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How Ford Will Fix Europe

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What will Ford (NYSE: F  ) do about Europe?

Ford has been a major player in the European auto market since founder Henry's day but, lately, the Blue Oval has been losing big money in the region. A rough economy and fierce competitive pressures led Ford's European division to post a $404 million loss last quarter -- and to warn that there will be more losses to come.

So far, Ford has said little about its plans for restoring its European operation to sustainable profitability. But the company has dropped a few hints -- and the outlines of Ford's plan are starting to emerge.

Going beyond factory closings
Analysts have suggested that returning Ford Europe to profitability will require factory closings -- always a painful sell in labor-friendly Western European nations like France and Germany, as rival General Motors (NYSE: GM  ) has discovered, to its chagrin. While one or more shutdowns might ultimately be in the cards for Ford, it's increasingly clear that the Blue Oval's plans for the region go far beyond cuts.

When pressed for details on their plans for Europe, CEO Alan Mulally and other Ford executives have demurred on specifics. But they've repeatedly answered with a hint: Look at what we di d in North America, they say.

What do they mean? For starters, they mean looking beyond factory closings -- way beyond. Ford did downsize significantly during the company's wrenching U.S. overhaul. But, more importantly, it turned around its business with a string of excellent new products, and an overhaul of the way it did business.

The importance of "One Ford"
Mulally's blueprint for Ford's historic turnaround -- and for its operations going forward, post-turnaround -- is called "One Ford." It has a lot of components but, at its essence, it boils down to this: Design a small lineup of great cars and trucks based on platforms that make it easy to introduce variations on the fly, price them profitably, and scale manufacturing capacity to produce just enough of each vehicle to meet demand. That strategy, which is similar to the way Toyota (NYSE: TM  ) does business, has led Ford to big profits here in the U.S., despite overall levels of sales that remain well below pre-recession levels.

How does that translate to Europe? Scaling manufacturing capacity is just one part of that equation and, to be clear, I won't be surprised if Ford ends up closing a plant or two in Europe. But it's also clear that they'll take steps to increase demand for Ford products, in hopes of keeping existing production lines going, even though Europe is mired in recession.

Some of those steps are already becoming visible.

A big expansion of Ford's European lineup
Here's one way to increase demand for your products: offer more of them. Ford announced on Thursday that it will do just that, greatly expanding the lineup of models it offers in Europe. Included in the plans:

  • More SUVs. Ford already offers the all-new Escape in Europe, where it's called the Kuga. Joining the Kuga will be the Edge, from Ford's U.S. lineup, and the EcoSport, a small SUV originally planned for emerging markets.
  • An overhaul for the Fiesta. Ford's subcompact is already one of Europe's best sellers, but the company is planning to give it a facelift, with a new grill, and other detail changes. The updated car will launch in Europe later this year, before arriving here (and in Asia) in 2013.
  • A new Mondeo. The midsized Mondeo sedan was once one of Europe's best sellers, but sales have declined sharply in recent years. Ford hopes to reverse that trend with a sharply-styled new model that's essentially identical to the much-anticipated new Fusion, set to launch in the U.S. this fall.
  • More commercial vehicles. Ford will overhaul and update its Transit line of commercial vans over the next two years, it said.
  • The Mustang. Ford hasn't offered its signature muscle car in Europe in ages, but that's set to change. Mulally said on Thursday that the Mustang would join Ford's European lineup, though the company didn't give details.

The emphasis on SUVs is striking, given the high price of gas throughout Europe. But Ford says that European SUV sales are expected to increase 34% over the next five years, and the Blue Oval clearly hopes to win a big piece of that increase.

But will expanding the lineup save Ford in Europe?
It might.

If it doesn't, it won't be because the cars and trucks aren't good enough. Ford's latest products compete very well with those of key global rivals, like GM, Toyota, and Volkswagen (OTC: VLKAY), in markets around the world. Its Focus compact is already rivaling Toyota's ubiquitous Corolla for global sales leadership, and the Explorer and Escape have been in high demand here since their respective launches.

But, part of the challenge of the European market now is the massive discounting war being waged between Volkswagen and Fiat (OTC: FIATY) -- a war that Ford has, to its credit, steered clear of. Ford's SUVs are mostly top-notch, as is the current Mustang; but whether cash-strapped European consumers, who live in a region where gas can cost $8 a gallon or more, will go for them, is an open question. We'll find out.

Ford's stock has been under pressure lately, dropping to levels not seen in years. But the company is still performing very well at home, and is investing heavily for growth abroad. Have these short-term pressures created an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Click here to get instant access to this premium report.

Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford. Motley Fool newsletter services have recommended creating a synthetic long position in Ford. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 06, 2012, at 7:25 PM, TheDumbMoney2 wrote:

    John, a bit off-topic but what do you think of GM's Alt-Z score, which I saw someone recently claim has been declining since 2010 or 2011 and is in the 0.60 region? Have you analyzed that in any articles here at the Fool and if so can you post a link or links?

  • Report this Comment On September 06, 2012, at 8:14 PM, TMFMarlowe wrote:

    I hadn't heard that, but I will take a look. Generally, I've written off all of the recent talk of bankruptcy/default risk at GM as politically motivated, mostly for very simple reasons: the company remains solidly profitable and has $30B+ in the bank vs minimal debt (potential pension liability excepted). I'm certainly willing to hear substantive arguments otherwise, though, and I will look into that one.

    Thanks for reading.

    John Rosevear

  • Report this Comment On September 06, 2012, at 8:44 PM, TheDumbMoney2 wrote:

    John, I totally agree with you on the political-motivation front. On the other hand, in 2007 I bet my uncle-in-law, who is a fund-to-broker salesman for a major mutual fund company, $50 that either GM or Ford would file bankruptcy within five years. He laughed at the silly young lawyer with no formal financial training, and talked about what a large position GM was in the fund, and, I kid you not, how notwithstanding GM's debt they had $20 or $30 billiion in the bank as well. I have not looked into what this person said on Twitter is true re the Alt-Z, but it's a somewhat reliable person, and that metric is not politically-motivated. That's part of why I ask, because I though GM had its debt, etc., quite under control at this point. Personally, I tend to think as we saw again today, Europe will find ways to muddle through and we have at least another two years before the next recession, but who knows, really.


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