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Ford (NYSE: F ) just closed the books on one of the finest years in company history. The Blue Oval doubled its dividend, cut its underfunded pension in half, and continued to design vehicles that consumers are driving off the dealer lots in droves. I've discussed how investors need to watch CEO Alan Mulally's situation, as well as the 23 global launches of new or refreshed vehicles in 2014. But equally important is how Ford drives ahead in two key markets: Europe and China.
Ford has made great progress in Europe in narrowing losses faster than expected, and 2014 will be critical for the "One Ford" plan as the company launches more than double the number of vehicles around the world as it did last year. Ford is trying to drive stronger global brands and business through quality vehicles now for its broad goal of sustainable profitability.
You can see in the chart above the substantial progress made over the last few quarters in Europe. However, Ford in 2014 anticipates incurring restructuring costs of about $400 million related to depreciation of plant assets and production plants, and this will be reported in Europe's operating results. Ford also expects special-item charges between $400 million and $500 million related to personnel separations; these, though, will not be reported in Europe's operating results. In addition to those charges, expect Ford's research and development and engineering costs to be slightly elevated as the company continues on its goal of launching 25 new vehicles within five years.
It's possible we won't see the same drastic level of progress in Europe in 2014 that we did last year, although the company stands by its prediction of breaking even, or turning a small profit, on the continent in 2015. This year will give investors an immense amount of information of how to gauge higher costs, special items, and pre-tax earnings to better predict when Ford will show a profit in the region. When that happens, it will remove a huge burden from Ford's share price and will essentially send at least $1 billion annually, gauged by current losses, back to its bottom-line earnings.
Ford was a latecomer to the Chinese market and now has a lot of ground to make up on foreign automaker leaders General Motors (NYSE: GM ) and Volkswagen. Even with production constraints Ford managed to grow sales in China nearly 50% last year.
Ford expects that growth to continue; it's roughly halfway toward its goal of doubling its market share from 3% to 6% by the end of 2015. As more vehicles are launched in China, including the Mustang for the first time and the Lincoln lineup, Ford will need to add more production capacity to capture its sales potential. The company plans to have two facilities in China start production this year, with two more coming online in 2015.
Extra production capacity will enable Ford to grow sales and top-line revenue, while two potential mistakes by competitors may give the Blue Oval an additional edge in China.
Japanese automakers are just beginning to recover from a yearlong backlash by Chinese consumers after Japan's controversial purchase of a group of disputed islands sparked national protests in China. That helped Ford to edge out Toyota (NYSE: TM ) and Honda (NYSE: HMC ) in China last year after the Japanese car makers had largely led their U.S. rival for most of the last decade.
Just before the new year, Japanese Prime Minister Shinzo Abe visited a shrine in Tokyo that honors the country's war dead, including top military personnel convicted as war criminals after World War II. That drew another angry response from China.
"We're still at a stage where we need to carefully monitor the impact, but it's obvious that this only has a negative impact on Japan," said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management in Tokyo, told Bloomberg. "The visit poses great geopolitical risks."
It's unclear how large of an effect this will have on Japanese automakers, but it will clearly be something to watch as sales unfold in early 2014.
Another potential misstep was General Motors' recent recall of close to 1.5 million vehicles in China due to potential safety issues. The recall affected two high-volume and mainstream cars, the Buick Excelle and the Chevrolet Sail. There are so many recalls in the automotive industry, chances are this won't drastically alter General Motors' success.
These troubles for Ford's competitors may not seem huge, but in an industry where even a fraction of market share change is a major development, this might be all Ford needs to secure a strong start to 2014.
The automotive industry is rapidly changing, which automakers are the best investments in 2014?
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