It only takes one glance at Ford Motor Company's (F 0.67%) revenue breakdown to understand just how important North America is to the iconic automaker.
The company's struggles overseas with Europe and China being inconsistently profitable have hindered the automaker's bottom line. That's what makes South America interesting, as the company has incrementally turned its operations in the little-known market to profitability for the first time in a decade.
How has Ford succeeded in South America, and is the blueprint replicable in other overseas markets? If it is replicable, it could be one of Ford's most important strategies in the near term.
The story in South America
Many times investors focus solely on a company's growth through market share, revenue, units sold, or other commonly used metrics -- and that's fine. But at some point Ford came to the realization that it needed to trim its operations overseas to become more profitable.
Bigger isn't always better, and in this specific case, Ford's bottom line became bigger as its market share took a hit. In 2020 Ford's market share in South America checked in at 6.2% and it sold 185,000 vehicles. By the time the calendar closed on 2022 its market share had dipped to 2.1% on sales of 83,000 vehicles -- and it turned its first full-year profit in a decade.
Better still, management believes this profitability isn't a flash in the pan. Sustainable profitability overseas has eluded Ford in multiple markets for many years, but South America could serve as the blueprint to change that.
Turning South America into a profitable region took much effort and restructuring. The company ended production in Brazil that burned billions, and eliminated unprofitable products and the heavy truck business, focusing on cost reduction and launching products such as the Territory, Transit, Escape, and Ranger Storm -- helping the Ranger increase its share of the market and become the No. 2 midsize pickup.
You can see the slow and steady progress in the charts below.
Data source: Ford Motor Company's 2021 and 2022 earnings presentations. Chart by author.
Was this a trial run for Europe?
Ford's profitability in Europe has been problematic for over a decade, but the company has already taken the first step to generate sustainable profitability, much like it did in South America.
Ford will be cutting 3,800 jobs in Europe, roughly 1 in 9 jobs, and moving some of its engineering power and know-how to the United States. Then Ford will work on building its pipeline of new electric vehicle (EV) products, on the way to its full EV lineup target in Europe. In fact, Ford hopes to sell over 600,000 EVs in Europe by 2026, an increase from its mixed product lineup that generated only 517,000 new passenger car registrations in Europe during 2022.
While it has focused on the basics such as cost-cutting, Ford also waved goodbye to some of its highest-selling passenger cars, the Fiesta and the Focus. It has doubled down on selling crossovers and SUVs, which bring higher prices and margins, and it already leads the European market for commercial vans via its Transit lineup.
Generating sustainable profits from Europe take some time, especially considering Ford's EVs won't be profitable until the next generation begins production in 2025. However, as it slowly waves goodbye to unprofitable units and focuses on crossovers, SUVs, and the future of EVs with seven new models in the pipeline by 2024, it's off to the right start even if it possibly hurts market share in the near term.
What's in it for investors?
Ford's plan in South America didn't take long to bear fruit, and if that blueprint of downsizing and focusing on more profitable products cuts market share and volume, it will be worth it in improved profitability.
Further, if Ford can execute similar strategies in Europe and in China, it won't have to rely on North America to generate nearly all automotive earnings -- which would be a huge boost for investors.
North America will always haul in the big bucks for Ford, but it's time to trim the fat so that other regions can at least pull their own weight -- South America has shown it can be done.
