Ford Motor Company (NYSE:F) is a global auto manufacturer that competes with the likes of GM, Chrysler, Toyota (NYSE:TM) and Honda (NYSE:HMC). Ford recently completed the sale of its Volvo division and related assets to China’s Zhejiang Geely Holding Group.
We think the Volvo sale was a mistake that will hurt Ford’s global cash flow and North American market share going forward. Our analysis follows below.
Why Ford sold Volvo
Desperate Need for Cash: Ford had suffered a net loss of -$14.7 billion in 2008 and badly needed cash during a deep crisis for the U.S. automotive industry. GM and Chrysler reorganized under Chapter 11 last year, while Ford barely escaped bankruptcy.
One Ford Vision: The Volvo sale was part of CEO Alan Mulally’s “One Ford” vision. The strategy involves losing regional brands and reducing global segmentation while strengthening Ford’s core lineup. As part of this vision, Ford sold Land Rover, Jaguar, Mazda and Volvo in order to concentrate on the Ford brand.
Why selling Volvo was a bad idea
Fire sale price: Ford bought Volvo for $6.45 billion in 1999, and sold it for $1.8 billion a decade later. We think Volvo is conservatively worth close to $4 billion today.
Strong brand: Volvo has an excellent brand and a strong product lineup. As a Ford division, it had recently returned to profitability after a successful restructuring. We estimate that Ford’s truck and SUV division has a market share of 19.8% in North America. Volvo would have contributed an additional 1% share in North America alone.
You can drag the trend-line in the chart below to create your own forecast Ford’s North American truck market share forecast and see how it impacts the company’s stock price
Based on the success of Daimler trucks in North America, the slow but steady recovery of the U.S. automotive industry, and Alan Mulally’s proven ability to turn companies around, we think Volvo could have contributed an additional $2 billion in North American revenues to Ford and $10 billion globally. This would have translated to $500 million in additional cash flows in 2010 and better cash flows going forward.
Disclosure: No positions