Despite a Profit Blip, Ford's Remarkable Recovery Continues
byOct 27th 2011 7:00AM
Are things really that bad at Ford? You'd think so, given that after Ford (F) reported its third-quarter earnings Wednesday morning, the stock market responded by driving the company's share price down sharply -- as much as 6% in early trading.
Maybe investors are disappointed by the headline profit number -- $1.65 billion, a bit lower than the $1.69 billion posted by the company in the third quarter of 2010. Perhaps they're concerned by a small decline in the company's pre-tax operating profit, though it still beat analyst estimates.
But considering the tough economic conditions Ford faces in markets around the world, those are quibbles that overlook the larger story: This company has become very strong, thanks to its relentless focus on a surprisingly simple plan.
And given where it was just a few years ago, that's a huge change.
An Exceptionally Solid Foundation for Growth
As recently as a couple of years ago the company remained in a precarious state: It was just barely profitable and was carrying a truly staggering debt load that peaked at more than $34 billion -- not far below its market cap at the time.
Just under the hood, however, things were changing profoundly: Ford's newest products weren't just decent, they were excellent -- good enough, finally, to compete with the best from Toyota (TM) and Honda (HMC) on their own terms.
Ford CEO Alan Mulally, hired away from Boeing (BA) by the Ford family in 2006 and charged with nothing less than saving the company their grandfather Henry had founded, was promising big results -- and overdelivering, quarter after quarter. Wall Street was starting to notice, as were consumers: Ford's strong new products drove big sales gains as archrival General Motors (GM) struggled to overcome the stigma of bankruptcy.
The Plan That Changed Everything
Mulally's plan to revive the Blue Oval, called "One Ford," was deceptively simple: unify Ford's far-flung divisions and fiefdoms into one company, working in sync, with one set of products. It sounds easy, even no-brainer obvious. But the details turned out to be fiendishly complicated.
For example, most of the Ford models sold in Europe had nothing in common mechanically with the models sold here in the United States. Even cars with the same name and market niche, like the Focus, were built on completely different underpinnings.
Creating two different versions of cars like the Focus required two different, separate development programs -- each costing hundreds of millions of dollars and tying up hundreds of employees for as long as three years. Ford did it that way because it was the way Ford had always done it. But the need to squeeze costs from two different development programs meant -- again, to take just one example -- that the compact car Ford sold in the U.S. wasn't really competitive with the best of the imports. It also wasn't particularly profitable, which is why Ford depended so much on its more profitable trucks and SUVs, and why the company, like its Detroit counterparts, suffered so badly when gas prices rose and SUV sales stalled.
The Key to Ford's Remarkable Success
It took awhile to bear visible fruit, but Mulally's plan changed all that. Ford still makes plenty of money on its trucks and SUVs here in the U.S., but it's no longer dependent on them.
Unlike in the old days, it has excellent small cars, developed by its engineers in Germany and built and sold here in North America, where they generate substantial profits.
By reducing the number of products it had to develop around the world, Ford is able to lavish more time, money, and care on each one. The new Focus, for instance, is built in Russia, in Germany, and in Michigan. Those factories each build the same car, with minor changes to meet different countries' safety rules -- but it's the same car, engineered by the same team, using parts that are the same around the world.
That has given Ford the ability to make inroads in emerging markets like Russia, China, and India, as well as renewed strength in Europe and Latin America. And those strong products have driven strong profits in the U.S., which Ford is reinvesting in the next generation of strong products -- as well as in factories in those emerging markets that could drive substantial new growth for the company in coming years.
Poised for Future Success
Ford may be facing some economic headwinds at the moment, and factors like rising commodity prices could squeeze its profits a bit in coming quarters.
But put simply, automakers live and die by the strength of their products. Mulally's "One Ford" plan has given the Blue Oval brand something that it arguably hasn't had since Henry's day -- a lineup of no-excuses products that can compete well around the world. That, plus the company's ongoing (and relentless) focus on containing costs, should ensure that Ford's string of profitable quarters continues -- even if the world's economies start to head south again.
At the time of publication, Fool contributor John Rosevear owned shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors.