Why Success in China Is So Important for Ford's Stock

Despite being very late to the party in China, Ford has done an impressive job over the last several years to battle back and take a surprising amount of market share from the incumbents. Ford is now expected to control 5% of the Chinese market by the end of the year, an impressive feat considering that the figure is double the share the company had just two years ago.

Looking longer term, Ford expects 40% of its revenues to be from its Asia-Pacific-Africa region by the end of the decade. If Ford is able to hit this goal, margins will be extremely important. Watch the video below as Motley Fool analyst Brendan Byrnes explains why margins will be lower in that segment than in North America, and why there is still a tremendous opportunity in Asia for Ford. 

A transcript follows the video.

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Brendan Byrnes: Hey Fools, I'm Brendan Byrnes, an analyst here at The Motley Fool.

We're talking about Ford in China, a market that historically Ford has neglected, but it's coming back strong right now. Ford expected to have 5% of the Chinese market by the end of the year, which may not sound like a lot, but when you talk about doubling the market share in less than two years for Ford in China, it's incredibly impressive.

Looking at this from an investing point of view, they basically broke even last year in their catch-all Asia-Pacific-Africa segment, that China is a part of. But they have been profitable in that segment for four consecutive quarters, so things are looking up.

China is a big part of that, and I really like their strategy here, going forward. They plan on making 1.2 million vehicles in China over the next two to three years. They're also introducing new vehicles, including SUVs, and Chinese customers have been very receptive to these vehicles, so that's certainly a good sign.

Ford's actually expecting 40% of its unit sales to come from China by the end of the decade; talk about an incredible stat. It just shows you the opportunity that auto makers still have in China, despite maybe a little bit of a slowing economy there, or not growing quite as rapidly as it has in the past.

One thing that Ford investors must keep an eye on when it comes to this segment is margins. They don't break them out specifically for China -- Ford doesn't -- but when you look at their overall segment as we talked about earlier, Asia Pacific Africa, last quarter Ford had 5.8% operating margins in this segment, significantly less than North America, 10.4%; incredibly strong margins in North America.

Why are there smaller margins here? A couple reasons. One, you have to operate basically through a JV, which takes a lot of the profits from Ford, and also F-150 trucks are huge in North America, really driving those margins up.

It's been said that you can make as much as $10,000 on an F-150 pickup, just pure profit for Ford, whereas they might make about a grand in normal vehicles. That definitely hurts them as far as margins go, but the opportunity is still huge here.

One of the reasons I still remain bullish on Ford, despite its recent run-up from around $9 a share to sitting around $7 (Editor's note: Brendan meant to say $17) now in just about a year -- a little bit over a year -- North America still looking great for Ford, Asia-Pacific-Africa should really start to contribute meaningfully to the bottom line over the next couple years.

If they can combine that with breaking even in Europe, we're talking about a great story here for Ford, and should add quite a bit to the bottom line and to earnings per share for investors.

The article Why Success in China Is So Important for Ford's Stock originally appeared on Fool.com.

Brendan Byrnes owns shares of Ford. The Motley Fool recommends Ford. 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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