Ford's ambitious plans to grow in Asia took a toll on its second-quarter profit, with higher costs to design and sell cars offsetting rising sales.
The company's net income fell 8 percent to $2.4 billion for the April-June period. Ford blamed higher prices for steel and other commodities, but also said that after years of restructuring, the company is strong enough to spend heavily on future growth. Ford spent $400 million more on engineering and advertising new vehicles than it did a year earlier.
"That's the new thing for Ford, that we are investing in the future," Ford Chief Financial Officer Lewis Booth said.
Rival Chrysler Group also took a hit, reporting a loss of $370 million in the quarter. Like Ford, Chrysler said the loss was a sign of a healthier balance sheet. Without a $551 million accounting charge for refinancing bailout debts to the U.S. and Canadian governments, Chrysler would have earned $181 million.
Ford's worldwide sales were up 7 percent. Revenue rose 13 percent to $35.5 billion. But the company warned last month that its profit could slip, citing investments in future products.
Investment in Asia is the next step in President and CEO Alan Mulally's plan to move beyond the company's near collapse in 2006, when it took out $23 billion in loans to restructure. Since then, it has cut costs and sunk billions into improving Ford cars, resulting in nine straight quarterly profits. Now, the company aims to expand its business in Asia, where it's dwarfed by General Motors Co.
Ford plans to roll out 15 cars in India and China over the next four years, and as a result, it's spending hundreds of millions more on product development than it did a year ago. In Asia, Ford reported a pretax profit of just $1 million, down $112 million from the same time last year. The company also took a hit because some of its hottest cars are smaller and less profitable than its older models, like the $8,000 Figo in India. It hopes to make up for that by selling more cars.
An investment now could mean a windfall for Ford later. GM sells three times more cars in China than Ford does in all of Asia, and GM booked a $600 million profit in its international operations — which includes Asia — in the first quarter. Ford currently controls less than 3 percent of the market in both India and China, but wants to increase its sales by 50 percent by mid-decade.
Ford also said it is spending more on production to meet post-recession demand in the U.S., where people are expected to buy nearly 2 million more cars this year than they did last year. Ford projects that annual U.S. sales will be in the lower end of its 13 million to 13.5 million forecast. The company lowered its forecast for European sales, which were weakened by the debt crisis in the latest quarter. Ford now expects sales no higher than 15.3 million vehicles, down from 15.5 million.
One reason sales softened in the U.S. was a lack of discounts. Both Ford and Chrysler were able to command higher prices for their cars and trucks last quarter, partly because of tight supplies of Japanese cars following an earthquake in that nation.
Chrysler's average selling price rose nearly 5 percent from a year earlier to $29,964 while Ford's rose 1 percent to $31,179, according to Edmunds.com automotive website. Both spent less on rebates and other deals.
While Chrysler was focused on paying off its government loans, Ford paid $2.6 billion of its own debt during the quarter. The company now has $14 billion in debt, a legacy of its 2006 restructuring. Ford hopes its steady reduction in debt will convince ratings agencies to return the company to investment-grade status, which would make it cheaper to borrow money.
Ford may not have to wait long. Standard and Poor's Ratings Service said the company's "financial performance is tracking levels consistent with a higher rating," although it said it is waiting to act until Ford completes contract talks with the United Auto Workers union. Ford and the UAW are expected to kick off negotiations on a new four-year contract this Friday.
GM is scheduled to release its second-quarter earnings Aug. 4.