utomotive News Europe
March 4, 2018 06:01 CET
Ford's European operations are huge when measured by its number of employees: 54,000 people work in sales, development and at its 16 plants in the region. The same is not true for its profits. Ford made a pre-tax profit of $234 million last year in Europe compared with a $7.5 billion (6 billion euro) profit for its U.S business. Put another way, Ford 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 pre-tax profit, a stunning turnaround after losing $3.1 billion in the region between 2011-2014. Ford of Europe said two years ago that it wanted to achieve an operating margin of 6 percent 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, the bulk of Ford’s profits are made in the U.S. Like 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 on the year before, the company said.
The poor performance was because of four main problems, Ford said. 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. The company also 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.
The new year carries over many of the same issues. Ford warned of "continued headwinds" from currency exchange rates and said that it was preparing for prices to rise again for "most key metals" in 2018. It also has another expensive launch to pay for – the new Focus compact, its No. 2-selling car in Europe, debuts this year. Ford's revised margin target of 6 percent for Europe looks a long way off. Last year its margin was 0.8 percent.
Ford's exposure to the UK, the highest of any manufacturer in Europe, continues to hurt. "The fact the UK 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 UK's 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 UK sales are expected to fall another 5 percent.
Brexit could increase costs further in the form of tariffs if the UK splits from the EU's customs union and single market, something the UK government has promised to do following a "transition period" until the end of 2020. The increased costs and complexity resulting from a hard border could also damage profitability at Ford's two UK engine plants, which need to export to Ford's factories in the EU. Ford no longer makes cars in the UK.
Along with its rivals, Ford needs to prepare for the EU’s 2021 CO2 target, which required fleet emissions from automakers decrease to 95 grams per kilometer from 118.1g/km in 2016.
"We think Ford will probably be OK – but they will need to sell about 5 percent sub-50g/km CO2 vehicles – that will be stretching it given their lack of progress with plug-in hybrids and EVs so far," said Greg Archer, who is director of clean vehicles at European lobby group Transport & Environment.
Ford says the Mondeo has a future despite falling demand in its segment.
'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 headwinds. To increase its margin, Ford of Europe will continue cutting costs, which is something 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 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 model lineup. It will achieve this in three ways: sell more SUVs, increase the money it makes on its passenger cars and sell more LCVs, Ford's global head of operations, Jim Farley, told the Deutsche Bank Global Automotive Conference in January.
Ford is relying on demand for SUVs including the Kuga, shown, to boost sales in Europe.
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," Felipe Munoz, global analyst for market researchers JATO Dynamics, said. 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 SUV segment.
Farley said Ford will attack the SUV 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 SUV 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, the LMC predicts.
Over the same timeframe, LMC sees Ford's sales of conventional cars dropping to 36 percent from 41 percent (the remaining volume would come from Ford's LCVs).
Farley promised the new Focus, which is 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.
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 percent to 20 percent of its midsize Mondeo range.
Farley said in January that Ford would "rationalize" the automaker'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 has mostly 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, Ian Fletcher, principal analyst at IHS Automotive said. "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 up product development thanks to greater use of simulation technology.
While Ford says it is committed to Europe, Bernstein's Warburton says remaining 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."
Da quando GM ha venduto Opel a PSA nel mondo automotive circolano voci insistenti di un disimpegno di Ford dal vecchio continente. Il management ha sempre negato queste indiscrezioni eppure questa interessante analisi fatta da automotive news mostra che gli americani saranno costretti a scelte drastiche. Ford Europe rispetto a Gm Europe ha portato a casa risultati sempre migliori ma rimane una divisione con una redditività molto bassa. La brexit è una mazzata durissima ( 600 milioni di profitti evaporati nel 2017) e potrebbero esserci conseguenze ben peggiori nel caso di una hard brexit. Ford ha già chiuso da decenni i propri impianti britannici ma produce in loco ancora motori. I tagli continui non hanno portato a grossi risultati nel 2017 e soprattutto hanno reso la gamma abbastanza esangue. Hackett sarebbe favorevole a creare una Jvs ponendo il 50% delle proprie attività europee con un altro costruttore. Nel frattempo Mondeo e S-Max rimarranno senza eredi.