Ford's bold European gamble
Experts: Success hinges on whether rivals follow suit
Photo credit: REUTERS
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Ford Motor Co. hopes capacity cuts in Europe will make the company profitable there by the middle of the decade.
But whether Ford fully realizes the benefits of its European plant closings may depend on whether rivals follow suit or whether they continue to overproduce and, as a result, offer discounts that destroy profits for the whole industry.
The closings mirror moves Ford made last decade to turn around its money-losing operations in North America -- which roughly coincided with similar capacity cuts by General Motors and Chrysler Group, followed by industrywide discipline on production and pricing.
Ford said it would shut down its Southampton assembly plant and Dagenham tooling plant, both in England, in 2013, and its Genk, Belgium, assembly plant by the end of 2014. It will move production of the vehicles and parts made in those locations to other European factories.
The closures will trim 355,000 units, or 18 percent, of Ford's European capacity. Ford said the moves would save $450 million to $500 million annually.
Ford now projects losses in Europe will exceed $1.5 billion this year, compared with its previous forecast of a $1 billion loss. Ford still expects a full-year global pretax profit. The company is expected to offer more details when it reports third-quarter earnings on Tuesday, Oct. 30.
Amid a long recession, Europe's auto sales have slipped to their lowest levels since 1995, exposing overcapacity that has led to a brutal price war. Volume carmakers have offered average discounts of 20 percent in key European markets.
Europe's continuing failure to address overcapacity has drawn dire warnings from industry executives.
"I am concerned that if we don't find a collective will to resolve this at a European level, this is going to become a permanent crisis," Fiat-Chrysler CEO Sergio Marchionne said this month. Marchionne is also chairman of the European automakers association, ACEA.
Analysts praised Ford's decision not to wait for an industrywide solution.
Said Adam Jonas, Morgan Stanley auto analyst: "You have to give Ford management credit. It's brave and it's hard." Fitch Ratings analyst Brian Bertsch said, "Ford's restructuring plan is the most aggressive announced thus far in the European auto industry."
Ford's plan could "focus the minds of other automakers," said Garel Rhys, president of the Centre for Automotive Research at Cardiff University in Wales. "They're down to their core plants, which have to be the heart of operations in Europe. Going further would mean you're cutting into the viable structure. This is really doing what they did in America before the crash."
The plan is not without risks, though, particularly if other carmakers don't follow suit. "If Ford's European competitors do not also sufficiently right-size their capacity in the region, the company will not fully realize the pricing benefits of reduced capacity," said Bertsch.
General Motors, for example, has struggled to close European plants.
GM's biggest recent move was the negotiation to end production at its plant in Bochum, Germany -- but not until 2016, when the factory stops building the Zafira Tourer minivan. GM reportedly had considered closure of its plant in Ellesmere Port, England. Instead, it agreed to shift production of its Astra compact from Opel's plant in Russelsheim, Germany, to Ellesmere Port and a plant in Gliwice, Poland.
Part of GM's problem is the timing of its product cycle, said Emmanuel Rosner, a New York analyst at Credit Agricole Securities.
"Their product cycle is such that their plant closures probably won't happen until at least 2016," Rosner said. "So we're probably talking about five more years of losses before they can get to breakeven. That's a big difference from Ford." The Ford vehicles built in Genk and Southampton are at their end of their cycles, making closures now easier.
Also, Ford had the advantage of closing plants in England and Belgium, said Jonas. For GM, he said, "It's harder. A lot of GM's unused capacity is in Germany. These are more aggressive unions."
So GM is looking elsewhere for cost savings. Last week, GM and alliance partner PSA Peugeot Citroen said they plan to co-develop four new vehicle platforms: A compact van or crossover, a small car, a low-emissions small car and a mid-sized car. The first cars on those platforms are expected to arrive by the end of 2016.
They also are moving ahead with a joint purchasing organization that, the companies say, should combine with the shared vehicle platforms to save $2 billion over five years.
You can reach Bradford Wernle at bwernle@crain.com.
