In July 2018, Ford Motor Company (F 0.47%) announced a major restructuring aimed at significantly improving its profitability. As part of this "global redesign" project, the automaker said that it would incur up to $11 billion of pre-tax charges (including $7 billion of cash impacts) over three to five years in order to close plants, exit markets, and form strategic partnerships.
However, Ford has moved at a glacial pace in its restructuring effort. In the first two-plus years after the initial announcement, Ford incurred just $4.2 billion of pre-tax charges, with a cash impact of $1.5 billion.
That's finally about to change. Earlier this week, Ford announced that it will wind down manufacturing in Brazil and restructure its product portfolio in South America. That should help it address a years-long string of massive losses in that region.
Image source: Ford Motor Company.
South America: the worst of the worst for Ford
In announcing its global redesign in 2018, Ford noted that it was earning more than 100% of its operating profit in North America. Its operations in Europe and the Asia-Pacific region were also profitable, although they weren't earning their cost of capital. In the Middle East and Africa, Ford was losing money, but with a clear path to profitability.
South America was the company's real problem child. Indeed, Ford noted that most of its products in the region were unprofitable. The Ranger midsize pickup was the main exception, along with "select SUVs" and some imported models.
In 2013, Ford broke even in South America on $10.8 billion of revenue. Since then, Ford has rung up huge losses year after year. It hasn't just been unprofitable: The company's operating margin in South America has been in double-digit negative territory consistently since 2014. Ford has reported cumulative operating losses of more than $5 billion in South America over that period. Meanwhile, the region's revenue fell to less than $4 billion last year.
The COVID-19 pandemic made matters worse. In contrast to North America, the South American market remained severely depressed throughout 2020. This finally forced Ford to take aggressive action.
Three plants set to close
On Monday, Ford announced that it is closing all three of its manufacturing plants in Brazil this year in order to put the region on a path back to profitability. In fact, it has already ended vehicle production at two of those facilities, although they will continue producing spare parts for a few more months. Ford will wind down production at the third plant by year-end.
These moves won't be cheap. Ford expects to incur $4.1 billion of pre-tax special charges related to the plant closures, including cash costs of $2.5 billion.
The plants that are closing build the Ford Ka (a subcompact car), Ford EcoSport (a subcompact crossover), and the Troller T4 (a Jeep-like off-road SUV). As a result, Ford will discontinue all three of those models in South America. Instead, the South American business will increase its focus on commercial vehicles like the Ranger pickup and the Transit commercial van, as well as iconic global vehicles like the Mustang and Bronco. It will source those products from Argentina, Uruguay, and other countries.
A lot of work ahead
If nothing else, closing these three plants in Brazil will help Ford address persistent overcapacity in South America. That should contribute to better profitability, particularly because the Ka and EcoSport were low-value products and the Troller T4 never sold in high enough quantities to make money. However, it remains to be seen whether these plant closures and Ford's new product plans for South America will be enough to make the region sustainably profitable. To some extent, Ford's fortunes likely depend on a broader recovery of the South American auto market.
Ford's global redesign plans also took a step backward a couple of weeks ago when Ford and Mahindra terminated their plans to form a joint venture in India. That leaves the Blue Oval on its own in that tough-to-crack market. Thus, while the recently announced restructuring in South America is a welcome sign of progress, Ford still has plenty of work left to finish turning its business around.
