This is going to be an interesting race, the one to see which car company is the most profitable in the world. Will it be a big, multi-brand automaker from Germany, or a big, mostly one-brand automaker from the United States?
Will the winner be Volkswagen AG or Ford Motor Co.? Right now Ford is in the lead.
On Tuesday, Ford said it earned $2.6 billion in the first quarter (all figures in U.S. dollars). Today, VW said first-quarter profit more than tripled thanks to the success of the VW and Audi brands in China. Bloomberg reported that VW Group net income increased to 1.71 billion euros or $2.51 billion from 473 million euros a year earlier.
VW CEO Martin Winterkorn said that for now China is the company's ace in the hole. He noted that rising demand in China will help boost revenue and operating profit this year. VW's first-quarter deliveries in China, the world's largest automotive market, climbed 20 per cent.
Ford? Ford essentially has no presence in China at all, though the company has sent one of its best, smartest executives – former Ford of Canada CEO Joe Hinrichs – to run its Asian operations with specific instructions to boost Ford's presence in China.
But let's face it: VW has a huge advantage over Ford in China. Ultimately, the race to become the world's most profitable car company could be won or lost there. As Moray Callum, head of Ford design in North America told me last week in New York at the auto show, "Get used to it. We're all going to design cars for China and turn around and sell them here (in North America.)"
VW's other main advantage over Ford is Audi, its high-volume luxury brand. Audi accounted for 1.1 billion euros in operating profit for the VW Group.
At Ford, the luxury side of the equation is inconsequential. The Lincoln brand may be first in J.D. Power's three-year Vehicle Dependability Study, but by all reports it contributes almost nothing to Ford's bottom line – certainly nothing in comparison to Audi.
On the other hand, it's possible to argue that Ford has an advantage as a two-brand car company – Ford and Lincoln. Since 2006, Ford has shed all its other distracting and money-losing brands, including Land Rover, Jaguar, Aston Martin and Volvo.
By contrast, the VW Group with its 10 brands must absorb losses at its SEAT subsidiary in Spain (a 12 million euro loss) and at Bentley (a 25 million euro loss). Porsche, too, is a drain, though that will change once losses related to Porsche's failed takeover of the VW Group work their way through the system.
As for Ford, three key points jump out and all will factor into the race to become the most profitable car company in the world:
First, Ford has turned around its European business. Ford's operating profit in Europe nearly tripled from a year earlier to $293 million.
Second, Truecar.com in the U.S. says Ford's average transaction prices climbed eight per cent to $33,173 in the first quarter compared to $30,658 a year ago. That's a big gain, given Ford is transitioning away from a heavy reliance on pickups and SUVs for earnings to passenger cars, especially smaller ones such as the Fiesta and Focus.
Finally, Ford said it ended the first quarter with automotive gross cash of $21.3 billion, up $800 million from the end of 2010. Ford reduced debt in the first quarter by $2.5 billion during the latest period, leaving it with $16.6 billion in debt.
That from a company that in 2006 borrowed some $22 billion simply to survive and pay for the total restructuring that is now showing real results. As debt is paid down, lower borrowing costs will help to pad Ford's bottom line.
No one really can know how the next three quarters will shake out and there are plenty of issues at play, all of which are beyond the control of any car company. Increasing commodity costs, higher fuel prices, seasonal factors, extra costs related to stricter fuel economy and emissions regulations and fickle consumer tastes all make it tough for car companies to plan their businesses.
We know this, though: Of all the car companies in the world, it looks like for 2011 Ford and VW lead the pack in planning and executing their businesses in a wickedly unpredictable global marketplace. No other car company is likely to challenge these two for the title of world's most profitable automaker.
The race is on.
