Ford’s (NYSE:F) October 1 announcement that it was forming a joint-venture partnership worth $275 million with India conglomerate Mahindra & Mahindra (OTCMKTS:MAHMF) did little to move Ford stock.
In fact, F stock lost almost 3% during the October 1 session.
Why such a tepid reaction? After all, this partnership could generate significant future vehicle sales in both India and other emerging markets.
Well, for one, Ford has a $36 billion market capitalization. That’s true despite the gradual decline of the F stock price over the past five years. Plus, Ford has global revenue of more than $160 billion and free cash flow closing in on $9 billion. In other words, $275 million amounts to peanuts for one of Detroit’s “big three.”
That’s how an outsider might view the announcement. However, the reality is that Ford needs to focus its energy on fewer bets around the world.
India’s been a tough nut to crack for the company. By partnering with Mahindra, a conglomerate based on the ground in India, it’ll be working with a company that’s on two of Forbes’ annual lists: Top Regarded Companies 2019 and Global 2000 2019.
What Does Ford Get?
The company gets a chance to save face in a country where it’s failed miserably to generate any real traction. Historically working against Ford stock are lower-priced competitors such as Suzuki Motor (OTCMKTS:SZKMF). Suzuki’s Alto at $4,100 was India’s best-selling vehicle in the first half of 2019.
By comparison, Ford’s lowest-priced vehicle in India, the Figo, costs 80% more than the Alto. It simply can’t compete.
So, it’s taking an impairment charge of up to $900 million in the third quarter against the value of its fixed assets that are being thrown into the joint venture. It’s a small price to pay for maintaining a presence in India.
“This move gets Ford’s underperforming assets in India off its books, which should help clean up its balance sheet a bit,” said John McElroy, veteran industry analyst. “Kudos to Ford for not throwing in the towel altogether and abandoning the market. But this is another example of how big automakers struggle to design low-cost cars for developing markets.”
Sometimes even the biggest companies have to admit when they’ve failed. In Ford’s case, it’s had two decades to gain traction in the world’s fourth-largest automobile market. But even iconic Ford has failed to do so.
“Strong alliances like this play a crucial role in assuring we continue to achieve our vision while at the same time staying competitive and delivering value to our global stakeholders,” CEO Jim Hackett said in a statement.
In this instance, 49% of something is better than 100% of nothing.
What Does Mahindra Get?
Mahindra is investing $100 million for its 51% interest in the joint venture with Ford.
“Valued at…(US$275 million), the [Mahindra-Ford] joint venture will drive enhanced competitiveness through greater economies of scale across the automotive value chain, including optimised sourcing, product development, use of relevant technologies and a global network,” Mahindra said in a statement.
The joint venture will have a 14% market share in India and will be EBITDA positive in the first year of operation. This is expected to get going in mid-2020.
More importantly, Mahindra gains access to better technology, not to mention the Ford brand. The joint venture will release three new SUVs under the Ford brand utilizing the Mahindra platform and powertrain. This measure should result in vehicle prices more in line with the Indian market.
Additionally, this deal allows Mahindra to leverage Ford’s size to grow its business in India and other emerging markets at a very inexpensive price.
What Do Owners of Ford Stock Get?
Ford has spent more than $2 billion in India to gain a 3% market share. That’s abysmal.
The company had two options: Abandon India entirely or partner with another company that has a permanent and vested interest in the Indian automotive market.
Given the size of the Indian market and the amount of capital Ford’s already sunk into it, the choice for Jim Hackett was an easy one.
Long term, this could be very good news for Ford stock.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
