How Ford Is Slowly Reviving Its European Operations

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Ford Motors (NYSE:F) has been struggling in Europe over the last few years. Since the beginning of 2012 the U.S. auto maker has lost roughly $4 billion in the region. Part of the reason behind that is the overall decline in the European auto market, which has still to reach its pre-recession heights. In 2007, 14.9 million vehicles were sold, but in 2013 only 12.3 million vehicles were sold. In 2014, thanks to government incentives, tax breaks, and a shift in preference towards smaller cars, auto sales rose for the first time in 7 years, with the market growing by 5% and reaching 13 million unit sales. [1] Despite the sluggish sales situation, auto makers were operating at excess capacity, running costly manufacturing plants churning out vehicles that weren’t being sold. As a result, many auto makers, Ford included among them, had to cut their production and reduce their number of models on offer in an effort to narrow their losses.

In the first quarter of 2015, Ford sold more than 335,000 vehicles in Europe, which was a 12.5% growth for the quarter, 3.5 percentage points ahead of the market wide 9% growth. [2] The company’s overall market share in Europe was 20 basis points higher than last year at 8.2% and its market share in the commercial vehicle segment was 13.3%, the highest in Europe for the first time since 1997. [3] Additionally, nearly three-fourths of the company’s total sales came through the retail and fleet sales channel, which is close to 5 percentage points above the industry average. [3] Given that retail and fleet sales are more profitable than those to rental companies, this bodes well for the company’s profitability in the near term. Below, we take a look at the two main factors driving Ford’s recovery in Europe.

We have a $15  price estimate for Ford, which is slightly lower than the current market price.

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Popularity of New Models

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 since last year are models that are either brand new or have been refreshed since the beginning of last year. Ford launched a refreshed version of the Ford Focus late last year, which helped boost sales further. Additionally, just as in the U.S., the SUV car segment seems to be experiencing a boom in Europe. Sales of Ford’s Kuga SUV were up by nearly a third in 2014. 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 also replaced the mid-sized sedan Mondeo with a new version last year and will launch a new version of the Mustang this year, and if the 52% sales increase in Mustang sales in the U.S. in the first quarter is anything to go by, it should boost sales and market share in the region further. We expect all of these models to help Ford gain market share in the region. The Mondeo, which is a Ford Fusion under a different nameplate, posted a 34% sales increase in the first three months of 2015 compared to last year’s first quarter. [3] The Kuga, which is an Escape, reported a similar 31% sales increase in the first three months over last year’s first quarter. [3] Ford is also planning to introduce a new Mondeo under the Vignale nameplate later this year. This should allow the company to post higher margins without having to incur the costs of having to operate the Lincoln lineup in the region.

GM’s Chevrolet Pull Out

In 2013, GM announced that it will be stopping the deliveries of its Chevrolet brand in Europe in 2015. The brand was introduced by the company in Europe in 2005 to make up for the losses made by the Opel and Vauxhall brands in Europe, and has seen its market share decline over the last two years, while Opel and Vauxhall have maintained their regional shares. [4] Chevrolet had never been a popular brand in Europe, mostly because the perception of its cars did not gel with the brand image they were being sold with. The brand which is known for large U.S. road cruisers was being used to sell low-cost vehicles made by the Daewoo brand in South Korea. This incoherent brand strategy backfired in two main ways: 1) it turned off customers who realized that they were being asked to pay much higher prices for low-cost cars, and 2) it ate into the market share of the company’s own Opel and Vauxhall brands. Instead of segmenting the car market by price and aspiration levels, like the market leader of the European car market Volkswagen does with its VW, Skoda, Audi, and Seat brands, the company was trying to operate with two brands in the same segment. What’s more, each brand was sourcing its vehicle parts and design from two different places-Opel relies on Peugeot Citroen and Fiat for the development of its cars, while Chevrolet’s European operations are connected to its U.S. and worldwide operations. [5]

The Chevrolet pullout means that mainstream consumers in Europe are now having to look to the Ford brand to satiate their appetite for new vehicles. This was reflected in the fact that Ford’s total market share in the twenty biggest markets in Europe for the fourth quarter was 8.2%, on the back of a 30 basis point increase in market share in the retail sales segment driven by strong performance of the newly introduced line of compact vehicles. The company’s share in the commercial vehicle segment improved over the quarter to 13.3%, reflecting the strong performance of its new line of the Ranger compact pickup. In fact, Ford was the leading commercial brand in Europe 20 in the first quarter.

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Notes:
  1. European car sales return to growth in 2014, Reuters, January 2015 []
  2. Ford Q1 2015 Earnings Presentation, Ford Investor Relations []
  3. Ref: 2 [] [] [] []
  4. GM Pulls Chevy From Europe After Decade as Opel Expands, Bloomberg, December 2013 []
  5. Opel plans return to profit focusing on small cars, GM technologies, Automotive News, June 2014 []