When Ford of Europe President Jim Farley told Automotive News Europe in January that he wanted the U.S. automaker to achieve an operating margin of 6 percent to 8 percent in the region within the next five years I was skeptical.
At best, European volume automakers reach a 4 percent operating margin – globally – and that is only during years when market conditions are favorable. That is why PSA Group's surprise 5 percent margin nearly qualified the mass-market brand for a parade in Europe.
Meanwhile, an 8 percent margin is the minimum profitability expectation – also globally – for BMW, Audi and Mercedes-Benz.
But neither PSA nor the German premium automakers are bold enough to publically disclose their European profits.
That is why Ford of Europe's 6.3 operating margin in the first quarter and its $434 million pre-tax profit were so impressive, especially since the automaker lost $42 million during the same period last year.
But was Ford of Europe's Q1 success just a fluke result of economic tailwinds and its new way of accounting pensions? Farley said it was not. "Our first quarter was an exceptional result, but we are on the right track and trend, because we grew revenues and cut costs, which is the magical operation leverage," Farley told me.
He broke down some of the key factors that helped make Q1 Ford of Europe's best quarter since 2008.
Britain: Ford's No. 1 European market is the UK, therefore the automaker really benefits in March when sales spike because of the country's twice-a-year number plate change. (In the first quarter 771,780 cars were sold in the UK with 518,707 of those sales coming in March).
LCVs: Ford calls itself Europe's top seller of light commercial vehicles and Farley said demand for the automaker's vans and pickups contributed significantly to the $160 million improvement it made from selling a better mix of models in the quarter. Farley declined to reveal the profit margin he gets from Ford's LCV lineup, but analysts say it is at least 10 percent.
Top trim lines: Ford's model mix also improved in Europe because it sold more high-specification vehicles. Ford's numbers showed that 60 percent of Q1 sales came from its more profitable Titanium, Vignale and ST trim lines. That is an improvement of 4 percentage points on the first three months of 2015.
Top models: Another reason for the improved mix was strong demand for high-margin models such as the Mondeo midsize sedan, S-Max large minivan and the Ranger, which Ford says is Europe's top-selling pickup.
Lean machine: Ford of Europe cut costs by $164 million during the quarter, which is equivalent to a third of its Q1 pre-tax profit.
When I asked Farley whether he was ready to promise that this level of profit would be commonplace for the rest of 2016 he wouldn't.
He has some good reasons to avoid making any bold predictions. The third and fourth quarters are typically weaker because most European factories shut temporarily during the summer and the Christmas holidays. Ford's industrial costs will rise in the second half as it makes the switchover to the next-generation Fiesta, which is expected to debut in November.
On the plus side, Ford will end the year with a new version of the Fiesta, which is Europe's top-selling subcompact in its showrooms. To further increase the Fiesta's appeal Ford is expected to extend its top-of-the-range Vignale trim line to the car - a move that is sure to help boost margins for the automaker in Europe's most competitive segment. The other Fords with near-premium Vignale variants are the Mondeo, Kuga, Edge and S-Max.
Ford is also poised to get a boost from the launch of the U.S.-sourced Edge large SUV and the revamped Kuga compact crossover. Ford expects the two vehicles to help it increase its European sales of high-margin crossovers by 30 percent this year and push its full-year SUV/crossover sales to more than 200,000 for the first time in Europe.
Despite having so much to be bullish about, Farley remained loyal to Ford's current mantra on Europe, which is that the automaker expects to exceed the $259 million profit it made last year. Given Ford's very strong start to the year, it is a safe bet that it will easily surpass that conservative goal.