Ford (F) is a resilient company that has overcome odds many times in its history. The times Ford performed the best in history were usually preceded by times it performed the worst. We are talking about an American icon that doesn't give up after facing challenge after challenge. While things are somewhat tough for Ford outside of North America for the time being, the company has the capability to turn those challenges into opportunities and make an impact worldwide.
Most people remember how in 2009 GM (GM) and Chrysler were going out of business and it was widely thought the government would extend them a large loan so that they could survive. Everyone was surprised when the government decided to buy the two companies instead of lending them money. Not only was the government buying these two companies, but it was supporting them and changing the rules of the game as it was being played. Many people remember when all of GM's past debt was erased because the company had to emerge from a bankruptcy with a clean sheet, yet the company was allowed to keep its deferred tax benefits from the past years. While it took Ford many months to negotiate with the unions, the government was able to force an equivalent deal out of unions for GM and Chrysler. These companies were allowed to utilize low-interest lending while Ford Credit had to struggle for many months to gain a similar status. Basically, Ford was competing with government while emerging from the worst recession in the history since the Great Depression. As a result, the company walked out of this competition stronger than ever.
Now Ford is facing new challenges and it is likely to turn these challenges into opportunities.
Ford South America
South America is very diverse in terms of economy, culture and political conditions. Some South American countries enjoy growth, while others are struggling to avoid recession. Ford's challenges in South America are highly related to the political and economical factors in the continent.
In the last quarter, Ford South America generated $2.31 billion in revenues. This is slightly down from $2.38 billion it generated in the same quarter of 2012. Before taxes, the company reported a loss of $218 million, down from a profit of $54 million in the first quarter of 2012. On a positive note, the worth of Ford's assets in the region were up from $6.52 billion to $6.98 billion which shows that the company has been investing in South America.
The exchange rates were highly unfavorable for Ford in most of the South American countries it operates in. The U.S. dollar was particularly strong compared to many of the currencies in the region, hurting the company's earnings. This was particularly the case in Venezuela. Furthermore, Ford increased its investments in the region for future growth and launched new products, which resulted in higher costs overall.
In the first quarter of this year, Ford sold fewer vehicles in South America compared to the year before. The number of vehicles sold by the company was down from 118,000 to 113,000 and the operating margin was down from 2.3% to -9.4% mostly due to the currency rates in the continent. Unfortunately, Ford's market share fell from 9.4% to 9.1% in the quarter.
The Ford dealers in South America didn't have enough of the Ford Fiesta units, which are highly popular in the continent. This is one of the major reasons Ford wasn't able to sell as many cars as it would like in the continent. The company is working on moving more of the cars people want in the dealerships so that it can generate higher sales.
Ford currently operates 6 production plants in South America. In Argentina, there is one plant producing the Ford Focus and the Ford Ranger models. In Brazil, there are 4 different plants producing a wide range of cars from the Ford Fiesta to the Ford Focus. These four plants employ more than 20,000 people, and the vehicles produced here are being sold in and around Brazil. Finally, the Valencia Assembly Plant in Venezuela produces mostly pick-up trucks and SUVs with the exception of the Ford Fiesta. I don't know if Ford is planning to open new plants or close some of them, but I expect these plants to gear more towards producing the vehicles that are more likely to sell in the continent. Note that some of these plants assemble full vehicles while others produce only certain parts of these vehicles, such as transmissions or engines.
Moving forward, Brazil's fiscal policies are likely to stimulate the country's economy while the economies of Argentina and Venezuela will continue to be fragile in the short term. As these companies figure out and solve their economic problems, Ford will benefit from producing more of the vehicles that people want and less of the vehicles that don't see as much demand. Since there is strong demand in North America, perhaps some of the excess inventory might even be passed to this region for a while. In this quarter, the company is increasing its production in the continent compared to the second quarter of 2012, which is encouraging. This year, Ford South America is expected to reach breakeven, and next year, it may return to profitability.
Ford Asia Pacific and Africa
Asia is a market where some analysts say that Ford is too late. Still, very few people in the continent own cars and there is still a lot of room for growth there. In the last couple of years, Ford has seen a lot of growth in this market and the trend is likely to continue.
Last quarter, Ford generated $2.59 billion in Asia Pacific and Africa, up from $2.28 billion in the same quarter a year ago. In total, 7.45% of Ford's revenues came from this geography in the first quarter of last year, compared to 7.66% this quarter. As time goes on, this area is expected to contribute more and more to Ford's overall revenues. Since the first quarter of last year, the worth of Ford's assets in the region increased from $6.61 billion to $8.11 billion, reflecting the investments of the company in the last year. This shows that the company sees a lot of potential in Asia Pacific and Africa. Ford currently enjoys a tiny market share in the region, which is up from last year (3.0% vs. 2.3%).
In Asia, Ford was able to increase both the volume and net pricing at the same time. Furthermore, the company was able to collect more royalties and better profits from its subsidiaries. This was boosted by higher parts and service sales. During this quarter, Ford's plan is to produce 315,000 vehicles in this region, up from 244,000 in the same quarter a year ago. The company launched two new plants in the region last year, and seven more plants will be added between now and mid-decade. Furthermore, Ford is increasing the number of dealerships in this region rapidly in order to address a fast growing market.
Despite all this growth, the company expects to breakeven in the region this year, and many investors might be curious to know why. Ford expects to invest in new plants, new people and new assembly lines, which will utilize the profits in the region. Ford's goal is to ensure that a third of its global volume to come from Asia by the end of the decade. By mid decade, Ford Asia should be a significant contributor to Ford's profits.
In the near future, Ford will stop making vehicles in Australia because the country is associated with high costs, and it is highly isolated from the rest of the world, which makes it difficult to move the excess inventory to places where the demand may be higher. Also, lower tariff rates in the country make it cheaper for the company to produce the vehicles in Asia and move them to Australia than to actually produce them in Australia.
When investors look at Ford's income sheet, it is normal for them to feel worried because the company is barely reaching "breakeven" in South America, Asia Pacific and Africa regions. Yet, most of this is due to either the currency fluctuations or the investments made by the company in order to ensure future growth. For example, Ford is spending all the money it makes in Asia to open new plants and dealerships in the continent in order to grow further. Of course, there are many challenges in front of the company, but it has every tool and resource to turn these challenges into opportunities.