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It's no secret that Ford (NYSE: F ) has been on a roll over the past few years.
After a wrenching restructuring, Ford has been able to launch a string of strong, competitive products that have been stealing sales from its longtime rivals -- and generating record profits here in the U.S.
Ford's profit margin in North America has been among the highest in the business, and the numbers have been impressive.
But for all of its success here at home, Ford is still facing some challenges. Here are two big ones.
Challenge 1: Europe
Why does Europe matter to Ford? It matters because Europe is a big part of Ford's business, and lately it has been losing a ton of money. Ford lost over $1.7 billion in Europe last year, and $462 million more in the first quarter of 2013. It has warned that it could lose $2 billion this year. That's not because Ford made huge mistakes, it's because recessions in Europe have clobbered new-car sales: They're now at lows not seen in 20 years, and they may fall further before things start to improve.
Ford is the second-biggest auto brand in Europe after Volkswagen (NASDAQOTH: VLKAY ) , and cars like its Fiesta, shown above, are big sellers. Last fall, Ford announced a comprehensive turnaround plan for Europe that is closely modeled on the approach that has made Ford such a success here in the U.S. The company will cut production by closing three factories, one in Belgium and two in the U.K.
It's also introducing more of its global products to Europe, including vehicles like the Explorer and Mustang that haven't traditionally been part of its European lineup. And it's emphasizing more profitable retail sales over sales to rental-car fleets, and cutting back on discounts, in an effort to make sure that it's maximizing the profits on the cars it does sell.
Ford says that all of these changes should get it back to at least breaking even by the end of 2015, even if overall European auto sales don't improve between now and then. Ford's approach has a lot of credibility with Wall Street, because of the success of Ford's U.S. turnaround, and it's a good bet that this story will end well for Ford. But it's a complicated situation, and it's one that Ford shareholders should monitor closely.
Challenge 2: Quality
Ford's new cars and trucks are huge improvements over the old models, reviewers and owners say. But they're getting knocked in quality surveys. The latest J.D. Power Initial Quality Survey knocked Ford's most prominent entries, even while giving rival General Motors (NYSE: GM ) high marks. And Consumer Reports has lately been on Ford's case as well. But everybody agrees that these are the best Fords ever. What's the deal?
There are two deals, actually. First is that Ford has had some troubles with the launches of new products. To some extent this is the fault of Ford's suppliers, rather than Ford itself: Issues with faulty parts on all-new vehicles marred last year's launches of both the Escape SUV (which had several recalls) and the Ford Fusion. Those issues have all been resolved, but they hurt Ford in the J.D. Power standings.
Ford is taking steps to fix that, working more carefully with suppliers and changing procedures to ensure that their next big product launches -- which are expected to be the F-150 pickup and the Mustang, next year -- go much more smoothly.
But there's another problem that's costing Ford big in these quality rankings: Buyers are having a lot of trouble with the popular MyFord Touch system. This is a touchscreen add-on to Ford's acclaimed SYNC "infotainment" system that allows voice commands and links with your smartphone. MyFord Touch was supposed to take SYNC to the next level, and it includes touchscreen controls for a lot of functions that were traditionally controlled with conventional knobs and switches.
But the user interface isn't great, and the system is prone to glitches. The good news is that Ford is able to quickly update the software, so it has gotten a lot better, but the bad news is that it still isn't as good as it should be. This may sound like just a nuisance, but it counts as a quality problem. It's interfering with owners' ability to use their cars, and it's leading customers to bring their cars to dealers to try to get help.
Consumer Reports has also complained that it's a safety issue, because it distracts drivers from the road, and Ford definitely doesn't want that kind of feedback. So there are changes on the way, and not just more software updates (though those are coming, too).
Ford has already added back in some knobs in its F-Series pickups that have MyFord Touch, to accommodate drivers wearing work gloves, it has said. It's probably not a coincidence that F-Series owners are happier with MyFord Touch than other Ford owners. Those knobs will be added to all Ford models that offer MyFord Touch as they're redesigned or updated over the next couple of years.
That should help -- at least, it should be enough to make MyFord Touch more competitive with rival systems. It should help Ford's standings in the quality rankings as well.
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