The financial crisis in Europe is becoming a huge obstacle for the growth of most US companies that carry on business operations in Europe. There are even companies that are failing to retain its investor confidence despite showing decent performances. One such company is Ford Motor Company (NYSE:F) . In spite of the company’s strong fourth quarter earnings beating the Street’s expectations, Ford couldn’t impress its investors and the stock dropped more than 5%. Thanks to Europe, the only factor behind the company’s unwelcoming guidance for 2013.
A quick look at the quarter:
The company performed astonishingly well, reporting automotive sector profit of $1.3 billion from North America, South America, and Asia Pacific. In the Asia-Pacific-Africa region, surging sales in China triggered the 41% increase in wholesale unit volume sales during the quarter. At present, Japanese automakers are facing a tough time in China as Chinese consumers have almost stopped buying Japanese cars due to the territorial dispute between Asia’s two largest economies. In the last quarter Honda Motor Co Ltd (ADR) (NYSE:HMC) reported a 41% drop in their sales in China and Toyota Motor Corporation (ADR) (NYSE:TM) suspended parts of its production in China after their September sales tumbled 49%. Thus while Japanese automakers like Honda and Toyota, who held over 20% of the Chinese automobile market, are suffering due to the recent disturbance between the two countries, Ford cashed in on this opportunity and rapidly captured market share.
During 2012 the company continued to follow the One Ford plan, which focuses on providing customized vehicles to the customers. The company launched Escape and Fusion, which were widely accepted by customers and provided significant gains to the company.
You must be thinking that if Ford has shown such a bright performance, why are investors losing their confidence in the company? Well, along with the above good news there was also a bad news for the investors, and it seems they gave more emphasis to the latter.
What went wrong?
Despite the strong performance across all regions, Ford suffered as the company continued to post big losses in Europe. For the fourth quarter Ford’s European losses plunged to $732 million, which is almost four times the loss the company reported a year ago. For the full year, Ford reported a loss of $1.75 billion.
Obviously this devastating condition is not unique to Ford. Almost all American companies who have business operations in Europe are feeling the pinch of the contraction in the European economy. The huge financial crisis in Europe is creating a sudden lag in US exports as European customers are buying less US products and services. From consumer nondurable goods companies like Kraft Foods Group Inc (NASDAQ:KRFT) to electronics companies like Koss Corporation (NASDAQ:KOSS), all of them are facing a shrinking top line. All of these companies will continue to experience this difficult situation until the European crisis eases, and Ford will definitely not be an exception. Keeping this in view, the company, in its 2103 guidance, reported an anticipated loss of $2 billion next year.
When an immediate improvement in the economic condition in Europe is not expected, the only way to ward off the slump in sales is to devise new strategies to sustain in the market, and Ford is very much on the right track. For the time being, Ford is taking some strategic steps to ward off the adverse market scenario.
What lies next?
As Ford’s European factories have been running at almost 60% capacity, the first step that the company has taken to lower the costs and make every sale more profitable is to shut down three of its factories. The company has also signaled that if necessary Ford will close more of its factories.
Again, Ford is also trying to bring a change in its product line as well. Earlier Ford was offering locally designed expensive vehicles in Europe, but now Ford has plans to launch low cost vehicles in Europe that should definitely increase sales volume as well as their market share. Ford is also planning to apply their “One Ford” strategy in Europe, which means it will now produce customized vehicles for its European customers. This has been a tried and tested strategy for Ford, and when the company was losing its US market share this strategy not only helped the company to regain it, but also post continuous profits in the US. So investors can be a bit relieved this time as this strategy has already turned out to be fruitful for the company once.
While the company is restructuring its operations in turbulent markets like Europe, it is also expanding operations in growing markets like China. Ford is expecting to double their production capacity in China, and is planning to invest $760 million to build a new assembly plant. As we’ve already seen, the main reason behind the surging sales in the Asia-Pacific-Africa region is Ford’s Chinese operations, and a further increase in the production capacity will definitely turn out to be fruitful for the company in the coming years.
Foolish Bottom line:
Ford has still a long way to go, but it’s on the right track to success. Adding to all the above factors, which promise a stronger financial performance for the company in the near future, Ford has added one more reason for investors to be happy: the company has recently announced that they are doubling their dividend payment to shareholders. So investors buckle up and get ready to add an accelerating stock in your portfolio.
The article Zoooooom……Here Comes Ford originally appeared on Fool.com and is written by Satarupa Bose.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
