North American market, Ford smoothly got through the turnaround by shrinking its size. This may however not work in Europe. While Ford needs to reduce its costs in order to compensate for the declining sales, it still needs to compete against other competitors like Toyota (NYSE: TM) who appear to have a larger footprint in the European market.
Though layoffs are effective, they will not materially reduce the bulging costs. The closure of plants will, however, achieve this. Ford is under a lot of pressure to commence plant shutdowns. I am inclined to believe that Allan Mulally is on board despite the lingering dangers of shrinking the European market.
Why could Mulally be on board? Ford uses only 63 percent of its European plant capacity. As such, closures seemingly appear to be the best option. Nonetheless, the European situation affects all automobile players. General Motors (NYSE: GM) for instance, recorded an 8.5 percent dip in European car sales. In fact, General Motors is one of the first huge players, alongside Peugeot, to commence the plant shutdowns. Italy based Fiat also posted an 18 percent dip in car sales. Ford, leading with a 29 percent decline, should therefore bear in mind that the whole European market has shrunk.
This invites a rock and a hard place scenario.
If Ford turns away from the European market, it will provide a leeway to other competitors in the region. On the other hand if it stays there, it will make big losses. It becomes evident that the same strategy that was applied to overhaul American operations is not fully applicable in the European market.
Allan Mulally may, however, decide to push forward with the shutdowns. Being a short term solution, shutdowns will spark off a short-lived theme of bullishness before casting Ford into another bearish stretch. This is especially so if other formidable competitors restrain from shutting down.
As a round up, I believe that the European situation will eventually stabilize. However before then, every decision matters and I am not that confident in the decisions that Ford will make with regard to controlling the situation. Another bearish season could very well be in sight.
Meanwhile, Toyota still grapples with potential losses in the Chinese market amid protests related to territorial conflicts between Japan and China. Back in the American market, Ford still has the financial edge and is exclaiming its presence in the green segment, rivaling other players like Tesla who have a knack for producing green automobiles and enhancing sustainability. Therefore, the European situation, however serious, doesn’t necessarily close all the doors for Ford. It should however be handled tactfully.
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muhammadbazil 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.