Why is Ford Motor Company (NYSE:F) still losing big money in Europe?
Like most of its regional rivals, the Blue Oval has lost a lot of money in Europe over the last few years: $1.75 billion in 2012, $1.6 billion in 2013, and $619 million so far in 2014.
But since October 2012, Ford has been working on an elaborate turnaround plan that was supposed to return its European unit to sustainable profitability by 2015. Ford executives reiterated that optimistic guidance over and over -- until September, when the company abruptly changed course and said that another loss is likely next year.
What happened? Did the turnaround plan go awry? What changed to lead Ford to expect another loss in Europe in 2015, and how big will that loss really be?
The state of Ford's European "transformation plan"
Ford gave us some clues in its earnings conference call back in October, but we got more specifics this week from an executive who is in a position to know.
Barb Samardzich is currently chief operating officer of Ford Europe. She spoke at some length about the state of Ford's European business at a Goldman Sachs conference in London on Thursday -- and she had bad news and good news about the state of Ford's European turnaround.
I'll get into details on the bad news below, but the gist is that Ford still expects to post a $1.2 billion loss in Europe for 2014 and a $250 million loss next year.
But there's also good news: Ford's plan really is solidly on track. As I explained when then-CEO Alan Mulally first unveiled the plan back in 2012, Ford's European restructuring has three basic components, and Samardzich emphasized that all are proceeding as planned:
- Restructuring: The big challenge facing the European auto industry is overcapacity -- the region has more car factories than its level of sales can profitably support. Ford is doing its part to help solve that problem: It has closed two factories in the U.K., and it's winding down a big assembly plant in Belgium that will be closed for good at the end of the year. Those closings have meant the loss of over 5,000 jobs, but they'll save Ford Europe $400 million a year or more going forward, Samardzich said.
- Product "acceleration": For many years, Ford Europe offered a relatively small range of models: small cars, a midsize sedan, a few commercial vans, and a single SUV, the Kuga. That's changing: Ford is drawing on its global product portfolio to greatly expand its European offerings. By the end of next year it will have brought at least 25 new or significantly refreshed products to European showrooms since 2012.
- Brand strengthening: Just as it has been doing in the U.S., Ford has cut back on sales to rental-car fleets in Europe, focusing on more profitable retail and commercial fleet sales. It has also curtailed the practice (widespread in Europe) of allowing dealers to register lots of new cars for use as demos and counting those as "sales." Ford is also making a series of moves to improve its dealerships and enhance the level of customer service they deliver.
So if the restructuring plan is on track, what's the problem?
Two unexpected challenges have complicated Ford's plans for profits
As Samardzich tells it, there are two problems that Ford didn't foresee when drew up its plan in 2012.
- Russia: Economic deterioration in Europe's third-largest market has clobbered new-vehicle sales, forcing Ford to reduce its expectations and cut spending in a region it was counting on for significant expansion.
- Pension expenses: Like the U.S., Europe fell into a big recession late last decade. But unlike the U.S., Europe hasn't recovered -- and its recovery is proceeding much more slowly than expected. That means interest rates in Europe are still lower than Ford expected, and that means that the fixed-income investments in Ford's European pension funds aren't performing as well as Ford hoped. The upshot is that Ford will have to contribute more money to its pension funds next year than it expected in order to make up the shortfall.
So what does that mean for Ford's longer-term outlook in Europe? It depends. On one hand, Samardzich said that Ford should be able to get higher prices for its products once its overhauled lineup is in place next year. That would boost its margins -- but it's also possible that fierce competitive pressures will limit those gains.
As long as the problem of overcapacity in Europe persists, automakers will be motivated to fight very hard for every sale, every bit of market share.
The outlook also depends to some extent on Russia's recovery. Ford doesn't expect conditions in Russia to start to improve until 2016 -- at the earliest. Ford is committed to Russia over the long term, but it's hard to say right now when its efforts will start to pay off.
The upshot: Expect a big loss in Europe in the fourth quarter, and a smaller one next year
Samardzich said that Ford expects its full-year loss in Europe to be about $1.2 billion, which suggests that it will post a loss of around $600 million for the fourth quarter.
The pension costs won't be a factor until next year. The two factors driving up costs in the current quarter are Russia and a happier one: The costs of launching the all-new Mondeo sedan (the European twin to the Fusion) and the refreshed Focus, both of which have begun arriving at European dealers.
Long story short: Ford's plan is proceeding as expected, and it has done a lot of good -- a loss of $250 million in 2015 will still be a huge improvement over its results in 2012 and 2013. But events beyond Ford's control have thrown a couple of wrenches into the works, and those elusive sustainable European profits may still be a year or more away.