If you've been a Ford Motor Company (F +0.09%) investor for any length of time, one consistent bear argument you've surely heard is that Detroit's second-largest automaker is too dependent on America's best-selling F-Series truck and SUV sales for profits. More important, bears believe Ford is simply too dependent on North America -- where the majority of those trucks and SUVs sell -- to fuel the company's success.
Chart by author. Data source: Ford's Q2 earnings presentation.
There's truth to that argument, for sure. While Ford certainly depends on success in North America to fuel its profits, that leaves much upside for the company's business and its investors as the automaker focuses to correct this problem -- and that's exactly what Ford is doing.
Let's take a look at how Ford is stepping on the gas in its two most critical markets outside of North America.
First up: Europe
Investors know Ford breaking even in Europe would be huge progress, and we can see the light at the end of the tunnel. That doesn't mean the company is slowing down -- far from it. Ford's focusing on improving three aspects of its business in Europe: its brand, product, and cost.
Image source: Ford's Deutsche Bank IAA Cars Conference, September 2015.
Product-wise, Ford has achieved its goal of delivering 25 new products from the end of 2012 through the end of 2015, and it's recently focused on performance vehicles such as the Focus RS, Focus ST, Fiesta ST, and the newly available 2015 Mustang. Thus far through 2015, Ford can boast it has best-ever levels of reliability and customer satisfaction in the region.
Brand-wise, Ford is improving in all aspects. Ford was named "Most Innovative Volume Brand 2015" by the German Centre of Automotive Management, which speaks to the company's improved mainstream passenger vehicles. Ford also created the new Vignale brand, which is meant to be a premium brand compared to its mainstream vehicles, yet the brand is designed to avoid direct competition with top-of-the-line luxury brands.
Outside of mainstream and premium vehicles, Ford's success with commercial vehicles has gone largely unnoticed. In 2012, Ford was ranked the No. 7 commercial vehicle brand in Europe, and now Ford sits atop the rankings as the No. 1 CV brand in Europe.
Cost-wise, Ford has continued to reduce its manufacturing capacity after the recession caused a huge slowdown in vehicle sales. While some brands have ceased investment during the slowdown, Ford transformed its Valencia plant into one of the most advanced and productive automotive plants on the planet. Furthermore, Ford's Innovative Cologne investment agreement, which runs from 2017 to 2021, will make its Cologne, Germany, assembly plant more efficient to cut costs in Europe. The plant will insource some operations currently being handled by suppliers to improve cost efficiency and begin a flexible two-shift work pattern, allowing it to very efficiently match production with demand yield. The changes are expected to yield $400 million in total savings.
Ultimately, it's a three-pronged strategy that has been working for the automaker. Through the first three quarters of 2015, Ford's sales in Europe rose 10% compared to last year, to nearly 1 million vehicles.
Next up: China
Ford has made incredible progress in China, where it was late to the game after automakers flocked into the region as if it were a modern-day gold rush. Since former Ford CEO Alan Mulally initiated a $5 billion strategy in 2012 to boost the company's presence in China, the automaker has roughly tripled its sales and sped along on its way toward becoming the fifth-largest foreign automaker in the country.
Chart by author. Information ends in April due to switch from reporting sales in wholesale units to retail units. Data source: Ford China's press releases.
Now, it looks like Ford is going to make a push toward electric and greener vehicles. It's great timing as China is dealing with massive pollution problems, and Volkswagen -- which battles General Motors to be the top foreign automaker on a yearly basis -- is likely to face declining sales from consumer pushback after its diesel emissions cheating scandal.
Ford announced last week that it plans to invest $1.8 billion over the next five years to expand its research and development in the world's largest auto market to bring new hybrids and electric vehicles to China.
It's a great move because while China has publicly encouraged the use of more electric vehicles, it's a movement that has progressed much slower than anticipated as the country lacks sufficient infrastructure to make electric vehicles a mainstream option. However, with Ford's timely investment into electric vehicles in China, it will be ready to capitalize on that market when infrastructure enables more consumers to make the switch from gasoline-powered vehicles.
Another near-term positive for Ford in China, despite the country's economic slowdown, is that China cut the purchase tax from 10% to 5% on vehicles with engines of 1.6 liters or smaller, effective through the end of 2016. It's a move that Barron's estimates could save up to $1,500 on certain vehicles, and 71% of Ford's unit volume in China would match that criteria.
Sure, Ford is still dependent on North America for the vast majority of its profits. But the near-term and long-term prospects in its next two critical markets, Europe and China, show much upside -- and that's because the company continues to focus on improving its product, brand, and costs.
