A Reason to Worry About Ford's Recovery?

The last thing an ambitious carmaker needs in the midst of a thriving recovery in its business is the announcement of a recall. That's the situation Ford (NYSE: F  ) faces after announcing it'll take back several thousand of its popular Escape crossover SUVs. The bad news tailgates on the back of strongly positive sales figures for all American auto manufacturers, itself included. So does the recall put it in danger of rolling downhill once more, or are there bigger threats down the road?

No Escape
As far as recalls go, this current one isn't particularly dramatic. It applies to around 7,600 2013 Escapes sold in the U.S. and Canada, or less than 0.5% of the total currently prowling the roads. Contrast that with the most infamous recent example. In 2010, Toyota (NYSE: TM  ) offered to take back 6.67 million of its 2004-2010 editions of several popular models (including the Prius) because of the scary possibility that they might accelerate without pressing on the gas pedal.

The mother of all recalls, though, was Ford's own: In late 2009, it came to light that a faulty cruise-control switch could result in spontaneous combustion of a number of its larger models. The action originally applied to 4.5 million cars, but by the time it was finished it spread to cover around 14 million.

Driving off a cliff
That was probably the worst year possible for Ford to announce a multimillion-car recall. That was the year many predicted the death of the American car industry as we know it. On the heels of the Great Recession's badly affecting consumer demand, Ford and its brethren were not given long to live. A lifeline was thrown to General Motors (NYSE: GM  ) and Chrysler, in the form of a government bailout that divided tens of billions of dollars between those two companies.

Ford, thanks largely to a $23 billion credit line it wisely set up in the pre-recession days of 2006, refused any government money. But just as it seemed as if the company would make it through the bad times on its own -- crash! came the huge 2009 recall. The company's stock predictably dived on the news, at one point trading below $2 per share.

Speedy recovery
The revival of the domestic car industry since those difficult days is one of the great industrial success stories of our current era. The "Big Three," sobered by their experiences during the recession, all managed to recover -- particularly in terms of revenue and profit. GM, for example, saw a nearly 30% rise in top line from 2009 to 2010, and another 11% climb in the following year.

For its part, Ford had already begun some form of the restructuring demanded of its two rivals by the government. In 2007 and 2008 it unloaded a clutch of assets, including high-end brands Jaguar, Land Rover, and Aston Martin. By 2010, that series of divestments culminated with the company's sale of the well-reputed but highly unprofitable Volvo.

Determined rivals
This has positioned the company effectively to take advantage of a surge in demand. Its overall U.S. sales in August rose a beefy 13% year over year, beating the 10% showing of GM and keeping pace with Chrysler's 14%.

Much of Ford's advance was due to the success of its more economical models, the compact Focus (which saw a 35% annual rise in sales) and, funnily enough, the Escape (36%). It seems Ford has managed to time its production right to meet that current demand, which, thanks to high gas prices, is generally aimed at the more economical cars on the market.

Oil prices aren't anticipated to drop anytime soon; thus, demand for the less thirsty cars should continue to be robust. A fairly small-scale recall of less than 10,000 cars shouldn't affect this all too much. Ford shareholders, for their part, don't seem to be too spooked about the news; on the day the recall was announced, the shares traded up (by 1.7% to $9.57), beating the Dow's rise (0.09% to a little over 13,000).

What represents a darker threat is the seemingly unstoppable advancement of foreign rivals on the business of the domestic industry. Each of the Big Three has lost market share over the past year to overseas heavyweights such as Toyota, Honda (NYSE: HMC  ) , and Volkswagen (NASDAQOTH: VLKAY.PK). Ford's still No. 2 with 15.3% (as of August), but that's a drop of a full percentage point from a year ago.

Meanwhile, Toyota now has a 14.7% share, up significantly from the 12.1% of August 2011. Honda's also creeping up (10.2% this past August, up from its year-ago 7.7%). More Volkswagens are now cruising American roads, with that company experiencing nice market-share growth from last year's 2.4% to the most recent 3.2%.

No one likes recalls. But this current one doesn't seem to be affecting the market's generally bullish sentiment on Ford stock. Those bulls should be wary, though, and keep looking in their rearview mirrors to watch how the rivals are doing. Carmaking is a tough business, and there are a lot of competitors determined to succeed. It is they the Fords of the industry need to worry about, not minor recalls.

Want to know more about Ford? We have one of the best, in-depth digests of the company. Our premium report on the carmaker is only $9.99, and what's more, it includes a full year of quarterly updates. It's a must for anyone who's interested in the company or the industry. Get more details.

Fool contributor Eric Volkman owns no stocks mentioned in this article. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and creating a synthetic long position in Ford. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 08, 2012, at 10:25 AM, belseware wrote:

    Sounds like you think Ford's fiscal prescience and current product tour de force are luck.

    Sounds like you think Chrysler and GM are now fully responsible going businesses.

    This is nonsense, even though it looks like the market has bought it.

    Recalls are a good thing...they protect the customer and are usually mostly precautionary.

  • Report this Comment On September 08, 2012, at 12:25 PM, spawn44 wrote:

    Weak article. All old material re-hashed. If your worried about recalls you should be covering McDonald's.

  • Report this Comment On September 10, 2012, at 4:13 PM, TMFVolkman wrote:

    belseware, I never said or implied that Ford's results are flukey. On the contrary, I think they're doing quite well, all things considered. But foreign competition is heavy and getting heavier; the big question is whether they'll be able to keep pace.

    spawn44, thanks for the compliment. I'm not worried about recalls, I only write about them.

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