The Single Most Important Factor in Ford's Future

If you've been invested in Ford (NYSE: F  ) over the last couple of years, you understand how instrumental North America is in driving the company's profits. You also know what a large hindrance losses in Europe have been on profits, subtracting $1.7 billion right off last year's bottom line. Nearly every investor understands what North America and Europe mean to Ford's current and future success, but what some investors can't grasp is what China represents for the Blue Oval. Here's some information to give you a better idea.

Eyes on the prize
Ford was definitely late to the game, and trails General Motors (NYSE: GM  ) and Volkswagen in China by a long shot. Consider that through October, Ford has sold nearly 742,000 vehicles in China this year, far below General Motors' 2.59 million vehicles.

Though Ford remains far behind, that means it just has more incremental sales left to capture -- and investors love upside. Back when Ford's market share in China was 3% the company set a goal to double that share by launching 15 new models in the region by the end of 2015. Ford has honed in on that goal, sending its year-to-date sales in China up 52% and claiming 4.3% of the market share.

To keep claiming additional market share, Ford will have to continue to deliver smaller, valuable, and more fuel-efficient vehicles. To put it kindly, that's not a product the automaker has always been known for -- but that's changing, and fast.

Sales of the Ford Focus are up 48% in China this year. Photo Credit: Ford

Consider that people all over the world now love Ford's Focus and Fiesta models. The Focus is the world's best-selling vehicle nameplate, and the Fiesta ranks as the world's fourth-best-selling nameplate and the No.1 subcompact vehicle. That's an impressive turnaround from when Ford was known only for producing gas-guzzling behemoths that clogged the road a decade ago.

Yes, Ford is behind its rivals in China for now, but progress is clearly being made. But just how much is China worth to the company?

Consider these facts
As of the third quarter, Ford's Asia-Pacific-Africa region represented roughly 8% of company revenue; the region is dominated by revenue in China, which isn't broken down separately for the public. Ford has estimated that the region will contribute about 40% of company revenue by the end of the decade.

Graph by author. Information from Ford's third-quarter financials.

As you can see, over the next seven years, Ford's revenue gap between North America and China will narrow drastically, which will boost top- and bottom-line figures significantly. To further put in perspective the growth expected from China, consider this: Vehicle sales in China topped 19 million in 2012, already making it the world's largest automotive market. Right now U.S. sales are on pace to come in between 15 million and 16 million, and sales in Europe are likely to fall between 12 million and 13 million this year. Some analysts predict sales in China to reach 30 million vehicles per year by the end of this decade. That's a huge increase when you consider that sales in the U.S. are expected to maybe top 17 million, while Europe will struggle to get to pre-recession levels of 15 million per year. In other words, China is expected to grow its vehicle sales by nearly the entire amount Europe sold last year.

Final word
That should help investors grasp the situation developing in China. Ford is certainly behind, but it is designing the right vehicles in the hottest segments to tackle the task of catching its rivals in the region. Consider that Ford just topped 1 million vehicles sold in its Asia-Pacific-Africa region through October for the first time ever, driven by its recent success in China. CEO Alan Mulally and Ford have a plan for China, and if it's anything nearly as successful as the turnaround in America since the recession, I wouldn't bet against the Blue Oval.

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  • Report this Comment On November 06, 2013, at 5:40 PM, jymmross wrote:

    You don't "hone" in on something; you "home" in.

    Other than that, good point.

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