Over the past several years, Ford Motor (NYSE:F) has been investing billions of dollars in Asia. As part of the company's restructuring plan, and to help diversify Ford's profit sources, Ford aimed to increase its presence in some of the largest and fastest-growing markets in the world, especially China. In 2012, more than 100% of Ford's profit came from the North American automotive sector; the rest of the company combined for a loss.
The key to gaining market share in China and other large Asian economies is Ford's plan to bring new "global" vehicles to these markets. For example, Ford is introducing 15 new models in China between 2012 and 2015. These model introductions -- along with a territorial dispute between Japan and China that sparked anti-Japanese protests in China -- have led to incredible sales growth for Ford in China.
However, due to the heavy level of reinvestment and rapidly growing manufacturing capacity, Ford has not been able to turn that sales growth into strong profits -- until now. Last quarter, Ford earned $177 million before tax in its Asia Pacific Africa region, up from just $6 million in Q1, and a $66 million pre-tax loss in Q2 2012.
This strong result validates Ford's investments in the region. It also points to the potential for a much higher profit contribution from the region a few years down the road, after Ford has grown into its bigger manufacturing footprint.
Catching up in China
Ford's investment in Asia -- and particularly China -- is definitely warranted given that China has already surpassed the U.S. as the largest auto market in the world, and continues to grow. Detroit rival General Motors (NYSE:GM) was way ahead of Ford in penetrating this market. Ford China set a record in 2012 with over 626,000 vehicle wholesales, but that paled in comparison to GM's more than 2.8 million vehicle sales in China during the same period.
Obviously, Ford is not going to challenge GM for the market share crown for the foreseeable future. However, it grew China wholesales by an amazing 47% for the first half of 2013, putting it on pace to surpass last year's record sales level by late September or early October! By contrast, GM has grown China sales by a more modest 10.6% year to date, albeit from a much higher base.
As newly minted COO Mark Fields noted on Ford's earnings call this week, the recent gains in China have been driven in large part by excitement about Ford's growing SUV and crossover lineups. Moreover, Ford has been expanding its dealer network in order to gain a foothold in some of China's smaller cities. These initiatives should provide a continuing sales tailwind in 2014 and 2015.
Strong across the board
While China has been the biggest emerging-market success story for Ford in the last 12 months, the company is performing well in other Asian markets as well. Ford made double-digit sales gains in the rest of the Asia Pacific Africa region, which contributed to its growing market share and profitability overseas.
Ford still makes essentially all of its profit in North America, but the company's recent results demonstrate that this situation will not last long. Losses in Europe are moderating, while South America is turning around, and the Asia Pacific Africa region appears poised for strong revenue and profit growth over the next several years. All of this will boost Ford's earnings while also diversifying its profit base, which is good for the company's long-run health.