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Europe No Longer a Thorn in Ford Motor Company's Side

By Daniel Miller – Feb 16, 2016 at 2:10PM

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It has taken years, but finally investors emerged into the light at the end of the tunnel -- profits in Europe!


Ford's performance lineup could help sales in Europe, as well. Image source: Ford Motor Company.

After years and years of Ford Motor Company (F -2.35%) burning through billions in Europe, the pain finally appears to be over. From the beginning of 2012 through the end of 2014, the folks at the Blue Oval would have been almost as well off burning cash in barrels for heat -- Ford lost roughly $3.1 billion in Europe during that time frame. 2015 marked an end to that when the company posted a full-year pre-tax profit of nearly $260 million, though that profit was largely due to accounting changes with the company's pension plans.

Fortunately, Ford isn't finished making adjustments in the region. Here's a look at the moves it plans to make, and how much it could help the bottom line going forward.

More job cuts
Layoffs aren't a new thing for anyone familiar with Ford's operations in Europe, or even those familiar with Europe's automotive industry in general. Ford isn't resting on its laurels even after 2015 generated a full-year profit, and it plans to find $200 million in annual administrative savings. More specifically, Ford plans to offer its administrative staff in Europe voluntary layoffs to trim the automaker's roughly 10,300 salaried employees.

Going hand in hand with administrative cuts, Ford's aiming to create a leaner manufacturing operation in Europe. The plan is to reduce its manufacturing costs by 7% by essentially any means necessary, be it increased automation or working with unions to figure out labor cost savings.

There's no question that Ford's $259 million profit in Europe last year was a victory for investors. However, there's still quite a bit of room to improve operations. Consider that Ford's pre-tax operating margin last year was 0.9% in Europe, but the company's long-term target is between 6% and 8%. That improvement would add hundreds of millions to the company's bottom line.

More to the equation
Improving the automaker's manufacturing efficiency and cutting costs is a needed move, but the other side of the equation is just as important for Ford to remain consistently profitable in the region. By that I mean the company has to continue investing in its vehicle lineup to keep its transaction prices and sales at high levels.

Fortunately, Ford's been great at keeping its vehicle lineup fresh for European consumers -- and not all automakers can say that, as some investment capital dried up in the years following the global recession.

"In 2015, we showed our customers a more emotional, vibrant and upmarket vision of Ford with cars like the new Mustang and Mondeo Vignale, and we're poised for an exciting 2016 with vehicles such as the all-new Edge SUV and RS Focus performance car," said Jim Farley, chairman and CEO of Ford of Europe, in a press release.

Ford estimates it will sell more than 200,000 SUVs in Europe for the first time ever in 2016, which would be a huge help to the company's profitability. Typically, SUVs carry higher margins and transaction prices, rather than the typically less-profitable smaller passenger vehicles that sell well in Europe. Furthermore, newer vehicles also carry the same positive effects as SUVs, with the higher transaction prices and margins, and Ford is planning to launch seven new or refreshed vehicles in 2016.

Investors can also expect Ford's Vignale brand to expand in Europe during the next two years. Since Lincoln would likely have a difficult time battling Europe's luxury brands on their home turf, the solution was to use Vignale as a super-premium version of Ford vehicles, which would draw a more valuable consumer without competing directly with European luxury brands, or cannibalizing its mainstream Ford brand sales.

For all those reasons -- cost-cutting, leaner manufacturing, selling more SUVs, a fresh vehicle lineup, and an expanding Vignale brand -- Ford's profitability should continue to improve in the near term. For investors, that's a huge plus compared to the company's past few years of burning cash by the billions.

Daniel Miller owns shares of Ford. The Motley Fool owns shares of and recommends 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.

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