A couple of weeks ago, General Motors impressed analysts with a strong fourth quarter that boasted a 28% surge in revenue and 15% increase in net income, despite a challenging year for the automotive industry.
Ford Motor Company (F 3.03%), to put it bluntly, did nearly the opposite. Management expressed frustration, disappointment, and even admitted it had left $2 billion in profits on the table in factors it could control.
Ouch.
It might be time for Ford to consider two radical changes with its Europe and China operations. Here's what that could look like.
Solution in China: Lincoln
More than a decade ago, investors lauded Ford's potential in China, at the time the world's fastest-growing automotive market. The region was supposed to become Ford's second pillar of revenue and profits, standing alongside North America, which generated nearly 70% of automotive revenue in 2022.
That vision of rapid growth has failed to gain traction: During the fourth quarter, the China division made up 10% of total wholesale units but generated less than 1% of revenue and wasn't profitable. Wholesale units, revenue, adjusted earnings, and margins have all consistently declined.
Image source: Ford's fourth-quarter presentation.
There's no doubt COVID-19 restrictions affected results, but the truth is Ford has had a decade to turn China into a pillar of profits and it has failed to do so. However, there is a silver lining in its operations: Lincoln.
Lincoln, a smaller player in the U.S. market, sells really well in China, and management has noted it is a strong source of profitability in the region.
It might seem radical -- and we'll talk later about similar bold moves Ford has already made -- but perhaps it's time to strip its operations in the region down to only Lincoln and Ford's growing electric vehicle lineup.
During the third quarter of 2022, Ford brand passenger vehicle sales were down 12% in China, compared to the prior year, while Lincoln delivered its best ever third-quarter results, with unit sales up 31%. If Ford were to focus only on Lincoln's luxury lineup of SUVs, it would improve profitability and open the doors to better funding its surging EV lineup.
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Key Data Points
There's a similar story in Europe, although Ford's strength in the region isn't with its luxury Lincoln lineup.
Solution in Europe: commercial vehicles
Europe generated 23% of Ford's fourth-quarter wholesale units, but only 15% of revenue and also wasn't profitable. Europe has bounced around from losses to meager profits for over a decade, but similar to China, it has a bright spot: commercial vehicles.
Ford has been the No. 1 European commercial vehicle brand for eight straight years, which is a first for any OEM. It also boasted a 40% growth in subscriptions for its Ford Pro's paid telematics, which is an end-to-end solution to help business customers lower operating costs of vehicle fleets and increase uptime of those vehicles.
Ford Pro is targeting this business to generate global revenue of $45 billion by 2025 and could turn into Europe's pillar of profits for the automaker.
Already, Ford has said goodbye to some of its most popular passenger vehicles in Europe, such as the Fiesta, and its Lincoln lineup won't even enter the region dominated by European luxury automakers.
It might be time to trim the fat of its traditional vehicles and focus solely on its surging commercial vehicle lineup and Ford Pro business in the region, which would better support profitability.
Not as radical as it sounds
While investors always want to hear growth strategies, and these two decisions in Europe and China would hinder revenue in the near term, they would also focus the company on its strengths and improve profitability -- bigger isn't always better.
These moves may sound radical, but let's remember that Ford has already made similar decisions. Some investors don't realize that Ford has already given up on producing all but high-performance and high-margin passenger cars in the U.S. market -- essentially, only the Mustang remains.
In fact, passenger cars make up less than 3% of Ford's U.S. sales in 2022, and the company is almost entirely focused on larger SUVs, full-size trucks, which haul the vast majority of profits for the automaker, and its expanding EV lineup.
Ford's management is frustrated, and it has internal operation problems to improve if it's to stop leaving billions of profits on the table. Expect to see some radical strategy changes over the next few months as the automaker attempts to convince investors it can improve its bottom line and enable international operations to pull their own weight.
