Ford (NYSE:F) said on Wednesday that its sales in Europe rose 8% in September, led by a 45% jump in sales of the midsize Mondeo sedan.
That's good news. Europe has long been a trouble spot for Ford. If recent trends hold, the region could finally be on the road to profitability within a few quarters. But the losses are likely to continue when Ford reports third-quarter earnings later this month.
A turnaround plan gets a boost from the European new-car market
Ford's European unit has lost a lot of money over the last few years: $1.75 billion in 2012, $1.5 billion in 2013, $1.1 billion last year, and $199 million so far this year. Former Ford CEO Alan Mulally initiated a restructuring plan for Europe in the fourth quarter of 2012; the losses have gradually fallen as its changes have taken hold.
Under the turnaround plan instituted by Mulally, Ford Europe cut back its sales to rental-car fleets, introduced new-to-Europe models from its global product portfolio that expanded its range, and made changes to its dealerships and retail efforts in a bid to draw more buyers and boost transaction prices.
But an upturn in new-car sales in the region is also helping. Ford -- and many of its rivals -- fell into the red in Europe because new-car sales dropped sharply during the economic crisis and took years to recover.
More recently, a big drop in sales in Russia -- where Ford has made substantial investments -- have held the unit's results back despite gains elsewhere. While rival General Motors (NYSE:GM) essentially packed up and left the world's largest country, Ford said it was taking a long-term view and chose to continue operations.
So far this year, Ford's sales in Europe are up 10%. The Mondeo, the European version of Ford's Fusion, has had a lot to do with that gain. It's new to Europe this year, and it replaces an older Ford sedan (also called Mondeo) that was designed just for Europe.
Ford has also benefited from Europe's increasing interest in SUVs -- but not as much as you might expect.
Ford Europe's SUV sales lag the market, but that could change soon
SUVs account for roughly 20% of new-vehicle sales in Europe, but they're only about 10% of Ford's sales in the region.
On first blush, that makes no sense: Ford's SUV lineup is extremely competitive elsewhere. But as Ford Europe chief Jim Farley pointed out in a recent interview with Automotive News Europe, the dynamics of Europe's SUV market are different from those in the U.S. or China.
The SUVs that have seen big growth in Europe are small -- subcompact -- models. Ford has a Fiesta-based SUV called EcoSport that it originally developed for emerging markets. It has had some success in Europe, but European buyers tend to choose models that are small but relatively luxurious -- and the EcoSport wasn't really designed for that.
One of the top sellers is GM's Opel Mokka, a near-twin of the Buick Encore. Like the Encore, the Mokka is small but plush. That's the formula that sells SUVs in Europe. Farley said that Ford recently gave its version of the EcoSport an overhaul to boost its competitiveness in the region; with the Kuga (a twin of the Escape) and the all-new Edge, he feels that Ford now has a good chance to boost its SUV sales in the region.
The upshot: Progress, but losses will likely continue
Ford Europe lost just $14 million last quarter -- practically breakeven. But CFO Bob Shanks told me at the time that deeper losses were likely in the second half of 2015. Ford is in the process of launching all-new versions of its big (by European standards, anyway) minivans, the S-Max and Galaxy. That, plus the normal seasonal rhythms of Ford's European business, are likely to lead to a wider loss than we saw in the first half.
Things should look better next year. Ford previously said that it expected to post a profit in Europe in 2016. But the ongoing slump in Russia may have thrown a wrench into that plan. We'll find out more when Ford reports earnings on Oct. 27.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.