Standing before a vault in the soaring depository of the 118-year-old Bowery Savings Bank building in New York, Ford Motor (F) Chief Executive Officer Alan Mulally announced a global expansion in early June that would have made old Henry proud. Mulally, revered at the company as the man who spared Ford the indignity of bankruptcy, vowed to push the automaker into Asia and boost worldwide sales 50 percent by 2015, to 8 million vehicles annually. "This is a bank vault behind us," Mulally told 200 investors sipping coffee and munching petit fours. "This is where all the money is, and it'll reveal itself later."
Sadly for Mulally, what came next was a sell-off. Instead of giving Ford's sluggish stock a pop, his agenda spooked investors, who in the next two weeks sent the shares to their lowest level of 2011 ($12.65), down 23 percent since Jan. 1. "The last thing the market wanted to hear from Alan was about emerging markets because of the softness in China lately," says Brian Johnson, a Barclays Capital (BCS) analyst who isn't using Ford's aggressive forecast in his own projections. "A lot of other players have growth plans, too, but the jury is still out on their ability to actually achieve them."
Mulally isn't accustomed to Wall Street skepticism. Since landing in Detroit in 2006, the former Boeing (BA) executive transformed a company that lost $30 billion between 2006 and 2008. He overhauled the model lineup and upped Ford's quality rankings, moves that boosted U.S. market share and generated $9.28 billion in profits in the past two years. Yet when it comes to Asia—and especially China—Ford is an also-ran, with a scant 2.6 percent of the market. While Mulally was busy fixing Ford at home, General Motors (GM) was selling Buicks and Chevys to the Chinese, grabbing 10 percent of that market. "Asia has been a sore point for Ford for years," says IHS Automotive (IHS) analyst Michael Robinet. "GM had so much success in emerging Asia, and Ford was always following along like a baby brother."
Mulally is out to change that. He's on a building binge, spending $1.6 billion in China on four factories, including an assembly plant and an engine factory in the western city of Chongqing. Ford is tripling its lineup in China to 15 models by 2015 and more than doubling its offerings in India to 8 models. By 2016 it will have tripled its dealerships in India and doubled is distribution network in China, where it's currently opening two new showrooms a week.
The early returns are promising: Ford's China sales are up 15 percent this year, three times more than the market overall. And when models such as the Kuga, a small sport-utility vehicle, join the China lineup next year, Mulally is confident Ford can take on leaders GM and Volkswagen. "They are the same people that we compete with around the world," says Joe Hinrichs, Ford's Asia chief, "but we have a broad, full product range in the other parts of the world."
A limited lineup is one reason Ford is still a bit player in emerging markets. It ranks No. 4 in Brazil and No. 5 in Russia, with less than half the sales of GM in each. Ford's share in India is 2.6 percent. "Their ability to play catch-up is the big investment debate," says Jefferies (JEF) analyst Peter Nesvold. "The nice thing about Ford's position is that they're not at risk of losing much share." Because they don't have much to lose.
Mulally says Ford's success in Asia will come from a parade of new models that share mechanical underpinnings worldwide. For example, the Focus small car Ford introduced globally this year is built on the same chassis as nine other models that Ford says will generate 2 million in annual sales. With that volume, Ford will be able to sell many models in China profitably for less than $14,500. Hinrichs says 70 percent of all models sold in China are at that price or lower. "We're not investing this money to lose money," he says. "It's all about scale."
Mulally promises that even as lower-priced small vehicles grow to 55 percent of Ford's worldwide sales (from 48 percent now), he'll boost profit margins to 8 or 9 percent, from 6.1 percent last year. Nesvold figures that translates into doubling Ford's automotive earnings before interest and taxes to $14 billion by mid-decade. International operations would generate half those profits, up from 20 percent today. "This is a very dramatic transformation," Nesvold says. "If they can pull this off, this is a new Ford."
Success is far from certain. Auto sales in China have been slowing for months and actually fell in April. Even with its new model onslaught in Asia, Ford will have holes in its lineup. It has no tiny car to sell in India to take on Tata Motors' (TTM) $2,500 Nano, and remains absent from China's fast-growing, lucrative luxury car market. (Lincoln, Ford's struggling luxe line, is getting a makeover and is years away from being offered outside North America.) The Chinese haven't embraced GM's Cadillac, either, preferring Volkswagen's Audi brand and BMWs. "It's not clear that the Chinese want American luxury," says Johnson. "Bringing Lincoln there might be like bringing American champagne to China."
What gives Mulally's Asian ambitions credibility is Ford's turnaround on his watch. Many on Wall Street and in Washington thought Ford would follow GM and Chrysler into bankruptcy in 2009. Instead, Mulally used the $23 billion he borrowed soon after arriving to rebuild the model line and gain U.S. market share. "This guy has been disbelieved before," says Jeffrey Spotts, a New York portfolio manager for Prophecy Fund who switched from shorting to buying Ford's stock after Mulally's aggressive forecast.
Others aren't so certain. "The size of that number he laid out really caught people by surprise," says Mirko Mikelic, who helps manage a $13 billion fixed income portfolio for Fifth Third Asset Management. "People are taking a wait-and-see approach. They're saying, 'Before hitting the big number, just start out small and show that you can improve your market share in these overseas markets.' "
The bottom line: Mulally has turned around the automaker's finances, but growth in Asia is crucial to his annual sales goal of 8 million cars.