For Anja Schlosser, Ford Motor Co.’s Fiesta and Focus didn’t stand much of a chance against the i30 from Hyundai Motor Co.
“I chose the Hyundai because it was the cheapest,” said the 31-year-old purchasing manager from Frankfurt, who was looking to replace her Fiat Punto. “And I liked the design better than Ford.”
Schlosser’s decision against Ford isn’t an isolated case. The Dearborn, Michigan-based company is losing market share and piling up losses in Europe with a model lineup that has failed to stand out from the competition.
That’s forced Ford to compete on price, even though it’s hampered by labor costs in Europe that are more than double those at Hyundai’s factories. Like other legacy carmakers in the region, the root of Ford’s disadvantage is plants set up decades ago in western European countries like Germany where workers command high wages and growth prospects are now dim. By contrast, newcomer Hyundai swooped in to build modern facilities in the low-cost east, taking advantage of cheap wages and efficient infrastructure.
“Labor costs have a big influence on car manufacturers’ profitability,” said Marc-Rene Tonn, an analyst with Warburg Research in Hamburg, who estimates that wages and related expenses account for as much as 10 percent of production costs.
At its factory in Saarlouis, Germany, which dates to 1970, Ford pays workers a total of about 480 euros ($600) to make each Focus compact, based on man-hour estimates and published labor costs. That compares with 207 euros for the Hyundai i30 at the Korean carmaker’s four-year-old plant near the Czech town of Nosovice. The difference helps Hyundai offer the i30 from 15,990 euros, 960 euros below the Focus’s starting price.
With discounting in Europe’s slumping car market accentuating the cost disadvantages, Ford reported a second-quarter operating loss in the region of $404 million after a profit of $176 million a year earlier. Its European sales dropped 9.9 percent to 532,819 vehicles in the first half, while Seoul-based Hyundai grew 12 percent to 232,454 cars, and sister brand Kia jumped 25 percent to 173,232, according to the ACEA, an auto industry group.
Hyundai says it builds a car in Nosovice with 19.5 man-hours. Ford is quicker, needing around 11 hours to produce vehicles in Europe, according to Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen. The company declined to comment on production hours.
Still, Ford’s speed isn’t enough to offset German labor costs, which at 43.85 euros per hour are more than quadruple the 10.62-euro rate for workers in the Czech Republic, according to the European Labor Cost Index.
While Ford opened its first European plant in 1911 and built up a network of 23 factories in the region over the following decades, Hyundai-Kia began European assembly in 2005. The Korean manufacturer now has plants in Slovakia, Turkey and the Czech Republic, allowing for a more efficient production network, according to Ron Harbour, a partner at New York-based consulting company Oliver Wyman.
Alongside the Hyundai plant in Nosovice, for instance, the company has built a companion factory that produces 600,000 transmissions annually. A Kia plant 56 kilometers (35 miles) away in Zilina, Slovakia, makes the same number of engines in addition to cars. Trucks can therefore depart the Czech plant loaded with transmissions and return with engines from Slovakia.
“You’ve always got a full truck going both ways, and it helps optimize costs,” said Harbour, who developed industry standards for measuring the productivity of auto factories. “If Ford were starting new today and building their footprint in Europe, they would be doing exactly the same. You’re dealing with the legacy of what was built over 100 years.”
Ford’s main European assembly plants are in the more affluent west, with facilities in Germany, Belgium, the U.K. and Spain. While the second-biggest U.S. carmaker does have plants in Romania and Turkey, where it makes vans, it’s failed to make the most of lower costs there, said Christoph Stuermer, a Frankfurt-based analyst with IHS Automotive. Rival Renault SA, by contrast, based its budget Dacia brand in Romania.
Ford didn’t find the right vehicles to build in the low-cost factories, Stuermer said. Because Hyundai’s “products are comparatively affordable,” he said, “they can keep their factories running at full pace so that they’re not losing money.”
The utilization rate of Ford’s European plants is 63 percent, according to Morgan Stanley, while auto factories typically need to produce at around 80 percent of capacity to make money.
“We do have overcapacity,” Ford spokesman Mark Truby said in an e-mailed response to questions. “We will continue to match production to demand and further raise our capacity utilization rate.”
Experience suggests that the solution is not as simple as relocating production to eastern Europe from the west. Ford’s sales in Britain have declined 44 percent to 265,894 units since 2002, when it moved its European headquarters to Germany and closed much of its Dagenham facility, according to U.K. auto industry association SMMT.
“If I pull out of a country, do I lose my brand image there?” said Wyman’s Harbour. “If I save a billion, do I lose a billion in revenue in that country? There is no magic formula. But it has hurt Ford in the U.K.”