Ford Is Making GM CEO Mary Barra Look Really Smart

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Several years ago, General Motors (NYSE: GM) began taking aggressive steps to shut down its operations in underperforming markets around the globe. In the intervening years, it has stopped competing in big but unprofitable markets such as Europe and India, as well as Southeast Asia and most of Africa.

One of the first casualties of this retrenchment plan was GM's Russian business, because of a sharp downturn in the auto market there. In early 2015, the General decided to shut down local production in Russia and stop selling most of its vehicle lineup there, with the exception of high-value imports like the Chevy Tahoe, Corvette, and the Cadillac luxury line.

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Ford Motor (NYSE: F) went in the opposite direction, investing for long-term growth in Russia. This turned out to be a very bad move. After four years, Ford has finally seen the error of its ways, and it now plans to follow its crosstown rival by exiting the Russian passenger vehicle market.

Swimming against the tide

Russia's auto market hit a post-recession peak in 2012 but quickly went into reverse thereafter. In recent years, a weak ruble, volatile oil prices, international sanctions, and tough regulations have weighed on international automakers' sales and profitability there.

Many of these factors contributed to GM's decision to exit the market four years ago. CEO Mary Barra and her lieutenants concluded that despite Russia's apparent potential, there was no clear path to profitability there.

Around the same time, Ford decided to double down on Russia. It bought preferred shares in its joint venture with locally owned Sollers, gaining a controlling share of the joint venture. The automaker invested money in localizing its products for the harsh conditions that vehicles have to cope with in Russia. It also spent about $275 million to open an engine plant in Yelabuga in 2015, becoming the first foreign automaker to build engines in Russia.

Two years later, Ford's then-CEO, Mark Fields, took a victory lap of sorts, noting that Ford posted a 10% sales gain in Russia in 2016. That still left its sales volume nearly 80% below the 2008 peak of 190,000, according to Reuters. At the time, Fields was optimistic that the Russian auto market would keep growing in the years ahead and that Ford could continue gaining market share.

Ford will exit the passenger vehicle market in Russia

In hindsight, Fields' optimism was misplaced. The Russian auto market didn't recover nearly as quickly as Ford had expected. Moreover, demand shifted toward lower-priced vehicles: a part of the market where it is challenging to turn a profit in the best of times.

As a result, Ford announced earlier this week that it will exit the passenger vehicle market in Russia. From here, it will focus on building and selling commercial vehicles: primarily its Ford Transit van. It will also hand control of its Russian operations back to Sollers, which will now have a 51% stake in the Ford Sollers joint venture.

In conjunction with these moves, Ford Sollers will close three of its four factories -- including the engine plant opened with such fanfare a few years ago. Ford will also take one-time pre-tax charges totaling $450 million to $500 million, including roughly $200 million of cash costs related to this restructuring.

Profitability must come first

Exiting the Russian passenger vehicle market is just one of many restructuring actions in the pipeline at Ford. Over the next few years, Ford expects to take $11 billion of special charges as it retools its global operations, including up to $7 billion of cash costs. Ford probably won't exit as many markets as GM did -- for example, it is highly unlikely to abandon Europe -- but there is clearly a big need for it to downsize in perennially unprofitable markets and vehicle segments.

Ford's huge restructuring project represents a complete vindication of the strategy Mary Barra has implemented since becoming CEO at General Motors. Barra has been willing to invest huge amounts of money in long-term projects like developing electric vehicles and autonomous vehicles. And GM has continued to invest in a handful of unprofitable emerging markets where it has a leadership position and a realistic path to profitability, like Brazil.

However, Barra has aggressively taken GM out of emerging markets where it was losing money and wasn't a market leader. Even if such markets have long-term growth potential, automakers could have to stomach huge losses for an indefinite period of time -- with no guarantee of long-term profits, particularly for competitors with lower market share.

In retrospect, Ford clearly should have followed GM and begun an aggressive restructuring of its international business several years ago. But late is better than never. With Ford's market cap now more than 30% lower than that of GM -- even though the two automakers generate similar amounts of revenue -- Ford stock has plenty of room to rise if the Blue Oval is able to restructure its business successfully.

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Adam Levine-Weinberg owns shares of Ford and General Motors. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy.