Ford Said to Drop Plans to Make European SUV in U.S.

Ford Motor Co. (F) has canceled plans to move production of a small sport-utility vehicle from Europe to Kentucky as currency exchange rates no longer favor U.S. production, according to two people familiar with the decision.

Ford had planned to shift the Kuga model next year to Louisville from Saarlouis, Germany, to take advantage of lower labor costs and the weaker dollar, according to the people, who asked not to be identified because the plan is private. With the euro falling, Ford plans to continue producing the Kuga in Germany, the people said.

The reversal demonstrates the difficulty of lowering Ford’s U.S. labor costs to globally competitive levels. The automaker intended to export as many as 80,000 Kugas a year to Europe, the people said. That plan was tied in part to exchange rates and labor concessions Dearborn, Michigan-based Ford sought last year that United Auto Workers members rejected.

“This raises issues of how the 2011 contract negotiations will go,” said Brian Johnson, an analyst at Barclays Capital in Chicago. He rates Ford “equal weight.” “If the UAW is going to try to extract givebacks, Ford is showing that with its global production footprint, it can build wherever it wants.”

The euro has fallen 14 percent against the dollar since Ford reached a tentative deal with the UAW in October to build the Kuga in Louisville alongside its mechanical twin, the Escape. At the time, the dollar had declined against the euro, lowering the cost of U.S.-made goods. Since then, the euro has dropped amid concerns Europe’s debt crisis may trigger another recession.

Deal Voided

The promise of Kuga production in Louisville began to fall apart in November when UAW members rejected Ford’s request to match givebacks it gave General Motors Co. (GM) and Chrysler Group LLC. Ford’s U.S. rivals, which each reorganized in bankruptcy last year, were granted a six-year freeze on wages for new hires and a ban on some strikes until 2015. The UAW agreed to a first round of concessions in March 2009 that Ford said cut its annual labor costs by $500 million.

Ford still will build the Escape in Louisville, replacing Explorer production the automaker is moving to Chicago, the people said. The Escape and Kuga models are code-named C520 and based on Ford’s chassis for compact cars.

“We are on track to begin production next year of a new vehicle from our global C-car platform at the Louisville Assembly Plant,” Mark Truby, a Ford spokesman, said in an interview. “Though we are not providing product details, we intend to fully utilize capacity at the transformed facility.”

Michele Martin, a UAW spokeswoman, didn’t immediately respond to a message seeking comment.

German Pay

A year ago, Ford paid its German workers about $62 an hour to build the Kuga, more than $10 an hour over U.S. workers’ wages and benefits, Johnson estimates. Ford’s hourly labor costs at Saarlouis now are $50 because of the weaker euro, about the same as in the U.S., Johnson said.

With U.S. and European labor costs converging and Mexico representing a lower-cost option, Ford has gained leverage in next year’s labor talks with the UAW, Johnson said. Ford’s four-year contract with the UAW expires in September 2011.

“This is a reminder to the UAW that Ford’s U.S. cars don’t have to be produced in the U.S.,” Johnson said. “Ford’s global architecture allows them to build anywhere. That’s good news if the U.S. has competitive labor costs. It’s bad news if they don’t.”

Rocky Comito, president of UAW Local 862, which represents Ford workers at the Louisville plant, didn’t respond to a telephone call seeking comment.

Ford is changing production plans for the Kuga one year before it is to begin manufacturing the model, which highlights how flexible the automaker has become, said Michael Robinet, an analyst for IHS Automotive in Northville, Michigan.

“Ford’s production flexibility allows for these decisions to be made much closer to production than ever before,” Robinet said. “Decisions can be made now almost in real time.”

Ford fell 5 cents to $11.75 at 4 p.m. in New York Stock Exchange composite trading. The shares have risen 18 percent this year.

To contact the reporter on this story: Keith Naughton in Southfield, Michigan at Knaughton3@bloomberg.net; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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