What’s Ford Doing To Revive Its European Business

Ford Motors (NYSE:F) finally seems to be making some progress in Europe. In 2012 and 2013, even as the company was boosting profits in a dramatic turnaround in North America, its European Division posted losses of $1.75 billion and $1.6 billion respectively. That trend seemed set to continue in 2014, but Ford’s European results surprised everyone when the company posted a small profit in the previous quarter. Despite the news, management has warned that more losses were likely in the rest of the year, but sales in August tells a different story.

Ford’s European sales were up 14% in the month of August, significantly outperforming the industry-wide 2% growth. ^[1] So far this year, the company’s sales have grown by 7% in the continent, faster than the industry-wide growth rate. ^[1] After suffering major losses because of economic weakness in several key European markets, the company seems to have finally recovered. Year-to-date, the U.S. based automaker has held a market share of close to 8% and the company’s retail-based market share grew by 2% and reached 8.5% in August. ^[1] The latter numbers show that Ford’s European turnaround strategy, which is based on reducing the contribution of rental-based sales and emphasizing on contribution of retail-based sales, seems to be working.

This move signals a shift in Ford’s European strategy. The company is now looking to move cars at higher prices instead of focusing on volumes. The automaker is trying to increase the share of sales to retail and company-fleet buyers, who purchase cars at higher prices, while reducing the share of less profitable sales to rental car companies. This might also come at the expense of market share. Ford’s passenger car share of the retail segment for five major European markets was 8.3% in the first quarter, down 0.1% point from the same period last year. The lower share reflected adverse segmentation changes, offset partially by improved performance for Fiesta and Kuga. The company emphasized that it plans to focus on the quality of its market share and sales channel mix, to achieve a higher share of the fleet segment in the Q&A following the earnings announcement. ^[2]

We have a $17.66 price estimate for Ford, which is in line with the current market price.

Ford Overhauls Its Model Lineup

Just as it did in the U.S. earlier this decade, Ford is gaining ground through the introduction of a number of new models. More than 50% of the cars sold by the company in Europe this year are models that are either brand new or have been refreshed since the beginning last year. The best selling among these is Ford Fiesta, which is up 9% this year. Ford will be launching a refreshed version of the Ford Focus later this year, which should help boost sales further. Additionally, just as in the U.S., the SUV car segment seems to be experiencing a boom. Sales of Ford’s Kuga SUV are up by nearly a third this year. Ford has recently added the Eco Sport to its SUV lineup in Europe and will be adding a new car called Edge later this year.  Ford will also be replacing the mid-sized sedan Mondeo with a new version later this year and launching a new version of the Mustang next year. We expect all of these models to help Ford gain market share in the region.

Just as they do in the U.S., Ford’s commercial vehicles are also performing well in Europe. The Tourneo and Transit commercial and the Ranger pickup have strong following among commercial buyers. European sales of Ford commercial vehicles have risen by 12.7% so far this year, and Ford’s share of that market is up to 10.8%, implying a growth rate of 0.6%.

Ford Trying To Revive Its European Business

Ford is also planning to enter the European luxury car market by launching higher-end versions of its mass-market models under the Vignale label in the continent. These cars will be targeted at more affluent customers of Ford cars and those looking to purchase luxury cars for the first time, but it will also attempt to steal some customers from other premium car makers, BMW, Mercedes and Audi. The announcement has been greeted with some skepticism but the Ford management remains confident, pointing out that one in six owners of Ford’s S-Max model previously drove a German luxury car. ^[3]

The Vignale trim line will come in similar prices like an ST model but are likely to attract a different type of customer. Consumers in the upper 15% of the ST’s price band who don’t want a performance-oriented ST model are the likely buyers of cars launched with the Vignale badge. These cars will be about 10% more expensive than Titanium-trim cars. Ford expects 10% of its European sales to be Vignale cars, which translates to about 5% of its global sales. Instead of focusing on performance by tuning the engine, brakes and suspension, like Ford does with its ST line, the Vignale will offer users luxurious attributes such as a unique chrome molding, leather interiors, a unique exterior color and Ford’s latest infotainment technologies. In addition, buying a Vignale will confer the privileges of a special ownership experience that is said to include free car washes for the car’s lifetime. Customers will also have a single dealership contact to help them deal with product and service needs. The company will also hope that the Vignale label can enhance the appeal of cars like the Mondeo midsize saloon and the S-MAX MPV as it renews its European model lineup. ^[4]

However, this is not the first time Ford has tried to penetrate the European luxury car market. In the past, the company has tried to enter the market through acquisitions of the Volvo and Jaguar brands, both of which it ended up divesting after failing to raise sales numbers. Ford has as many as 2,400 dealerships throughout Europe, but the sovereign debt-crisis plunged the company’s operations in the region into severe doubt and uncertainty. Rising public debt and worsening unemployment meant that the European car market fared poorly for much of the last five-seven years, affecting the company’s profitability. Between 2007 and 2012, Ford’s sales in Europe fell by 20%. As a result, the company had to re-configure its operations in the region. This involved the closure of many facilities, elimination of much of its workforce and a reduction of capacity by around 20%, in addition to having to replenish its car lineup in the region. ^[5]

The move into the luxury car segment comes as Ford’s business in the region is finally beginning to pick up. During the previous quarter’s earnings call, the management confirmed the company is on track to break even by 2015. Research firm IHS estimates that the introduction of 25 new or upgraded models by 2017 in Europe should be enough to raise sales by around 25%, that is to 1.65 million units by 2020. In addition to the new Vignale line, Ford will also start selling its iconic Mustang Sports Car in Europe next year and might also introduce the Lincoln brand at a later stage. However, gains in the region are going to have to be won the hard way since competitors like Peugeot, Renault and Fiat are also upscaling. ^[3]

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1. Ford’s sales in Europe up 14.4 percent in August, Detroit News, September 2014 [↩] [↩] [↩]
2. Ford Motors’ CEO Discusses Q1 2014 Results, Seeking Alpha, May 2014 [↩]
3. Ford’s Upscale Push In Europe Draws Skeptics, Reuters, May 2014 [↩] [↩]
4. How and Why Ford Is Rolling Out Vignale In Europe, Autoblog, October 2013 [↩]
5. Ford Attacks Europe Woes As Losses Mount, Forbes, October 2012 [↩]