Ford sees upside, takes on Toyota for global sales lead

Ford's outlook for the year is upbeat, with strength in North America and its Asia Pacific Africa region.
Ford's outlook for the year is upbeat, with strength in North America and its Asia Pacific Africa region. JONATHAN ERNST

How you view Ford’s third-quarter profit will likely depend on how you count the numbers. Despite a sharp decline, Detroit’s second-largest maker is proclaiming the earnings a “significant” success.

Indeed, Ford Motor Co. sees plenty of upside for the year so far, announcing that it has topped the industry’s 800-pound gorilla, Toyota Motor Co., in claiming that its compact Focus model finished the first nine months of 2013 as the world’s best-selling nameplate. But as with Ford’s earnings, that’s open to interpretation, counters Toyota.

There’s little doubt that however you look at Ford’s performance this year, the only Detroit maker not to have gone bankrupt in 2009 has plenty to crow about – but also a number of serious challenges ahead of it.

On the surface, the third quarter was a setback. Ford reported Thursday that net income dropped a steep $359 million, or 22 percent, to $1.3 billion compared to a year ago. But the maker notes that the July to September quarter had some sizable one-time charges, including a write-down for the ongoing restructuring of Ford’s struggling European operations, and for a pension buyout program.

But Ford’s $2.6 billion in pre-tax earnings, which worked out to 45 cents a share, beat Wall Street’s consensus forecast by 7 cents.

Strong at home, Asia

Give credit to the upturn at home. Ford’s North American operations continued to deliver some of the mainstream market’s highest transaction prices – what the typical customer actually pays after working in incentives and options. As a result, it is delivering better than 10 percent margins, the sort of number even its most successful luxury rivals can only envy.

Meanwhile, “We saw significantly improved results outside North America,” noted Bob Shanks, Ford’s chief financial officer, citing a reduction in losses in Europe, a big improvement in South America and a big gain in its Asia Pacific Africa region.

Ford was admittedly late to the party when the Chinese market began to boom a decade ago. It has been playing catch-up ever since. But a flood of new products being produced at a growing manufacturing network is finally beginning to pay off in what is now the world’s largest automotive market. Sales are up 51 percent since the beginning of the year alone, according to the region’s chief, David Schoch, who says, “By mid-decade I do expect Asia/Pacific to be a major contributor to Ford’s (total) profits.”

Ford’s surge in China has come even while Japanese makers continue to recover from the impact of a political imbroglio over a chain of uninhabited islands that resulted in a sharp decline in sales in that vast market. That helped push Ford’s Focus model to the top of the sales charts, according to data from auto tracking firm R.L. Polk. Consumers around the world snapped up 589,709 during the first half of 2013, a 20 percent year-over-year gain.

Toyota is protesting, though its claim for the Corolla involves some of its own accounting tricks, rolling into the count several different models that it claims are all versions of the Japanese compact.

Whether the battle matters beyond bragging rights is uncertain. Both Ford and Toyota officials admit that consumers rarely care who came in first, but what matters most to Ford is that it is gaining momentum.

“We really feel good where we are,” said Joe Hinrichs, Ford’s president of the Americas and, until late last year, the man in charge of Asia. Considering his new assignment puts him in charge of the maker’s most successful region, Hinrichs has reason to feel upbeat.

'One Ford' strategy

Going into the Great Recession there were plenty of observers who feared Ford would also need to file for bankruptcy, along with cross-town rivals General Motors and Chrysler. The maker made the prescient move of establishing a major credit line before the economic collapse that helped it ride out the downturn.

But under CEO Alan Mulally, it also abandoned many of its old business practices, and most notably adopted Mulally’s One Ford strategy, effectively merging a network of semi-autonomous regional operations into a truly global company. Today, Ford is a far leaner and more efficient operation by sharing products such as the Focus with dealers around the world.

A decade ago, noted Hinrichs, Ford struggled to make money even in some of the best years the U.S. auto industry has ever seen. “Today we know how to make money,” he added, even in leaner years. But the challenge, he quickly cautioned, will be to maintain those new “disciplines” as its balance sheet improves.

And despite the decline in third-quarter net earnings, Ford is now predicting it will deliver both higher margins and earnings, year-over-year, once it closes the books on 2013.

Longer-term, there are still plenty of challenges. Like rival GM, Ford has been struggling for years to right its European operations. It is putting in place a crucial but draconian turnaround plan that includes three plant closings, a move all but unheard of on the Continent until recently. Meanwhile, in China it still has a long way to go to catch up with leaders Volkswagen AG and GM.

Even at home, Ford has challenges. Analysts worry about recent increases in incentives. And the maker was embarrassed when, over the summer, it had to roll back widely hyped mileage ratings for its C-Max Hybrid. But the biggest concern has been over hits to Ford’s quality numbers.

Much of that is due to problems with the confusing user interface of its high-tech infotainment system, an irony since the Sync system has also helped Ford win over tech-savvy young buyers.

Despite such issues, investors appear to be buoyed by the latest earnings report, with Ford stock hitting a 52-week high in trading Thursday.

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