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Since 2008, Ford (F) has been doing great things and transforming itself in a way not many people thought it could. Led by Alan Mulally, the company has accomplished a lot of things and the Ford Story is far from over. As we speak, Ford is making a lot of money in North America and it has the potential to make just as much money elsewhere. Once the company reaches its potential globally, it will be doubling or tripling its income.

Now let's establish one thing: I am not one of the analysts that say "Ford is doing great in North America but the company is doing terrible elsewhere." My approach is "Ford is doing great in North America and it is in the process of making things great elsewhere too." It will take time and a lot of work, but the company will reach success.

During the great recession, Mr. Mulally has said "You have to expect the unexpected, and you have to deal with it. Whining is not a plan. Wallowing is not a plan. We have a plan and if we need to adjust it, we will (From American Icon of Bryce Hoffman - I recommend all Ford investors to read the book)." In Europe, South America, Africa and Asia, there are many challenges that Ford needs to overcome, and most of these challenges are caused by external rather than internal factors. For example, the great recession of Europe has been going on for a while, hurting the demand for new cars. Elsewhere, political and economical factors play a major role in car sales. While some of these problems are structural, many are temporary. In this article, I will summarize Ford's challenges in Europe and talk about how the company is trying to deal with these challenges.

Ford Europe: Challenges and Opportunities

In 2012 Ford sold 1.35 million cars in the continent compared to 1.60 million cars in 2011. This is a drop of 16%. Ford expects further drop in sales in 2013 and sales are expected to start turning around in 2014. The biggest culprit here is definitely the recession in Europe. Ford is transforming itself in the continent in order to become profitable despite all the hardships going on in there. European governments continue to favor austerity over stimulus and the European economy continues to shrink. Younger people in the continent have very high rate of unemployment, which makes it difficult for these people to buy new cars. In addition, high gas prices and wide availability of public transportation makes it less likely for people to buy cars.

In Europe, Ford is working on three major things in order to become profitable in the continent. First step is accelerating new product roll-outs without wasting time. Second step is strengthening the company's brand name in order to gain competitive advantage. Third step is to restructure manufacturing operations in order to make things more agile for the company. The third step is particularly important because if Ford can ensure that its production matches with the demand, most of the losses will be cut. The biggest issue in Europe will be working with the governments in the continent. European employment laws make it a lot harder for companies to lay-off employees and control their workforce, which makes it difficult for companies to remain agile in the face of changing economic conditions.

The excess capacity in the continent leads to pricing pressures and this affects margins negatively. While things look bad in the continent, Ford is not out of ammo in Europe. Within the next 5 years, the company expects to introduce 15 new models in the continent, with 7 of those already introduced. This is a brave move by Ford when we consider that many car companies in the continent are actually reducing the number of brands they offer. Furthermore, Ford plans to close three manufacturing plants (two in the UK and one in Belgium) and reduce its workforce by 6,200 as a result of these closures. It's always sad when a company has to let go of employees; however, sometimes difficult decisions have to be made and companies have to let go of a small number of employees in order to make sure they won't have to let go of more people in the future as a result of great losses.

There Is Still Plenty of Hope

The good thing is that Ford Europe has a great example it can look up to and learn lessons from: Ford North America. Just a few years ago, Ford North America was able to return to profitability by investing in new products (not only new products, but the products that consumers actually want to buy and own), restructuring activities and reducing its manufacturing footprint. Things worked out greatly in the US and they are likely to work out nicely in Europe as well.

Of course there are differences between the American market and European markets. Americans prefer bigger cars, Europeans prefer smaller cars. The American recession lasted less than a year; the European recession has been going on for a few years (and it will continue for a while). Ford's American turnaround was somewhat quicker than its European turnaround; however, this is not that bad. Look at it like this: Ford's American turnaround was an "emergency operation" and the company had very little time before it would run out of money and go out of business. Ford's European turnaround has more time and bandwidth because the company is not in an imminent risk of bankruptcy for the foreseeable future. Ford Europe can take its time and make sure that it is implementing the correct measures as it doesn't have to fight burning cash and a possible bankruptcy.

When you have a large company with many different products, complex relationships and thousands of employees, turning the company around takes a lot of time and effort. Another car company suffering in Europe is GM and the company isn't even expecting to reach breakeven in the continent before 2015. Ford Europe expects to cut its assembly capacity by 18% (355,000 units) and reduce the European workforce by 13% which should save it $450-500 million annually.

The Opportunities Ahead

Despite the relatively dark picture, Ford has a lot of opportunities in Europe. Currently, Europeans value fuel efficient cars. Ford has several cars that are exceptionally well at being fuel efficient. For example Ford's small SUV Escape/Kuga is one of the most fuel-efficient SUVs in the market. Furthermore, the latest recession increased the average age of European cars. Many Europeans had to delay buying a new car for the last few years and the current cars in the traffic are getting quite old (the average age is 8 years). Keep in mind that older cars tend to have worse gas mileage, which is a great incentive for Europeans to switch to a newer car that enjoys better gas mileage. Ford's market share in Europe is a little below 8% and there is a lot of room for improvement.

Currently, Ford's restructuring efforts in the continent are progressing on track. As of right now, everything is going according to the plan, which is encouraging. Unfortunately, many of Europe's problems are structural rather than cyclical; which means they are here to stay. Ford could ignore these problems, complain about them or be proactive about them. The company chose to be proactive and fight the challenges in order to beat them. Ford is aiming at higher volume, higher market share, richer mix of products, improved margin as a result of better mix of products and lower production costs. In the long term, the company's target operating margin will be between 6-8% in the continent.

How Much Difference Can Europe Make?

If Ford can reach breakeven in Europe, its overall income will improve by 20-25%. If the company can reach a profit in the continent, the company's overall income will increase by as much as 30-40%. The European challenge can actually turn into a huge opportunity for the company. Last year, Ford earned $1.48 per share. By 2015, the company is expected to earn $2.05 assuming that things haven't improved in Europe. If Ford reaches breakeven in Europe, the number will look more like $2.50. If the company reaches profitability in the continent, we will look at $2.50-2.80 per share, which means that the stock price could easily double from here to justify these earnings.

Conclusion

In conclusion, while many analysts look at Ford's European operations and see a worrisome picture there, I look at the same operations and see a lot of opportunities for the company. I don't think the European economy will improve anytime soon but I am confident that Ford will accomplish its goals even in the face of the bad economy. All Ford needs to do is to accomplish something it already has accomplished in the US. When I look at Mr. Mulally's vision, past accomplishments and ambition, I realize that I have nothing to worry about as a Ford's shareholder. In my next Ford article, I will discuss the company's operations in Asia, South America and Africa because those are usually overlooked by most analysts.

Source: The Ford Story Continues In Europe