Ford Inches Closer to Volvo Sale, Profitability

By announcing China’s Geely Automobile Holdings (PINK: GELYF) as the preferred bidder for its Volvo unit, Ford Motor Co. (NYSE: F) has passed another recovery milestone.

There’s much left to be sorted out in any possible deal, such as intellectual property concerns, but a completed sale of the money-losing Volvo is just one more smudge that will be wiped clean from Ford’s balance sheet. Ford put the Swedish luxury automaker up for sale in December last year.

“Ford believes Geely has the potential to be a responsible future owner of Volvo and to take the business forward while preserving its core values and the independence of the Swedish brand,” said Chief Financial Officer Lewis Booth. “But there is much work that needs to be completed in the more substantive discussions that are agreed to take place.”

Still, without assurances that it can trust its intellectual property in the hands of a Chinese company, Ford could walk away from a Geely deal. Technology found in Volvos will be used in future Ford products.

Earlier this month, the Federal Bureau of Investigation (FBI) arrested former Ford engineer Xiang Dong Yu, and charged him with the theft of more than 4,000 documents from Ford as he tried to get a job with Shanghai Automotive Industry Corp., Bloomberg News reported, citing a U.S. indictment. The 10-year Ford veteran was hired by Beijing Auto.

“Volvo is completely integrated into Ford’s product development strategy, and Ford should be concerned about where its vehicle architectures will end up,” Michael Robinet, a CSM Worldwide analyst told Bloomberg. “This is akin to selling a room on your house. You can’t separate it easily.”

Putting Volvo on the market is just one of several steps the Dearborn, Mich. automaker has taken to right itself after losing record amounts of money in the past few years. Since 2006, it cleaned out its upper management, sold its Jaguar Land Rover line and took out
an $18 billion loan in 2006 that helped it refuse federal bailout money last year.

Now, it appears Ford is on the brink of the black.

“I think we are beginning to kind of see the fruits of the longer-term efforts,” Barclays Capital analyst Brian Johnson told the Detroit Free Press. “We expect profitability in 2010.”

Ford looks to be headed in the direction of profitability, and the consensus among analyst estimates supports that. It’s still expected to lose $1.34 per share for the year, but 2010 estimates say the automaker will earn 11 cents per share next year.

This year has been a lackluster year for all automakers, but Ford managed to turn the worst financial downturn since World War II into a seized opportunity, whereas its American rivals General Motors Corp. (NYSE: GRM) and Chrysler Group LLC each lost ground, according to CNW Marketing Research Inc.

“The Ford story is that they have taken advantage of the fact that they were the sole domestic brand not to take a government bailout and not to file for bankruptcy,” Efraim Levy, an auto-industry stock analyst at Standard & Poor's told The Wall Street Journal. “But those benefits will fade in 2010 as the weaker competitors distance themselves from the bankruptcy filings and start to introduce some fresh product.”

Ford is also gaining ground in what is now the world’s largest market for automobiles: China. Its September sales grew 79% year-on-year in the Red Dragon, selling 119,338 units. GM is still king there, selling 181,148 vehicles last month. Ford understands the importance of China and is in the process of building its third Chinese auto plant, which will give Ford the capability to produce 150,000 more vehicles annually. It currently makes 450,000 vehicles on the mainland.

“China is one of the few markets worldwide which still keeps growing this year,” Zhang Xin, an analyst at Guotai Junan Securities in Beijing told The Associated Press. “It's obvious any automaker would like to set up plants here.”

Ford choosing Geely as Volvo's preferred buyer lends credence to a Money Morning report written by Investment Director Keith Fitz-Gerald earlier this year, which said that China's acquisition of overseas auto assets could be mutally beneficial to both parties.

"Top-tier managers of China-based companies recognize that the acquisition of overseas assets can strengthen their company’s domestic competitiveness," Fitz-Gerald wrote. "And with a market as big as Mainland China, that’s logical. But what might not occur to Western business leaders is that Chinese executives don’t yet view themselves has having global-branding expertise, particularly when it comes to the so-called 'design elements.'"

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