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Ford Is Exporting Its Success to Europe

By John Rosevear - Apr 24, 2013 at 2:00PM

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Ford's turnaround in North America is complete, and its first-quarter profits here were very strong. Now, Ford is trying to export that turnaround success to its European operation, which posted another serious loss on Wednesday.

Ford's factory in Genk, Belgium, is one of three European Ford plants slated to close. Photo credit: Ford Motor Co.

Ford (F 3.89%) reported strong first-quarter earnings on Wednesday morning. Its $1.6 billion in net income was driven by big sales and good margins in its home market of North America.

Ford's strength in North America is a result of the painful restructuring it went through last decade, and the "One Ford" plan that has become its global operating template.

By reducing production costs while increasing its product quality and competitiveness, Ford has been able to push its North American operating margins over 10% – absolutely huge for a mass-market automaker.

Ford's success at home has been a boon for the company in recent times, because its overseas operations are still works in progress. Nowhere is that more true than in Europe, where deep recessions have driven auto sales to lows not seen since the 1990s.

But that approach that worked so well for Ford in North America is now being exported to Europe. Despite significant losses in the region, Ford on Wednesday gave some hints that suggest its new approach is already starting to help.

Behind the headline numbers, some early signs of improvement
We should be clear up front that things in Europe are still lousy. Ford lost $462 million during the region, in the ballpark of most analysts' expectations, as nearly every factor contributing to income in Europe was negative when compared to year-ago totals.

But several factors did show significant improvement over last quarter's horrific $732 million loss. First, even though sales have been falling, Ford's efforts to concentrate on more profitable retail sales over sales to rental-car fleets and to clean up dealer inventories have already borne some fruit.

Next, the company's efforts to hold the line on pricing despite deep discounts offered by some competitors contributed to a $63 million improvement over last quarter, CFO Bob Shanks said in a presentation on Wednesday.

Ford's restructuring plan will come with a big bill
But the company did incur about $110 million in restructuring costs in Europe during the quarter. Shanks attributed those to accelerated depreciation for the three factories that the company plans to close in the region, as well as costs related to severance and pensions for departing employees.

Those kinds of costs will continue to weigh as the company's turnaround plan continues to unfold. Ford completed some previously announced reductions in salaried employees during the quarter, but there are layoffs yet to come at the three factories slated to close over the next couple of years, and those layoffs will be expensive.

Ford has already said that severance payments for hourly workers at its plant in Genk, Belgium, could total $750 million or more, an average of $187,500 per worker. With the deal for its salaried workers in Genk yet to be announced, and two more U.K. plants on the to-close list, total costs will be well into the billions.

An expensive Belgian wrench in Ford's works
Despite its cost, the deal that Ford struck with its workers in Genk has already provided some gains. The Belgian workers had essentially stopped production when Ford's plan was announced last fall. The plant produces cars on Ford's "C/D" platform, including its important midsized Euro-market sedan, the Mondeo.

Sales of the Mondeo fell sharply in the first quarters as dealer stocks were depleted. But with the production lines restarted last month, dealers are starting to receive shipments. That alone will help Ford's European sales totals somewhat in coming months.

But the situation at Genk has thrown a big wrench into Ford's future product plans for Europe. The Mondeo built at Genk is an older design that was set to be replaced by an all-new model, a twin in all but name to the hot-selling U.S.-market Fusion.

The Fusion was rolled out here last fall, and (under the Mondeo name) it will be rolled out in China later this spring... but it may not come to Europe until the end of 2014, officials said on Wednesday.

The problem: With Genk set to close next fall, it isn't worth the big investment to retool the Belgian plant just to make the car for a year or so.

The upshot is that Ford will build the new Mondeo in Valencia, Spain – but not until after Genk is closed. That's a wrench in the works for Ford, but the company has made the most of it by sprucing up the existing model and investing in some marketing support.

The upshot: More losses to come before improvements take hold.
Europe isn't going to get better any time soon for Ford. Like rival General Motors (GM 3.07%), Ford's losses in the region in 2013 will likely be as bad or worse than the $1.75 billion it lost in the region last year.

But small swings in things like pricing suggest that Ford's plan is beginning to show some benefit. That adds credibility to its chances of returning Ford Europe to break-even by mid-decade. And that reinforces the still-strong buy case for Ford's stock: Breaking even in Europe will add $2 billion to Ford's bottom line.

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