Ford’s Efforts In Europe Beginning To Bear Fruit

Ford Motors‘(NYSE:F) European operations have been a spot of bother for the company over the past few years. The company has lost roughly $4 billion in the region since the beginning of 2012. The major reason behind those losses was the overall decline in unit sales in the European auto market. Before the continent was hit by the financial recession, 14.9 million vehicles were sold in the year 2007. Compared to that only 12.3 million vehicles were sold in the year 2013 and 13 million vehicles in 2014. In fact, 2014 was the first time in seven years that auto sales rose year on year, but that rise was in large part attributable to government incentives, tax breaks, and a shift in preference towards smaller cars. This meant that even though unit sales increased, profits were low as margins are lower on these vehicles. Meanwhile, companies were still operating at excess capacity and undertaking restructuring operations that have included plant closures and mass employee layoffs. However, in 2015, it seems that Ford’s operations in Europe are finally beginning to have less of a negative impact on the American auto maker’s financials. Below, we take a look at the major reasons behind that turn around.

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

Restructuring

Ford’s strategy for reviving its European operations meant focusing on three factors, namely products, brand image, and costs. As far as products are concerned, Ford targeted an overhaul of its European model lineup and targeted 25 launches in the 2012 to 2015 period. The new products have done well and allowed Ford to report higher customer satisfaction ratings and improved reliability ratings. In fact, Ford has more 5-star Euro NCAP-rated (Europe’s safety measure) vehicles than any brand operating in the continent. ^[1]

Ford has also evolved its brand image in the region through the introduction of a new premium brand called Vignale. Although the brand isn’t an attempt at trying to lure customers away from competing brands, it is a successful effort at retaining customers who want to upgrade cars but stay with Ford. Additionally, the U.S. auto maker has also made progress on the commercial vehicles front, moving from the seventh position as a seller of commercial vehicle in Europe to the first position in 2015. ^[2]

On the costs front, the company has tried to improve its margins, both by cutting down on unproductive expenses and by moving its sales mix towards higher margin vehicles. The company closed its long-standing plant in Genk, Belgium late last year. ^[3] Additionally, the company has been trying to sell more cars through the retail and fleet channels rather than the rental and demonstrator channels. The former two fetch higher margins and Ford sells 3% higher vehicles in these two channels combined compared to the average industry wide figures in these channels. ^[4]

The upshot of these efforts has been that Ford is gaining market share in key markets and its sales are improving. For example, in August, the company sold close to 70,000 vehicles in the top 20 European markets, and through the first eight months of the year it has sold more than 838,000 units. ^[5] These two figures represent an increase of 12% and 10% year over year respectively. ^[5] Moreover, the company is set to introduce five all new or refreshed vehicles in the SUV and crossover segments in Europe over the next three years, starting with the Ford Edge. The company is expecting its SUV sales in the region to triple by the end of 2016 compared to SUV sales in 2013. ^[6] If the company achieves those targets, its profitability in the region will improve significantly.

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1. Euro NCAP Safety Ratings, Euroncap.com [↩]
2. Ford Europe Sales Rise 12% in August on Demand for Mondeo, SUVs; Ford Takes No. 1 in Commercial Vehicles, Ford Online, September 2015 [↩]
3. Ford shuts doors of Belgium’s Genk plant, Reuters, December 2014 [↩]
4. Ford Deutsche Bank Conference Presentation[PDF] [↩]
5. Ref: 2 [↩] [↩]
6. Ref: 4 [↩]