Ford (NYSE:F) said earlier this month that it would add to its already-substantial investment in Russia, taking a controlling interest in its joint venture with a local company and gearing up to launch four new models in the country this year.
Russia has been a sore point for both Ford and General Motors (NYSE:GM), as a steep decline in new-car sales has dashed hopes the country would be the next big emerging-market growth story.
General Motors responded by cutting its losses and essentially pulling out of Russia last month. But now, after taking some very big Russia-related losses in 2014, Ford is effectively doubling down. What's the story?
GM cut its losses, for good reasons -- but Ford chose a different course
Russian car sales have been hammered by economic challenges, political strife, and the sharp decline in value of the nation's currency, the ruble. New-vehicle sales in Russia have fallen every month for over a year now, and were down 43% year over year in March.
The sharp drop in sales led Ford to sharply lower its guidance for its European region last fall. Ford has posted big losses in Europe over the last few years, but the market had long been expected to return to profitability in 2015. That has been a key part of the bullish case for Ford stock, but lately it has become more complicated. Ford now says its losses this year in Europe will be lower than the $1 billion it lost in 2014, in (big) part because of ongoing uncertainty about Russia.
General Motors had less exposure to Russia than Ford, but last month CEO Mary Barra and her team decided it still had too much. The automaker announced in March that it would close its lone factory in Russia and end sales of most of its products in the country.
"We've decided it's better to have a more commercial, for-profit mindset," GM President Dan Ammann recently told Automotive News, archly, when asked about the reasons behind the withdrawal from Russia. But behind the comment, the logic behind the decision was clear: GM has higher priorities elsewhere.
But Ford is responding to the downturn by adding to its Russian presence. Is the Blue Oval throwing good money after bad?
A good moment to make a long-term bet on Russia's future?
I think the explanation here is pretty simple: Ford is taking advantage of exchange rates that favor dollars to boost a business in which it has a long-term view.
Ford was very late to the boom in China's auto market, although it has done a good job of making up for lost time over the last few years. But CEO Mark Fields and team don't want to miss out on another huge opportunity.
Russia isn't going to be a huge market for Ford anytime soon. Ford's joint venture with Russian automaker Sollers lost 5.5 billion rubles ($103.5 million) in 2014. Sales aren't exactly picking up, either: Russian sales of Ford-branded products were down 71% in the first quarter. Just 1,848 Fords were sold in Russia in March.
But by shoring up its investment now, Ford is putting itself in a better position to take advantage of a potential improvement of conditions in Russia in coming years.
Taking control of a still-small venture with (maybe) big potential
Ford didn't disclose the size of its investment, but Reuters reported that the Blue Oval's latest investment in Ford-Sollers effectively gives it control of what had been a 50-50 venture. Ford's equity stake remains at 50%, but it has acquired preferred shares that provide a controlling interest, as well as the right to buy out Sollers in the future.
Ford did say the venture's total investment in its factory near St. Petersburg now exceeds $400 million. The plant recently had a round of upgrades to prepare for the start of production of the Ford Mondeo sedan, the European twin of the Fusion.
The St. Petersburg plant also builds Ford's Focus, and it will switch over to the refreshed version later this year. At about the same time, another Ford-Sollers factory in Tatarstan will begin building the Fiesta for the Russian market, and possibly another Ford model as well.
The upshot: Some short-term pain to make a long-term bet
Russia will probably be a money sink for Ford for a while, though I expect the losses to be modest and well-contained going forward. But Ford doesn't want to risk being left out if and when conditions improve.
For GM, with its massive presence in China and pressing investment needs elsewhere, it makes more sense to cut losses and move on. But for Ford, doubling down might be the wiser course. We'll see how this plays out over the next few quarters.