Europe, once a bright spot in global auto sales, has completely imploded and taken its consumers with it. Ford (NYSE: F ) and General Motors' (NYSE: GM ) losses in the region are a large reason why their stock prices remain undervalued. Both are expected to combine for as much as $4 billion in losses in Europe this year, a major drag on earnings. While both are on plan to break even in the region by mid-decade, a recent bright spot has appeared that has opened an opportunity for investment – Russia. Here are some details on what you can expect, and what Ford and GM are doing to take advantage of this development.
Russia's growth story is one of few to be found in Europe's mess which is near 20-year lows in auto sales. Its auto market is the second largest in Europe, trailing only Germany, and its passenger car market could grow to top 3.5 million in unit sales, according to PricewaterhouseCoopers. What's more is that Russia's long-term growth seems sustainable because of neighboring countries' growth, as well as its lower vehicle per population density compared to other more developed countries.
Enter Ford and GM
With staggering losses from Europe, Ford and GM have scaled back operations and refused to dish out incentives, conceding market share. Russia gives them an opportunity to take advantage of a growing market to help boost profits and market share in a tanking region. This could drastically help both Ford and GM with their goals to break even, or dare I say become profitable, by mid-decade.
Ford just built a plant with its joint venture Ford Sollers, and is expected to triple production capacity in the years ahead. GM is following Ford's lead and is in the process of investing up to $1 billion to increase its own production capacity in Russia.
According to LMC Automotive, registrations in Russia were up just over 10% compared to 2011 and almost one-third of those were SUV's. This demand is likely driven by the countries combination of weather and road conditions. The upshot here is that Ford's had great success lately with its SUV's. Its Escape is selling at record pace in the U.S. and is going to launch in Russia soon. Ford's Explorer which is also selling very well is now being produced in one of Ford's three Russian plants.
While Russia's market is just under 3 million vehicles in sales; it's still a significant market and bright spot that looks to grow in a region marred by sales declines. Ford's learned from its mistake of a slow start in China's rapidly expanding market, and is looking to jump into its fellow BRIC emerging market Russia quicker than its competitors. If Ford and GM look to break even in Europe – likely contributing to a surge in their respective stock prices – success with new model launches will be the large contributor. It's something I'll be keeping a close eye on, and other auto investors should too.
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