Ford's Plan for Global Domination

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Want a sign that Ford (NYSE: F  ) will be able to sustain its earnings growth for a while? I've seen several lately -- they keep showing up in my news feed, with the word "China" attached.

Ford's recent increases in U.S. market share are welcome signs for shareholders, but let's face it: The company is just winning slightly larger pieces of a fairly static pie. U.S. auto sales may be on a solid recovery trajectory, but they aren't going to set new records any time soon -- much less sustain huge annual growth rates.

For that kind of market growth, you've got to look overseas -- and Ford has been doing a lot of that lately.

Big strides in China
The Chinese auto market -- now the world's largest, having grown sevenfold in the last decade -- is a convoluted and fast-evolving one, with a long list of domestic Chinese companies going head-to-head with more familiar names. Volkswagen and General Motors have the largest market share among foreign companies, with domestic hybrid- and electric-car specialists BYD having similar success.

While many of the Chinese companies are bit players, with monthly sales of a few thousand or less, there are a few heavyweights attracting major global attention and investment. Geely's recent purchase of Volvo from Ford was a sign of size and seriousness, as was Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) purchase of 10% of BYD in 2008.

Ford, however, has trailed far behind these leaders in China for a long time, and behind Toyota (NYSE: TM  ) , Honda (NYSE: HMC  ) , and Nissan as well. But that's starting to change -- the first quarter of 2010 was Ford's best quarter ever in China, with sales up 84%. The actual numbers don't (yet) rival Ford's U.S. sales, but they're significant -- 153,362 vehicles were sold by Ford and its various joint ventures in China during the quarter, versus 428,596 for Ford's U.S. arm.

China's rapid growth means it's likely to represent an even bigger piece of Ford's total sales before too long -- if Ford can manage to make enough cars to keep up, that is.

Production is the gating factor
Ford's recent efforts -- and successes -- in China represent a significant shift in strategy, as the company races to catch up with the established leaders. In recent years, Ford's attention and resources have been focused on survival -- on rebuilding its core businesses in the U.S. and Europe -- and previous management teams did little to build Ford's presence in Asia. But a return to profitability has led to a return to investment in growth -- and China, along with India and Latin America, are where CEO Alan Mulally's team sees significant opportunities for gains.

Those opportunities tie in with the company's current focus (so to speak) on smaller cars and greener-propulsion technologies -- small, efficient vehicles are what these markets demand. But because of the lack of attention in the past, Ford's Asian production capacity is constrained -- and although that's changing, as Ford has added shifts at existing plants and is constructing a third Chinese factory in Chongqing, the company is running a tight race between capacity expansion and sales growth.

As business problems go, that's a nice one to have -- but it's still a problem.

China is just one part of a big puzzle
China's market potential is enormous, but it's not the only place where Ford is investing in future growth. In recent weeks, the company has announced significant investments in Brazil and Argentina, and it is carrying through on a significant expansion in India.

India is just emerging as a major auto market, but like China, it obviously has the potential to be enormous in time. Ford's sales there are much lower than in China -- 9,478 vehicles sold in March -- but they are growing rapidly, with Ford's new Indian-built Figo sedan leading the way.

To make a long story short, these markets could serve as significant engines of growth for Ford for several years. The company's recent emphasis on high-quality small cars that can be adapted to markets around the globe has the potential to pay off handsomely, both in terms of suitability for emerging markets and economies of scale. But further investments in production capacity in both China and India, as well as Latin America, may be needed to keep up with exploding demand -- demand that is already sizeable enough to warrant careful attention from shareholders.

Fool contributor John Rosevear owns shares of Ford. Berkshire Hathaway is a Motley Fool Inside Value pick. Berkshire Hathaway and Ford are Motley Fool Stock Advisor choices. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (26)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2010, at 10:15 PM, SwampBull wrote:

    China, China China.

    I think it's time we take a hard look at what to expect and what not to expect from this country. If I believe everything I read, then China is the global economy's panacea for all things sluggish. Need growth? Turn to China. Need to finance debt? Beijing's got your back.

    But, without any supporting evidence, I would like to propose that perhaps the overall investment community is too reliant on Chinese growth. Isn't it possible that the country with the largest middle class, the United States, may be able to grow that middle class some more? And isn't it also possible that China's population could take some time, say, 50 years, to actually move up from a lower SES to a middle one? The assumptions and emotions that are attached with the 'China' label now are far too dot-com-like for me to be excited by them.

    While this comment has nothing to do with Ford, the fact that 'global' and 'China' are equated with each other through inference in the article is proof enough for me that expectations are simply too high.

    You can have China all to yourselves. I'll keep my slices of 'fairly static pie' - American pie.

  • Report this Comment On April 15, 2010, at 4:21 AM, Babble100 wrote:

    You forgot about Europe. A mix of static + growing markets (East Europe). If Ford produces quality (which Europe demands) at lower prices than its competitors, its market share will grow. Market share growth is as good for shareholders as growth in new demand like in China. And in Europe you get to earn money (euros) instead of paper (dollars).

    And what about Russia?

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