Ford Motor's International boss, David W. Thursfield, has sent Ford of Europe its marching orders: Get the fourth-quarter numbers back in the black. The top brass at Ford Motor Co. (F) in Dearborn, Mich., want visible proof that the elusive turnaround -- promised for three years now -- is nigh. Last month, Ford announced it expects its European unit to lose $1.2 billion in 2003, plus second-half restructuring charges of as much as $656 million.
Eking out a small fourth-quarter operating profit is clearly just the start. Despite all the whittling and reengineering to date, the $19 billion unit still suffers from a bloated cost structure and models that make European drivers yawn. Unless new products can recharge sales, Ford's position is likely to weaken further. UBS Warburg (UBS) analyst Saul Rubin forecasts a 2004 loss of $400 million for Ford Europe. "History does not offer much comfort about the ultimate success of these efforts," says Scott Sprinzen, auto credit analyst at Standard & Poor's in New York, citing repeated attempts to fix Ford Europe. "We believe there's a risk of additional restructuring."
RED INK AND RED FLAGS
Ford's anxieties about Europe go far beyond stemming the losses from a large division. In late 2001, when Ford's North American operations were floundering, new CEO William C. Ford Jr. adopted Ford Europe's two-and-a-half-year-old turnaround plan as the blueprint for repairing the No. 2 carmaker's core auto operations at home. So red ink in Europe is raising red flags about Ford's broader turnaround efforts.
While the carmaker is progressing toward its goals in cost cutting, plant closings, factory flexibility, and quality in Europe and the U.S., the success of its next-generation models is still uncertain. In Europe, Ford has delivered more than 80% of the new vehicles it promised would revive sales, but market share remains weak. In the U.S., where Bill Ford has promised "a product-led recovery" that is just kicking off now, investors remain wary. That's why Rubin titled his latest Ford report: "If Europe Is the Template, Proceed with Caution."
When it comes to the industry mathematics in Europe, Ford's in a bind. Steadily shrinking sales and ebbing market share make it doubly difficult to turn a profit, and the huge fixed costs of excess capacity can quickly wipe out the most diligent effort to cut costs. Ford Europe sells nearly 300,000 fewer cars annually in Western Europe now than it did a decade ago. In Germany, Europe's largest market, Ford's auto and commercial vehicle sales were down 9.8% in the first 10 months of 2003.
The already brutal competition is bound to ratchet up as the Japanese prepare for a major European offensive. Analysts say Ford is among the auto makers most vulnerable to losing market share to Toyota (TM), Nissan (NSANY), and Honda (HMC). To hold their ground, weaker brands such as Ford and Fiat are resorting to profit-eroding discounts. "I cannot see anything happening to reverse the trend. Instead of leading, they are limping behind the competition. The turnaround plan is 10 years late," says analyst Stephen B. Cheetham at Sanford C. Bernstein Ltd. (AC) in London.
Thursfield and Ford President and Chief Operating Officer Nicholas V. Scheele insist the worst is over in Europe and that huge savings from this year's restructuring, including cutting 10% of the workforce in Germany, Britain, and Belgium -- where workers recently took to the streets in protest -- will begin to flow through to the bottom line in the second half of 2004. Unfavorable exchange rates are easing, Ford says, and strong sales of light commercial vehicles are helping offset this year's small losses in passenger-car share. "Our European transformation strategy has not failed," insists Thursfield.
Scheele and Thursfield are also counting on new products with better margins and higher-quality interiors to pump up sales. The new Focus C-Max minivan has just begun to hit dealer showrooms, and Ford expects to sell 100,000 of them in 2004. The new Focus, Ford's largest-selling car, will be replaced in 2004. Scheele dismisses S&P's fears of future European restructuring. "We anticipate no other special charges of that nature."
The European template is straightforward: Realign factory capacity to reflect shrunken market share; overhaul the remaining plants to be far more flexible; slash costs; and revive sales with a flood of new high-quality vehicles. CEO Ford recruited Scheele and Thursfield, architects of the plan for Europe, whose continuing operations earned $268 million the year before, to lead the North American effort. "Bill liked what he saw over there," Thursfield said in an interview after arriving at Ford's Dearborn headquarters last summer. "He brought me across here to help North America implement that model where it's appropriate."
No question, Ford Europe has been doing a lot of things right. For two years, Thursfield led a drive to make Ford's factories more flexible and reap huge savings by assigning teams to reengineer components or share them across brands. Since 2000, Ford Europe has slashed capacity by 600,000 vehicles and cut over $1.3 billion in costs. Ford says its internal productivity data show a 15.8% improvement from 1999 to 2002, to 19.7 hours per vehicle.
But Ford Europe is still losing money and hanging onto every 10th of a percentage point of share by its fingernails. "The market moved away from us. We've adjusted the fundamentals and taken some one-time hits," Thursfield says.
Analysts say Ford has lagged the competition for so long that its brand image is badly tarnished. It missed the market for new-generation diesel cars, launching its first model six years after the segment boomed. The new Focus C-Max is seven years late to the minivan market. "The perception is they don't offer anything special," says J?rgen Pieper, auto analyst at Metzler Bank in Frankfurt. "Their recent products are improved, but they are not closing the gap with rivals."
Insiders say Ford Europe's new president, Lewis Booth, will also have to resolve a feud between Ford Europe's British and German product development teams. The conflict, they say, is the real reason behind Ford's inability to design hot new models and innovate in niche markets. "Splitting development between the U.K. and Germany is lunacy. It's the one thing no one talks about," says one former manager. Thursfield admits Ford missed "the market pulse on diesel and minivans" but insists the two development teams are working in unity and that the new products are "the best they've ever been."
Rapid and chronic management turnover has also plagued Ford Europe. Martin Leach, Booth's predecessor, is suing Ford for up to $71 million, alleging the company fired him but announced he had quit, thus barring him from taking another job in the industry. A revolving door at the top has resulted in four presidents over five years. Booth, 54, took the helm in August after only 18 months as president of Mazda Motor Corp. in Tokyo. Leach, a highly regarded product engineer, had been in his post only one year. "A company that burns through its most talented executives has deep-seated cultural problems," says one European auto analyst. Thursfield & Co. need to fix Ford Europe -- and make it stick -- both to bolster the parent company's bottom line and to prove that its management is heading in the right direction. By Gail Edmondson in Frankfurt and Kathleen Kerwin in Dearborn, Mich.