Can Ford weather headwinds in Europe?


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Ford’s European operations are huge when measured by number of employees: 54,000 people work in sales, development and at 16 plants in the region. The same is not true for profits. Ford made a pretax profit of $234 million last year in Europe compared with a $7.5 billion profit for its U.S. business. Put another way, Ford in the U.S. makes $75,000 for each of its 100,000 workers, compared with $4,300 per worker in Europe.

Figuring out how to make Ford of Europe sustainably profitable has become a priority within the company again after last year’s disappointing performance. Hopes were raised in 2016 when the company recorded a $1.2 billion pretax profit, a stunning turnaround after it lost $3.1 billion in the region from 2011 to 2014. Ford of Europe said two years ago that it wanted to achieve an operating margin of 6 to 8 percent within five years. But Europe’s uniquely tricky marketplace has proved nothing can be certain.

Rival General Motors left the market last year, and there are enough similarities between the two to wonder whether Ford might follow. Like GM, Ford sees the bulk of its profits in the U.S. Like for GM, Europe looks more like a distraction than an asset, especially as customer tastes between the two regions widen. “Ford does not seem to have an economically viable business [in Europe] at present,” Max Warburton, analyst with Bernstein Research, wrote in a paper published in January. “Could 2018 see it also slim or exit Europe, given its years of losses in the region?”

Ford’s disappointing result in Europe last year was not because of vehicle sales volume. Across the 50 markets it counts in its European operations, including Russia and Turkey, it sold 1.56 million cars and light commercial vehicles, up 1.4 percent from 2016, the company said.

Rather, Ford cites four main problems. The big one was the decline of the pound following the decision by Britain, Ford’s biggest European market, to leave the European Union. The company said the weaker pound wiped $600 million from its profits. In its annual report, Ford also blamed its European slowdown on the rising cost of steel, which also affected its U.S. earnings. And the company pointed to the expense of last year’s launch of the new Fiesta subcompact, Ford’s best-seller in Europe. Warranty costs were cited as the fourth drag on profits.

Many of the same issues carry over in 2018. Ford warned of “continued headwinds” from currency exchange rates and said it was preparing for prices to rise again this year for “most key metals.” It also has another expensive launch to pay for — the new Focus compact, its No. 2-selling car in Europe. Ford’s margin target of 6 percent for Europe looks a long way off. Last year, its margin was 0.8 percent.

Armstrong

Brexit backlash

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Ford’s exposure to the U.K., the highest of any manufacturer in Europe, continues to hurt. “The fact the U.K. is Ford’s largest market [in Europe] presents something of a headwind to the group’s outlook,” analyst Sammy Chan of LMC Automotive said. The decision to exit the EU has not only depressed the value of the pound, making Ford’s cars more expensive to buy, but also contributed to last year’s 6 percent drop in the country’s car sales. This year, U.K. sales are expected to fall another 5 percent.

Brexit could increase costs further in the form of tariffs if the U.K. splits from the EU’s Customs Union and single market, something the government has promised to do following a “transition period” until the end of 2020. The increased costs and complexity resulting from a hard border also could damage profitability at Ford’s two U.K. engine plants, which need to export to Ford’s factories in the EU. Ford no longer makes cars in the U.K.

Along with its rivals, Ford needs to prepare for the EU’s 2021 carbon target, which requires fleet emissions from carmakers to decrease to 95 grams per kilometer from 118 in 2016. “We think Ford will probably be OK — but they will need to sell about 5 percent sub-50 grams per kilometer CO2 vehicles. That will be stretching it, given their lack of progress with plug-in hybrids and EVs so far,” said Greg Archer, director of clean vehicles at European lobby group Transport & Environment.

‘We plan to stay’

Despite the headwinds, Ford insists it will remain in Europe for the long term. “We are committed, and we plan to stay,” Ford of Europe President Steve Armstrong told Automotive News Europe. He predicted Ford’s European profits will increase in 2018, despite the challenges. To increase its margin, Ford of Europe will continue cutting costs, which it has done for years. After reporting a $27 million operating loss in 2011, the company closed three factories in Europe. Today, Ford of Europe’s assembly plants (excluding Russia) are running above capacity, according to analyst firm IHS Markit, which defines capacity as two shifts a day, five days a week.

In 2016, Ford of Europe said it planned to eliminate about 1,000 white-collar jobs as part of a further $200 million savings drive. Overall expenses have pared back to the point where Armstrong now regularly uses budget airlines when traveling within Europe.

Along with the cuts, Ford plans to increase margins by overhauling its European lineup. It will achieve this in three ways: sell more SUVs, increase the money it makes on its cars and sell more light commercial vehicles, Ford’s global head of operations, Jim Farley, told the Deutsche Bank Global Automotive Conference in January.

Farley: 31 percent SUV share target

Utility push

Farley, who ran Ford’s European business until getting his global job last summer, said the automaker wants SUVs to account for 31 percent of sales in Europe “in a few years,” up from 22 percent now. “Ford’s position in the European SUV segment is still weak,” said Felipe Munoz, global analyst for market researchers JATO Dynamics. The 22 percent figure is below the market average of 28 percent for volume brands in Europe, mainly because of the relatively poor showing of Ford’s EcoSport in the crucial subcompact crossover segment.

Farley said Ford will attack the market by launching small urban crossovers and seven-seat SUVs, but he didn’t go into detail. LMC predicts Ford will launch a Fiesta-based small utility vehicle to replace the EcoSport before 2022 and reveal a seven-seat version of its Kuga compact SUV to better compete against larger SUVs such as Nissan’s successful X-Trail. Those models would push Ford’s SUV share to 29 percent by 2022, LMC predicts.

Over the same time frame, LMC sees Ford’s share of cars dropping to 36 percent from 41 percent. (The remaining volume would come from Ford’s light commercial vehicles.)

Farley promised the new Focus, due to be revealed in April, will “move upmarket with a slightly lower volume.” Like it has done with the Fiesta, Ford will create higher-value versions of the Focus, including an SUV-styled Active model and an upscale Vignale variant.

The Ford Mondeo is safe for now,but Ford says it will “rationalize” its vehicle lineup in Europe.

Premium alternative

Ford is expanding the Vignale trim line as an alternative to premium brands and says demand is building across its models, rising to about 15 to 20 percent of its midsize Mondeo range. Farley said in January that Ford would “rationalize” the carmaker’s lineup in Europe, which would indicate a reduction of models. When asked about the future of the Mondeo and related Galaxy and S-Max minivans, Armstrong said the current models are safe but declined to say whether they would have successors once they come to the end of their life cycles. “We’re not at the point that we need to make that decision,” he said. The three models compete in declining market sectors. While Ford mostly has persisted with minivans as rivals dropped them, the automaker did stop output of the subcompact B-Max minivan last year.

Ford can be flat-footed when it comes to reading product trends, said Ian Fletcher, principal analyst at IHS Markit. “Some of the product decisions/strategy in recent years have been slow out of the gates or have not captured the mood of the market,” he said. Armstrong promises Ford will speed product development thanks to greater use of simulation technology.

While Ford says it is committed to Europe, Bernstein’s Warburton says remaining there may not make sense for Ford in the future. “We think it’s unlikely that Ford will exit Europe in the near term,” he said. “But as the evidence builds that globalization is not driving profitability, the pressure may build.”



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