Ford and GM square off in U.K.

LONDON -- Ford and General Motors are campaigning hard to return to profitability in Europe, and their fight is proving fiercest in their traditional U.K. stronghold.

The country trails Germany in overall car sales in the region, but recent growth there makes the U.K. the largest market in Europe for Ford and GM. Indeed, it's Ford third largest market behind the U.S. and China, and GM's fourth just after Brazil.

But the pressure to beat Ford and squeeze every bit of profit from the country forced the managing director of GM's Vauxhall brand in the U.K. to resign in September. That led to accusations that GM is sacrificing long-term stability to keep its promise that it will become profitable again in Europe in 2016. Meanwhile, Ford and GM are losing market share in the country as luxury rivals eat into their traditional sales.

The U.K. is "fundamental" to Ford's plan to return to profitability in Europe, Lyle Watters, Ford of Europe's CFO, told Automotive News Europe. Ford sold more than 300,000 cars in the first 11 months to make it the No. 1 brand in the country, ahead of No. 2 Vauxhall with nearly 250,000, according to the U.K.'s Society of Motor Manufacturers and Traders.

Add phenomenal sales of panel vans (the Transit Custom was the country's No. 5 seller in November) and the U.K. accounts for around 30 percent of Ford's Europe sales, the company said. Ford of Europe doesn't have a time frame to return to profitability in the region.

Ford and GM's dominance in the U.K. can be explained by their long history in the country. GM bought Vauxhall in 1925, while Ford started making cars there in 1911. Despite Ford quitting its carmaking operations there in 2002, it has continued to hold its top spot over Vauxhall, which makes the Astra compact for it and sister brand Opel at GM's factory in Ellesmere Port in northwest England.

The problem for both brands is working out how to keep sales buoyant without dumping cheap cars on the market. That dilemma put Vauxhall managing director Tim Tozer at loggerheads with his bosses in Europe and ultimately caused him to resign, said a source close to Tozer.

"They wanted him to chase targets he didn't want to chase, and go into channels he didn't think Vauxhall should be in," the source said. "They were hellbent on being profitable in Europe."

Before resigning, Tozer had said that the U.K. was a profitable market. In the last two years the pound has strengthened against the euro, the currency used by the countries that build the bulk of Ford and Vauxhall/Opel cars for Europe. That increased margins and sales as customers took advantage of U.S-inspired finance schemes that kept payments affordable through low interest rates.

Also important in keeping monthly finance payments low are good residuals, but Tozer feared values would be eroded if Vauxhall started pumping more cars into low-margin channels such as daily rental fleets, the source said.

A Vauxhall spokesman denied the company was hurting the bottom line.

"We're not going back to pile 'em high and sell 'em cheap," he said. "We'll be nudging Ford quite hard next year."

Still, Tozer may have had a point.

"They need to make the numbers in Europe but it sounds like they're prepared to sacrifice long-term profit for the short-term gain," said Ian Fletcher, an IHS Automotive analyst in London, adding that factory overcapacity may be partly to blame.

"GM should have made far more of the cuts Ford did instead of having to fill those plants any way they can," he said.

A Ford U.K. spokesman said it had a policy of reducing its exposure to low-value business such as daily rental fleets. He said that retail numbers for 2015 through November accounted for 45 percent of sales, close to the market average of 44 percent for the same period.

The figures were boosted by the Fiesta subcompact, the U.K.'s best-selling car, which took a 6.6 percent share of the retail market in the same period, the company said. Vauxhall didn't disclose its numbers, but has traditionally sold a much greater proportion to fleets.

The Ford spokesman denied its policy would reduce sales, but IHS predicts that the brand will have a drop in U.K. volume over the next few years, falling from an estimated 336,000 in 2015 to 280,000 by 2018. That would bring it much closer to Vauxhall, which IHS predicts will remain flat from the 264,000 it predicts the brand will do this year.

Rivals are also denting numbers. In 2006, Ford had a 15 percent market share, while Vauxhall took 13 percent. But by the end of November last year that had dropped to 13 percent for Ford and 10 percent for Vauxhall. Meanwhile, the combined share of Audi, BMW and Mercedes climbed from 12 to 18 percent over the same period, eating into mass-market sales.

"Luxury brands are now in all the key volume segments, and the number of the value brands are growing so the traditional space for the mainstream brands is not as big as it used to be," Ford of Europe boss Jim Farley said last spring.

Even minivans aren't safe. Through November last year, sales of the BMW 2-series Active Tourer narrowly beat those of the Ford C-Max across Europe, according to JATO Dynamics. Ford is hoping to reverse premium gains with its Vignale upmarket subbrand, launched last year on the Mondeo (Fusion in the U.S). Meanwhile the U.K. motoring media regularly debate whether Vauxhall should drop its name and adopt the Opel name with its German, and therefore more premium, connotations.

Whether or not that happens, customer perception of the brand could bring about the end of the long-standing race to be No.1 in the U.K.

"You want to be seen as profitable and a brand to aspire to as well," said IHS's Fletcher. "You don't want customers to buy your cars just because they're cheap. That's short-termist."