The Best Thing About Ford's First Quarter

Last week, Ford reported yet another solid quarter, with a pre-tax profit of $2.1 billion and adjusted EPS of $0.41. In North America, revenue grew nearly 20%, and while operating margin contracted by 50 basis points year over year to 11%, this was still sufficient to generate record North American profits. On the flip side, Ford lost nearly $500 million in Europe, as it is absorbing additional costs related to its restructuring and sales remain slow.

The very strong results in North America and the weak results in Europe merely represented a continuation of long-standing trends, yet Ford's improving results in the Asia-Pacific-Africa region were a clear sign of progress. Ford is growing rapidly in China, India, and other key developing markets, and this should help the company become less reliant on the North American market, following the example of top U.S. rival General Motors

Big gains in Asia
Ford has recently embarked on an ambitious expansion plan in China, which involves bringing various new models to the market while building several new joint-venture factories. Ford has clearly benefited from a territorial dispute between China and Japan that began last fall, as Japanese automakers have been hit by a nationalist backlash from Chinese car buyers. At this point, top Japanese automakers Nissan, Toyota Motor, and Honda Motor have all experienced persistent sales declines for six months or more in China.

Ford was ideally positioned to capitalize on this opportunity, and it added over 1% of market share in China last quarter, ending with 3.6% of the market. That still puts Ford well behind market leaders GM and Volkswagen, but it also means that there is plenty of room for growth if the company can maintain its momentum.

Across the whole Asia-Pacific-Africa region, Ford's wholesale unit volume grew 30% over Q1 2012. This allowed Ford to swing from a $95 million loss in Q1 2012 to a small $6 million profit in the region last quarter, despite heavy spending on growth investments. According to Ford CEO Alan Mulally, Ford will start producing meaningful profits in China next year, which will grow significantly the following year, as Ford leverages its fixed costs with higher sales.

The road ahead
Ford's main lever for increasing its market share in China is the introduction of a variety of new models that will address market segments not previously covered by Ford's China lineup. For example, at the end of last year, Ford and its joint-venture partners only sold one type of SUV in China: the Edge. In the first quarter, Ford rolled out three more SUV models: Kuga, EcoSport, and Explorer. As a result, the company now competes in every segment of the Chinese SUV market. With a larger addressable market, Ford has a good chance to continue gaining market share.

Over the next year or two, Ford will follow the same script in other market segments, launching 15 new vehicles in all. Ford will also expand its product lineup significantly in India, and plans to double its market share there with localized versions of its global vehicles. Ford is already making tangible progress in the Asia-Pacific-Africa region by growing sales rapidly, and is building a foundation for future success by reinvesting all of today's profits. As the Chinese and Indian auto markets become increasingly important to global automakers, Ford's investments in the region are likely to seem especially prescient.

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Motley Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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.

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