One of the biggest drags on Ford Motor Company's (NYSE:F) earnings has been its staggering losses in Europe, as new-car sales cratered with the region's dismal economy. Consider that Ford's European operations have lost more than $4 billion since the beginning of 2012. Heck, in the short term, it would have been just as effective for Ford to hunt down D.B. Cooper and give him a private jet with $4 billion and directions to a secret landing strip.
Because of its steep losses, Ford was forced to close its Belgium plant to cut production capacity in Europe and cut costs by roughly $400 million annually. But why, then, has Ford continued to invest $2.6 billion in its Valencia, Spain, auto plant?
Let's dig in
Investors should note that of the total $2.6 billion Ford has invested in the Valencia plant, only $1.37 billion of it has been invested since 2013. But more important, Ford believes the investment will help accelerate its growth in Europe and around the world. Last year, despite significant bottom-line losses, Ford did indeed increase its sales by 7.3%, which was higher than the overall market.
However, does that increase in sales justify the 40% increase in vehicle production to 400,000 at the plant? Probably not, especially considering the plant won't even be producing any of Ford's three best-selling vehicles sold in Europe. However, there are more reasons the investment makes sense for Ford.
Spain's economy is still extremely dismal, and unemployment remains around 24%. Despite Spain's car industry creating more than 26,000 jobs last year, unions are still very willing to accept less-flexible work practices and salary freezes to protect the industry's jobs, according to Automotive News Europe. That's important for Ford controlling costs in Europe, as its Valencia plant employs about 8,000 of Ford's overall 47,000 employees in Europe, or about 17%.
"Valencia is not only a major hub of production -- building vehicles and engines exported to 75 countries worldwide -- but also a centre of innovation employing some of the industry's most advanced lean, flexible and environmentally friendly manufacturing processes." said Mark Fields, Ford president and CEO, in a recent press release.
In fact, 80% of Valencia's production is exported worldwide, making it one of Spain's top automotive exporters, according to Ford. That theme goes hand in hand with the automaker's One Ford plan, which is increasingly creating a truly global lineup -- a great example is the Kuga, or the Escape, as we know it in the U.S., which is increasingly selling well in foreign markets and is produced in Spain.
Ultimately, it might seem odd that Ford closed a plant in Europe to help reduce capacity while simultaneously investing in a plant in Spain. However, Ford believes it will actually help fuel sales and lower costs with the favorable labor market, which would make it a very worthwhile investment. This should be just another step in the direction of Ford turning a profit in Europe, which will be a huge boost for the automaker's earnings and stock price in the years ahead.
Daniel Miller owns shares of Ford. The Motley Fool recommends and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.