VW, Ford Van Venture Might Lead To Something Bigger.
“It’s a big leap from “investigating several joint projects” to believing that Ford and VW are about to reshape the automotive landscape”.
Volkswagen and Ford said their collaboration plan was limited, but the news inevitably spurred speculation that there might be more ambitious plans afoot.
Ford and VW announced they were thinking about designing and making vans and commercial vehicles together. Ford said in a statement that the potential alliance would not involve equity sharing.
Speculation has been growing that Ford might seek to dispose of its unprofitable European operation, as part of its corporate fitness plan aiming to cut $25.5 billion in costs by 2022. But its commercial van business in Europe is said to be highly profitable, with margins often comparable to BMW, Mercedes and Audi’s closer to 10% on upmarket vehicles.
Bernstein Research analyst Max Warburton said the Ford/VW probably wouldn’t be more than a series of joint projects.
“But this won’t stop the market discussing whether this marks the start of something bigger and may herald a swap of assets, or even more,” Warburton said.
“Ford is strong in U.S. light trucks, but struggling in Europe. VW is strong in Europe but almost irrelevant in the U.S. and hopeless in light trucks. Both have issues in Latin America, particularly Ford. Ford is behind VW in electric vehicles. Ford is a million miles from VW in China. Scale doesn’t solve everything, but there may be some logic in working together on specific projects,” Warburton said.
Investment researcher Evercore ISI was relaxed about the deal, saying very little had been agreed, and saw limited gains for Ford’s vans.
Will it follow GM?
Investment bank Morgan Stanley has speculated that Ford might follow the lead of General Motors, which dumped its chronic loss making European subsidiaries Opel and Vauxhall last year. Morgan Stanley recently renewed its doubts about Ford’s European operation, valuing it at a negative $5 billion. Morgan Stanley said Ford Europe has posted a pre-tax loss 12 times since 1999, and calculates that it lost an accumulated $3 billion since then.
“For 2018, we forecast Ford Europe to post another loss and we expect the trend to continue in each of 2019, 2020, and 2021. By our estimates, Ford Europe is clearly the least profitable (manufacturer) in Europe,” Morgan Stanley said.
Last year Ford Europe profit fell 81% to $234 million, hit by rising costs and Brexit related exchange rate problems with Britain’s currency. Ford Europe said it expected 2018 to be more profitable than 2017, and the margin target remains 6%. In the first quarter of 2018, the margin slid to 1.3%.
Bernstein Research’s Warburton conceded that Ford and VW were careful to spell out the limited nature of the potential deal.
“It’s a big leap from “investigating several joint projects” to believing that Ford and VW are about to reshape the automotive landscape. But it’s not insane to consider the possibilities. Some form of asset swap might help VW and Ford lower their invested capital and raise their returns. We see these discussions as a positive step,” Warburton said.
According to JATO Dynamics, Ford has been the leader in the European van market since 2016, with a strong position in the small commercials segment and pickups. Volkswagen has posted a continuous decline in the small commercial segment. In 2012 it dominated with 26 per cent market share, but last year this fell to 17.7 per cent.
“Most of the small and midsize vans come from joint-ventures or alliances like PSA-Fiat, PSA-Toyota, and Renault-Nissan-Mitsubishi-Mercedes. Only Ford and Volkswagen have been out of this way of building LCVs,” said Felipe Munoz, global automotive analyst at JATO Dynamics.
“We must also remember that there is a lot of LCV in mind in the recent “deal” between Daimler and Geely. This is also a reason that explains this new alliance. Europe is certainly a headache for Ford, but partnering with Europe’s top maker could make things a bit easier, and Volkswagen could also find a way to improve its position in the LCV market,” Munoz said.