Ford is redirecting spending in Europe away from cars to focus on more profitable crossovers and commercial vans to help return its operations in the region to profit.
Hit by Brexit and a big consumer switch to crossovers, Ford’s European operations swung to a $73 million pretax loss in the second half from an $88 million profit last year.
Announcing the results on Wednesday, CEO Jim Hackett said: “We're extremely dissatisfied with our performance in Europe.”
Ford now expects a full-year loss in Europe after earning $234 million in the region last year.
CFO Bob Shanks said the bulk of Ford’s European vehicle range was unprofitable. “The low-performing part of our portfolio represents a majority of our volume, revenue and capital deployed in the region,” he said. This consisted “principally of cars and multi-activity vehicles [minivans] such as C-Max,” he said.
Ford’s Transit van, Kuga crossover and Ranger pickup and “selected imports” are selling profitably in Europe, Shanks said, without naming the imported vehicles. They are likely to include the Edge midsize crossover and the Mustang sports car.
Shanks said the vehicles represented more than 200 percent of Ford’s profits in Europe, despite accounting for less than half of its volume and revenue.
Europe needs reboot
Jim Farley, Ford’s head of global markets, said commercial vans are earning 13 percent profit margins for the automaker in Europe.
Ford is shifting its focus to concentrate on vans and crossovers to hit its long-term target of a 6 percent margin in the region, Farley said.
“Clearly we have to redesign Europe, centering the operations on our profitable LCV business,” he said. SUVs were also part of that plan. Capital allocation plans now align with the SUV and the LCV business opportunities, Farley said.
Ford is making the right move, said Ian Fletcher, principal analyst at IHS Markit. “Ford cannot afford to just tinker. They have undertaken restructuring in the past and they’re still moaning about the lack of profitability in the region. They have to take a big step or they will be in the same situation down the line.”
Ford has attempted to boost margins on its Focus compact and Fiesta subcompact cars by offering different variants designed to increase its selling price, including an Active crossover-inspired version and an upscale Vignale-badged model.
The tactic isn’t paying off. “New products are delivering incremental profit but lower than planned,” Ford indicated in its second-quarter regulatory filing.
Margins were being “compressed” by a “weaker channel mix, lower net pricing and exchange headwinds,” the company said.
Ford has been hit by exchange headwinds mainly from the UK, its largest market in Europe, after the British pound lost value following the country’s decision to leave the EU.
The pound’s fall explains the “majority of our deterioration” in profit in Europe, Farley said. “In 2016 we made $1.2 billion in Europe and most of it was in the UK. Brexit and the continued weak sterling has been a fundamental headwind for our European business,” Farley said.
He acknowledged that Ford has been slow to expand in the crossover segment in Europe.
“One of our underlying issues is that we are behind on the shift to utilities and now our portfolio under-indexes on this highly profitable and growing segment,” he said on Wednesday’s earnings call.
Ford currently sells three crossovers in Europe: the small EcoSport, compact Kuga and midsize Edge. Kuga and EcoSport sales in Europe reached a record in the second quarter, Ford said.
Ford described its Kuga as “aging” in its filing and said new launches will increase its product mix by 2020, indicating new models are coming soon.
A Fiesta-based replacement for the EcoSport is due in 2020, analyst firm LMC Automotive predicts.
Products under threat
Ford singled out the C-Max compact minivan on its investor call as under-performing in Europe, indicating it could stop production of the car in the region.
Sales of the C-Max slid 18 percent in the first half to 31,888, figures from JATO Dynamics show. Also under threat is the Mondeo midsize car, which is a version of the U.S. Ford Fusion. Ford has said it would phase out U.S. sedan sales, including the Fusion, by 2020. The related S-Max and Galaxy large minivans could also be dropped.
Alongside redirecting r&d spending away from cars and toward vans and SUVs, Ford said it also planned to continue to “aggressively” cut costs and get new products to market quicker in Europe.
The company said in June it would close its Blanquefort gearbox plant in Bordeaux, southwest France, if no buyer was found.
On Wednesday’s call CEO Shanks said Ford also will rely more heavily on partnerships to turn Europe around. “It's important to recognize that partnerships, which are a part of our fitness toolkit, are already an integral part of our European operations and going forward we expect them to play an even greater role,” he said.
Ford has a long-term partnership with PSA Group on engines. In June it signed an agreement with Volkswagen Group for a potential an alliance on commercial vehicles, as well as other, non-specified projects.