Ford, GM Cut Their European Losses
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Ford (NYSE: F) has shocked the 4,300 employees at its 48 year old Belgium assembly plant by announcing the facility’s eventual closure in the next two years, after its workers had agreed to a pay cut. Following the closure, which comes with a price tag of $1.1 billion, the company is aiming to save $730 million annually. It is going to shift some of its vehicle productions to its Spanish facility, while some of the Spain’s production can be moved to the plant in Saarlouis, Germany. In addition, Ford is also shutting two plants in the U.K. next year, which will cause 1,400 layoffs.
The American vehicle manufacturer has been piling losses from its European operations that are likely to touch $1 billion in 2012, amid the lingering debt crisis and austerity measures that have caused a 20% drop in demand since 2007. Moreover, new car sales have touched 20 year lows, and the figure is not expected to improve anytime soon. In the second quarter, Ford’s European operation witnessed a drop of 66,000 units sold year over year to 369,000 units total.
While Ford is facing dwindling sales in Europe, it is working on a $760 million assembly plant in China through its Chinese joint venture Changan Ford Mazda Automobile (CFMA), which is expected to produce 1.2 million vehicles each year by 2015. This year, the company has also opened a new plant in Thailand, which has taken its Thai output to 425,000 units. In the meantime, Ford is also beefing up its production workforce in Chicago, Michigan and Kansas City. However, the company’s market share in its home territory, its primary market, is slowly falling.
Ford’s employees aren’t the only ones facing layoffs. The French vehicle manufacturer Peugeot is also closing its plant near Paris, which will eliminate 6,500 jobs. Similarly, GM's (NYSE: GM) struggling European unit Opel, after shutting down the Belgium facility in 2010 (which included more than 2,500 layoffs), is now planning to close its German plant as well by 2016. Opel has proved to be GM’s nightmare, as the company has generated cumulative losses of $12 billion over a span of 12 years. Until the first half of the current year, GM was losing $1,200 for every Opel’s unit sold. The business probably should have sold the majority stake in Opel to Sberbank and Magna International (NYSE: MGA) two years ago.
On the other hand, Peugeot’s news came as a particular shock to French political leaders, who had so far handed out more than $5 billion in financial aid to the company. Politically-motivated subsidization of car companies has a similar effect regardless of the market, and the losses incurred by companies like Peugeot due to years of subsidy and bailouts robs them of their drive to innovate and produce cars people actually want to buy.
Ford refused a direct government bailout in 2008 and has struggled to put their business back on track worldwide. Their OneFord program to streamline their production lines and local supply chains is a definite step in the right direction, but will take time to mature, and the current economic environment is not helping their transition costs at all. The closing of resources in Europe and shifting some of them east towards the growing markets in ASEAN and China is prudent, as Europe will be struggling with crushing debt-related economic hardship for the foreseeable future.
As for GM and Peugeot, to minimize their losses they formed an alliance in February, whereby GM purchased a 7% stake of Peugeot. The alliance has now moved forward towards a plan of joint production in four projects for small to medium-sized passenger vehicles. The first of such vehicles will roll out by 2016, while the companies are aiming to save $2 billion in five years.
Both Ford and GM witnessed falling profit margins over the past year, to the current 4%. Peugeot, on the other hand, has more than trebled its 6-month loss from $282 million in December 2011 to $1 billion in June 2012.
Meanwhile, the dominant Japanese vehicle manufacturers such as Toyota (NYSE: TM), Honda (NYSE: HMC) and Nissan, are caught in the crossfire on the disputed islands issue between China and Japan. The Chinese consumers have boycotted purchase of Japanese vehicles, which is turning into a blessing for American firms. In August, Ford managed to increase its monthly Chinese vehicle sales by an impressive 35% as compared to last year, effectively beating all of its previous records.
Whereas Ford is building more plants in the emerging markets, GM is working closely with SAIC Motor Corp, the largest Chinese vehicle manufacturer. GM has better future prospects due to its dominance in the Chinese market, albeit in the low-quality, value vehicle market, as the biggest foreign player in the country’s automobile industry.
Amid dwindling new vehicle sales in Europe, China is set to play a primary role in GM’s future. In 2011, the company earned a profit of $1.5 billion from its Chinese operations, about one-fifth of the business’ total profits that year. The sale of new Japanese cars is expected to drop by 70% in the final quarter of the current year, which will have a positive impact on GM’s earnings.
Ford is behind in Southeast Asia, but is moving methodically to build its presence there. The initial response to the new Ranger small-pickup has been strong in markets like Thailand, Indonesia, and Malaysia, having been designed almost specifically for the rigors and tastes of consumers in those countries. As these are some of the fastest growing markets in the world and sales are dominated by pickup trucks, specifically the Toyota Hilux, for Ford and GM to succeed they will have to build their credibility through competing in that segment.
I like the cost-cutting measures by Ford here, as well as their attempts to simplify and streamline their production chains. These things will create greater production efficiencies, which should drive better margins and opportunities to grab market share through aggressive pricing. But, until there is a trend of strong sales growth over 2 quarters, Ford remains on the shelf as an investment.
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