Ford Profit Squeezed by Excess Plant Capacity in Europe: Cars

Ford Motor Co. (F), with overseas losses reducing total profit, is under pressure to close at least one factory in Europe, where it may have more excess capacity than General Motors Co. (GM)

While layoffs and plant closings are difficult in Europe, GM and PSA Peugeot Citroen announced plans to do just that in the past six weeks, which could ease the way for Ford. The Dearborn, Michigan-based automaker’s assembly plants in Southampton, England, and Genk, Belgium, may be vulnerable.

Ford said last month it will report second-quarter earnings that are “substantially lower” because losses in Europe, Asia and South America will triple from the first quarter to $570 million. Ford is using just 63 percent of its factory capacity in Europe, where pretax losses this year may exceed $1.1 billion, double what the automaker previously said, Adam Jonas, an analyst at Morgan Stanley, wrote in June.

“By our calculations, Ford’s capacity utilization in Europe is even lower than GM’s, making it lower than any automaker besides Fiat” SpA, Jonas said yesterday in an e-mail. “Ford must address its excess-capacity situation with decisiveness to stay ahead of the wave.”

Producing to real demand -- without big incentives -- has been a pillar of the automaker’s comeback under Chief Executive Officer Alan Mulally. Ford said it’s developing a plan to match capacity to demand in the economically ravaged region, where it closed a plant a decade ago and has been profitable for six of the last eight years.

Faring Better

While GM has lost $16.4 billion in Europe since 1999, Ford has fared better, earning $1.73 billion since 2007, even while losing money in two of the last three years. Ford of Europe has enjoyed stable leadership under CEO Stephen Odell, who took on the job in 2010 after running Volvo Cars. GM this week named a turnaround expert as deputy CEO of its Opel operations after Karl-Friedrich Stracke ran the unit for less than eight months.

Ford’s net income in the second quarter may have fallen to $1.09 billion, the average of four analysts’ estimates compiled by Bloomberg, down 54 percent from $2.4 billion a year earlier. Profit excluding some items may have fallen to 29 cents a share, according to the average of 17 estimates, from 65 cents a year earlier. The company said it will report earnings on July 25.

“A lot of companies need to close a plant in Europe and Ford is probably among them,” said Efraim Levy, equity analyst for S&P Capital IQ, who rates Ford a buy and July 17 cut his 2012 earnings estimate for the automaker by 8 percent. “Ford lost market share in Europe in June and they’re clearly facing competitive pressure to discount to move the metal.”

Economic Slump

A stubborn sovereign debt crisis and collapsing consumer confidence has sent car sales skidding for nine consecutive months in Europe, as the auto market there falls to its lowest level in 17 years, according to the Brussels-based European Automobile Manufacturers’ Association.

“Our European team expects no recovery in the region’s demand before late 2014, leaving sales 20 percent below peak even two years from now,” Jonas said in an e-mail.

Ford, which has resisted deep discounts, is faring worse than average. It said its sales in Europe fell 16 percent in June, ahead of the total market decline of 1.7 percent. In the first half of this year, Ford’s European sales fell 10 percent, while industrywide deliveries were off 6.3 percent.

Closing factories is a difficult and slow process in Europe, where strong labor unions and state ownership in auto companies conspire against shutdowns and layoffs. GM said last month it plans to close its plant in Bochum, Germany, at the end of 2016, the first shutdown of a German car plant since World War II. PSA Peugeot Citroen said it will close a French factory.

Ford Shrinkage

Ford last closed a major car factory in Europe 10 years ago, when it shut its Fiesta assembly plant in Dagenham, England. It sold its Halewood, England, plant and two other U.K. factories to India’s Tata Group as part the 2008 sale of its Jaguar and Land Rover luxury lines. Ford also got rid of two major assembly plants in Europe when it sold Volvo Cars to Zhejiang Geely Holding Group Co. in 2010.

“Ford has done a lot to cut capacity in the past,” said Garel Rhys, president of the Center for Automotive Industry Research in Cardiff, Wales. “It’s not a big bloodletting Ford needs.”

Concerns about the financial crisis in Europe have weighed on Ford’s stock, which is down 29 percent from a year ago. Over the same period, GM shares declined 31 percent and the S&P 500 Index gained 3.8 percent.

European ‘Morass’

“Europe has been a morass for a long time for the American automakers and it will continue to be a challenge,” said S&P’s Levy. “And Ford has a bigger exposure to Europe than GM.”

Unlike Morgan Stanley, consultant IHS Automotive estimates that Ford’s capacity-utilization in Europe is higher than GM’s: 66 percent to 62 percent. Neither analysis is encouraging, because automakers rarely turn a profit with less than 80 percent utilization.

Ford said in a June 28 federal filing that the “serious economic crisis” in Europe is “compounded by an intensifying competitive environment as manufacturers react to lower consumer demand and excess production capacity.”

Ford’s factory in Southampton, which produces chassis cabs for the Transit commercial van, built fewer than 30,000 vehicles last year, using less than one-third of its capacity, according to IHS Automotive. That plant, with 550 workers, could be “low- hanging fruit” as Ford looks to reduce capacity, said Michael Robinet, IHS managing director.

“Southampton is down to 30,000 units a year; you could build that in your garage,” said Robinet, who is based in Northville, Michigan. “Appropriate scale in most facilities going forward is going to be at least 100,000 units. So any time you’re below that, that’s a huge warning sign.”

Genk, Belgium

Ford’s plant in Genk also could be vulnerable, according to Rhys. Genk built 178,000 vehicles last year, about 68 percent of its capacity, according to Ford. The plant builds the Mondeo, the European equivalent of the Fusion, the S-Max wagon and Galaxy minivan. Ford said Mondeo sales fell 11.5 percent this year, S-Max is off 6.6 percent and Galaxy up 1.4 percent.

“Genk is hanging on as a marginal plant,” said Rhys, who said the European market is shrinking for mid-sized sedans like the Mondeo. “Can you justify making a Mondeo at that plant for what’s basically now become a very, very small market?”

Ford has said it will begin building a redesigned version of the Mondeo in Genk next year, and it has a labor contract to build mid-sized models there that runs through 2014.

Asked about possible plant closings, Mark Truby, a company spokesman, said: “It’s premature to talk about what our plans may be.”

Align Capacity

“We understand the environment we’re in,” Truby said. “We know what it takes to be profitable in Europe: We’ve been profitable in six of the past eight years. We’ll work to match capacity with demand while accelerating new-product development.”

Mulally will unveil new European models, including the restyled Mondeo, in Amsterdam in September, Truby said. Ford is bringing 20 new models to Europe by 2014.

Concerns about Ford’s widening losses in Europe have caused analysts to cut earning per share estimates by an average of 20 percent since June 1, according to Brian Johnson, a Chicago- based analyst with Barclays who rates Ford overweight.

“We believe there is a significant risk that Ford will reduce its full-year guidance on pretax profit (to be roughly equal to 2011 profit of $8.7 billion) on the basis of weaker international earnings,” Johnson wrote in a July 18 report.

Mulally’s Turnaround

Ford’s pretax operating loss of $149 million in Europe in the first quarter was more than offset by the $2.1 billion profit it recorded in North America. Ford posted its 12th consecutive profitable quarter in the first three months of the year, with net income of $1.4 billion, or 35 cents a share, down from $2.55 billion, or 61 cents, a year earlier.

Mulally, 66, turned around the automaker in the U.S. by focusing on fuel efficiency, technology and quality. He also insisted factory capacity conform to real market demand. Ford earned $29.5 billion in the last three years after $30.1 billion in losses from 2006 through 2008.

Ford’s U.S. car and light-truck sales rose 6.6 percent to 1.14 million vehicles in the year’s first half, trailing the industry’s gain of 15 percent, according to Autodata Corp., based in Woodcliff Lake, New Jersey. Ford’s U.S. market share fell to 15.7 percent from 16.9 percent as Japanese automakers restocked inventory and made a sales push following last year’s production interruptions due to the earthquake and tsunami.

Quarterly Estimates

Ford’s second-quarter revenue may have fallen to $32.4 billion, the average of eight analysts’ estimates, from $35.5 billion a year earlier. Pretax profit may have fallen 38 percent to $1.6 billion, the average of seven analysts’ estimates.

By borrowing $23.4 billion in late 2006, Ford avoided the bailouts and bankruptcies that befell the predecessors of GM and Chrysler Group LLC in 2009. The automaker put up all major assets as collateral, including its blue oval logo.

Ford recovered those assets May 22 when Moody’s Investors Service became the second major rating company, after Fitch Ratings, to raise the automaker to investment grade. Standard & Poor’s still rates Ford one step below that level.

Now Ford must confront its overcapacity in Europe to return to profitability there, said Morgan Stanley’s Jonas.

“It won’t be easy,” said Jonas. “But we believe they have the balance sheet and political will to pull it off.”

To contact the reporter on this story: Keith Naughton in Southfield, Michigan at knaughton3@bloomberg.net

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

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