Ford: Where Catching up is Job One
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Ford (NYSE: F), like its counterparts, is shifting its production capacity to the biggest and the fastest growing markets, China and India. The American automaker is expected to spend a whopping $4.9 billion to build eight factories and introduce 15 new models in China by 2015.
Owing to its late entry in the world’s largest auto market, the automaker holds less than 3% of the market. It is, however, all set to make amends with these investments, including a $300 million commercial vehicle plant built with partner Jiangling Motors in Nanchang, to open in 2013. They will also build a $760 million plant with partner Changan Ford Mazda Automotive in Hangzhou, which will open in 2015, as well as a $600 million expansion to their existing plant in Chongqing.
The above investments are expected to bring Ford’s capacity to 950,000 vehicles in 2014 and 1.2 million vehicles by 2015, nearly double its existing capacity. The automaker has also planned to expand its dealer network to 960 by that time. This is up from just 242 in 2009. In spite of a 23% climb in sales for Ford in China in June, the total figure was about 14% of GM’s (NYSE: GM) total sales and about 2% of the market.
India, with one of the youngest populations in the world, is firmly on Ford’s radar despite reporting a 21% decline in total sales at 7,281 units in June. Ford has a $1 billion plant in Sanand in the pipeline, set to open in 2014 with the capacity to produce up to 240,000 vehicles annually. It will also increase its dealership network to 315 from 92 presently.
But the focus on infrastructure does not stop there; Ford is also boosting its factory capacity in North America to build 400,000 additional vehicles a year. Last quarter marked the highest quarterly profit for the region since 2000, which earned Ford $2.13 billion in North America compared to $1.84 billion in the first quarter of 2011, a 15.8% increase.
Ford, like GM, is struggling in ASEAN. Both companies are behind the curve in Asia, having to address the largest potential markets with massive assaults due to the painful restructuring forced on them in the wake of the U.S. economy bursting in 2008. While Ford came out of that period in much better karmic shape, not having to be bailed out or sold like the other two of the Big Three, it did set them behind the growth curve in the emerging automobile powerhouses and their satellites.
Ford, the first and only volume exporter of vehicles from the Philippines, was forced to shut its local vehicle assembly plant, with 360 jobs lost as part of an ongoing restructuring across Asia. Sales in the Philippines fell by 46.65% in January and 49.27% in February from a year ago. Reported declines in sales can be attributed to Thai floods that crippled major factories last year. Their Thailand factory, however, is now producing the new, highly-acclaimed Focus, which should stabilize their presence in the vital sub-compact segment. The problem for Ford in SE Asia, however, is that their light duty pickup trucks are not competitive. They have nothing that can compete with the ubiquitous and adored Toyota Hilux. On the strength of the versatile and rugged Hilux, Toyota (NYSE: TM) has built an impressive foundation for growth across the rapidly growing markets of Thailand and Indonesia.
Looking at their situation in Europe, a widespread regional recession has squeezed the buying power of middle-class Europeans who should be Ford’s best customers. Out of the total $190 million international losses reported by the company in the second quarter, Europe was responsible for $149 million; the company has 8% market share in Europe. And, as difficult as business for Ford is in Europe, it is even worse for GM, which has already announced that it will close an Opel plant in Bochum, Germany after 2016.
Ford and GM are both still facing problems relating to their employee pension. Ford’s global pension plans had $74 billion in liabilities at the end of 2011 and were underfinanced by $15.4 billion. In a move to reduce this strain, Ford said it would begin offering 90,000 salaried retirees and former employees in the United States the option of taking a lump-sum pension payment in lieu of their annuity payment. It remains to be seen what the uptake rate on this will be, but regardless this will be a drag on future earnings for a long time to come.
For the first quarter of 2012, the company reported that its profit fell by almost half, most of which was the result of higher taxes and a loss in Europe.
Electric-drive vehicles are the fastest-growing segment in the U.S. auto market. While the numbers are still essentially trivial, Ford’s CEO is quite serious about the technology, saying: “Even selling fewer than 5,000 Focus EVs in the first year wouldn’t be a failure.” Tell that to the Chevy Volt and the Nissan Leaf.
Along with electric-drive vehicles, Ford has introduced new pickups that are designed to run on compressed natural gas (CNG), using Westport Innovations (NASDAQ: WPRT) bi-fuel Wing System in the F-250 and F-350. Ford has also reduced the amount of energy consumed to produce each vehicle by 22% in the last six years and plans to reduce that amount by another 25% on a per-vehicle basis by 2016. This energy reduction should result in higher operating margins.
June’s sales in the U.S. were up across the entire auto sector, with all three U.S. manufacturers beating their sales estimates for the month handily. These sales figures may be able to arrest the sequential and annual slide in revenue, income, and margins. But Ford is right now a value trap at best and at worst a roll of the dice on the longer term strategy of building infrastructure in two of the world’s biggest markets. While there may be some incremental improvement in the U.S. auto sector brought on by ultra-cheap lending standards (0% financing for 84 months) it will only do to maintain the current level of income.
Ford, like GM, is ill-positioned in above-average growth markets where vehicle sales are likewise growing at startling rates.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford and Westport Innovations. Motley Fool newsletter services recommend Ford, General Motors Company, and Westport Innovations. 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.