Ford: Don't Miss Out On Explosive Chinese Demand

| About: Ford Motor (F)
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When the U.S. economy stumbled from the mid-2000s, culminating in the subprime mortgage-induced financial crisis of 2007 to 2009, the country's largest vehicle manufacturers did not escape the chaos. Even as the federal government forked out billion of dollars to keep the financial services industry from catastrophic collapse, the country's three largest car makers -- General Motors (NYSE:GM), Ford (NYSE:F) and Chrysler -- joined the begging line as they sought rescue from a series of industry shocks of their own.

The car makers' pleas to Congress for help in November 2008 hit a brick wall in the wake of mounting public displeasure with tax-funded bailouts. Fortunately for General Motors and Chrysler, the government came to their rescue through the TARP program with an initial $17.4 billion package that would eventually exceed $50 billion for General Motors and $10 billion for Chrysler. Interestingly, Ford indicated that it no longer needed cash to forestall imminent bankruptcy. This bold decision would be vindicated when the company announced its first profit in four years at the end of 2010.

Ford's refusal of the government bailout would turn out to be a blessing. By not receiving any tax-payer cash, Ford was not bedeviled with the many conditions General Motors and Chrysler had to satisfy. Yet, because the U.S. government and worker unions were keen to prevent yet another car maker from going over the cliff, Ford had an easier time renegotiating healthcare, reducing debt, and slashing production capacity.

Today, Ford is looking forward to an even brighter future as it fights to retain its share of traditional markets like North America, while increasing investment in the world's single largest market -- China. So far, the company has pumped more than $5 billion as it strives to minimize its dependence on the increasingly fragile North American consumer and push up its 3% share in the world's most promising automobile market.

Despite running behind global rivals General Motors and Volkswagen, Ford's recent success in efficient production, which mirrors Toyota's (NYSE:TM) world famous manufacturing philosophy, is likely to increase its share of China and the greater Asia auto pie. Another positive for Ford has been the success of foreign manufacturers in the China. The top six manufacturers are non-Chinese brands -- Volkswagen, General Motors, Toyota, Hyundai, Honda (NYSE:HMC), and Nissan.

Even better is the fascination with U.S. brands that saw both Ford and General Motors achieve record sales in 2011, with Ford selling 7% more cars than the previous year. Chinese carmakers, seemingly exasperated by competition from outside carmakers, are redirecting their energies to exports to developing countries.

Most vehicle buyers in China have, up to this point, been based in its larger and wealthier cities including Shanghai, Shenzhen, Beijing, Guangzhou, Suzhou, Dongguan, and Tianjin. Second-, third- and fourth-tier cities -- as well as rural areas -- have largely been relegated to the sidelines due to the comparatively lower spending power of their populations.

But as China hurtles on at an annual growth rate of 8% to 10%, it is only a matter of time before this demographic joins the middle class and, naturally, aspires for automobiles. Remember that there are more than 160 cities in China with a population exceeding 1 million, with this number projected to rise to more than 220 cities by 2025. If the country continues on its current economic growth trajectory, the number of people who can afford cars will rise exponentially. Ford wants to be there when that happens.

Little wonder that the company recently announced plans to roll out new models for the Chinese market that will cost even less than its low-priced Ford Fiesta model. It has also retained its eye on the aspirations of the country's middle class with plans in the pipeline to increase the range of options in SUVs by more than 300%.

Outside of China, Ford's R&D in lighter vehicles may pay off handsomely as it has a direct impact on customer's bottom lines. Lighter cars mean lower fuel consumption and could provide a much needed edge over competitors in an industry where the difference between similar-class models from different manufacturers is increasingly hard to see.

Despite General Motors remarkable recovery, continued growth and its position as leader in U.S. car sales, Ford has held its own. Of the U.S.' top 20 selling car models as at the beginning of April 2012, the Ford Focus experienced by far the highest growth year on year -- over 78%. The Ford F-Series PU also retained its pole position as America's top selling car model over the same period, churning close to 144,000 units.

Ford Motors' current share price is at about $12 giving it a market cap of approximately $44 billion and a price-to-earnings ratio (P/E) of roughly 2.3. On the face of it, this would price the stock favorably when compared to competitors such as General Motors (P/E of 5.1), Toyota Motor (P/E of 54.7), and Honda Motor (P/E of 28). This coupled with a forward P/E of 6.6 in part explains why analysts at Standpoint Research upgraded the stock from a hold to buy.

Ford is by no means out of the woods yet. The company's management appears to have no illusions of the volatility of traditional markets and the folly of putting all eggs in one basket. Diversifying into new markets is the way Ford and other major automobile manufacturers can survive if there is ever another major hit on the North American and European car markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.