The new Ford Edge will soon join the Blue Oval's European lineup, as it boosts its SUV offerings in search of fatter profit margins in the region. Image source: Ford Motor Company.
Ford Motor Company (F 0.98%) said on Wednesday that it plans to cut hundreds of white-collar jobs in Europe as it seeks to boost profit margins in the region.
Ford is looking to save about $200 million a year In "administrative and selling expenses" in its Ford Europe unit, it said in a statement. It will also boost its SUV lineup in the region and make a series of other changes to try to improve its profitability.
Ford Europe posted its first profit in four years in 2015, after a successful restructuring effort initiated in 2012 by then-CEO Alan Mulally. What is Ford doing now, and why?
An effort to boost Ford Europe's profit margins further
Ford is hoping to find an additional $200 million of savings by offering buyouts to its 10,330 salaried workers in Europe. It's not clear how many jobs will be trimmed, but Ford Europe chief Jim Farley told Automotive News that he expects "hundreds" to take the offers.
The company is also looking to reduce its European manufacturing costs by 7%, which it will do via "manufacturing efficiencies" and "improved capacity utilization." Or put another way, by maximizing the output and efficiency of its existing European factories. It's not clear exactly how Ford will do that.
Ford also plans to do more of what helped it get back to profitability last year: Introduce new products, and boost the profitability of its existing model lines with new more-luxurious trim levels. It promised seven "new and refreshed" vehicles for Europe in 2016, including the new Edge midsize crossover SUV and a revamped version of the compact Kuga, which is the Escape's European sibling.
It's going to add more to its SUV and crossover offerings in Europe, as demand for those vehicles is rising in Europe, just as it has in the U.S. and China. Ford promised "five new vehicles" for Europe over the next three years, starting with the new Edge. Ford said it expects to sell more than 200,000 SUVs in Europe for the first time in 2016, which would represent a year-over-year increase of more than 30%.
Ford's plush Mondeo Vignale is the first of what will soon be several upscale Vignale models offered with plush interiors, special trim, and VIP-level treatment at dealers. Image source: Ford Motor Company.
Ford is also going to expand its line of upscale "Vignale" models. At the moment, it offers just one, the Mondeo Vignale. The Mondeo is the Fusion's European sibling, and the Mondeo Vignale is similar to the top-of-the-line 2017 Fusion Platinum Ford will introduce here later this year. But in Europe, the Mondeo Vignale also comes with a VIP dealer experience. Ford is going to expand the Vignale treatment to "at least five" other models by 2017, it said.
Long story short: Ford is seeking to cut expenses and boost the profitability of its product line in hopes of getting Ford Europe to a sustainable 6% to 8% operating margin over the long term.
Why now?
Ford is starting to take steps to prepare for the next downturn
I think there might be a little bit more to the story than Ford has said.
I think Farley and his boss, CEO Mark Fields, want to make sure Ford Europe has a fighting chance of continuing to be profitable, even during the next economic downturn. Boosting its margins now, while times are still good, will give it more breathing room when the economy turns and auto sales fall back. And with regional giant Volkswagen (VLKAY 0.56%) stumbling as it copes with the fallout of a massive emissions-cheating scandal, and rival General Motors (GM 0.40%) still working on its own plan to return its European division to profitability, it's a good time for Ford to be aggressive with new products in new market segments in Europe.
If so, they're starting from a pretty good base. Ford lost $3.1 billion in Europe from 2012 to 2014, but it managed a $259 million profit in 2015. Its operating margin last year was tiny, just 0.9%. But it was a heartening sight for investors after those three years of big losses, and after Ford had put a great deal of effort into restructuring its operations and revamping its product lineup in the region.
Even more encouraging, Ford's business in the region has been moving in the right direction. "To me, the thing that was especially encouraging is that [among Ford's regional business units] this was the business unit that had the strongest growth," Ford CFO Bob Shanks told me while discussing the company's fourth-quarter earnings report.
Shanks noted that wholesale shipments grew 21% year over year in the quarter, and in constant dollars, the unit's revenue was up 19%. "Within these numbers is a very, very challenging Russian market, which is in deep recession. And we're still delivering these results," he said.
Shanks was right: Ford has done well to turn around Europe. But apparently, Ford's executive team has decided more is needed.
