The Real Reason Investors Should Be Excited for Ford's China Negotiations

For investors, the automotive industry probably seems like a game of whack-a-mole with icons such as Ford Motor Company (NYSE: F) and General Motors (NYSE: GM) constantly reacting to the new issue to pop up. One of the more challenging problems to pop up at Ford was its operations and business in Europe. Europe, an important global automotive market, has an obstacle course of challenges laid out for Ford, but the latter may have a trick up its sleeve to help turn business around – and investors are missing the best part.

How did this happen?

It's been nearly a perfect storm of negative developments for Ford in Europe. The company's business had been under pressure for years, passenger vehicle demand has been weak, electric vehicle (EV) adoption has accelerated more slowly than anticipated, and new competition from highly affordable and advanced Chinese EV makers threatens market share and profitability.

Ford's profitability in Europe has been an up-and-down roller coaster, with previous significant restructuring returning its operations to profitability in late 2020, only to be followed by more bumpy quarters. To make matters worse, Ford canceled popular models such as the Fiesta, Focus, and Mondeo, all while battling high labor, energy, and warranty costs. Thankfully for investors, Ford has a plan to rebuild its business in Europe, and there's also another reason for optimism.

The turnaround plan

Ford essentially has a three-prong strategy to tackle its challenges in Europe. First, the company will focus on the gem of its European business, its Ford Pro commercial vehicle division, which is a higher-margin business than Ford's traditional business division, Ford Blue. The second part of the plan involves Ford significantly refreshing its passenger vehicle lineup with distinct designs and multiple options between hybrids, full-electric vehicles, and gasoline counterparts. Lastly, as always, Ford is aiming to improve scale and cost efficiencies through its operational footprint.

Those strategies will be key to turning around Ford's European business, but there's a big potential development that many investors have overlooked. While some may be quick to joke that Ford's key to beating Chinese competition won't be to produce vehicles for them in Europe, it actually might be.

Take it from Steve Greenfield, Automotive Ventures general partner: "The most important thing is sharing intellectual property," said Greenfield, according to Automotive News. "As the Chinese did to us 20 years ago over in China, we need to figure out how they're building cars faster and cheaper. And if we can make sure that intellectual property gets shared back to our legacy automakers, they're actually going to be more healthy as a result."

Image source: Ford Motor Company.

That's what makes Ford's recent discussions with China's Geely about a partnership in Europe so interesting. Essentially, Ford could produce vehicles for Geely using its excess production capacity in the country, which enables Geely to avoid importing vehicles with expensive tariffs, and in return, discussions are focused on shared vehicle technology, including autonomous driving.

Investors can look at Volkswagen Group's tie-up with Chinese EV maker Xpeng, which is enabling VW to develop vehicles up to 30% faster and 40% cheaper than the German automaker's MEB platform, thanks to the established competitive advantages from Xpeng.

What it all means

Chinese automakers are expanding rapidly around the globe, and currently offer some of the most advanced and most affordable EVs on the market. Detroit autos, such as Ford, need to catch up, and they may need to learn some new tricks of the trade from their competitors. While Ford's turnaround in Europe won't be driven by its potential partnership with Geely, its long-term business is at stake. For savvy investors, these potential partnerships with Chinese EV makers are must-follow developments.

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and Volkswagen Ag. The Motley Fool has a disclosure policy.