How Committed Is Ford Motor To Its European Operation?
“(Ford could) Exit Europe, potentially with the help of a partner. GM showed the way with Opel and has been rewarded”
Ford Europe was never a financial basket case like General Motors’ Opel Vauxhall, but although it is currently apparently making money, it’s not successful enough to ward off recurrent suspicions that headquarters in Dearborn, Mich., might be planning to pull the plug.
Some analysts have suggested it would make sense for Ford to pull out of Europe, but academics interviewed reckoned it made sense for Ford to remain, although long-term this was not considered a shoe-in.
In an aside to reporters at the Detroit Car Show last week, Ford Motor CEO Jim Hackett told British magazine Autocar, at the moment, the company is unlikely to follow GM out of Europe.
“We’ve made a big commitment in Europe, and it looks as if Brexit is reaching some kind of resumption,” Hackett said, not exactly a ringing statement of intent in a story headlined “Ford boss: no plans to follow GM and leave Europe..
Brexit talks, Britain’s negotiations to leave the European Union, have taken a more positive turn recently according to government officials, although everybody knows that there will not be a deal until everything is agreed, so this will be cliff-hanger right up to the deadline on March 29, 2019.
To be sure, Ford Europe’s problems are minor compared with Opel Vauxhall, which racked up almost unbelievable losses, reaching a total of almost $20 billion since 2000, accompanied by promises most years that next year everything would be ok.
Through the first 3 quarters of 2017, Ford Europe generated just $178 million in operating profit, down sharply from $1.04 million in the same period of 2016. In the third quarter it lost $86 million, but Ford said it will return to profitability in the 4th quarter. Ford Europe sold 945,000 cars and SUVs in Western Europe in 2017, off 1.8% on the previous year for a market share down to 6.6% from 6.9%. In December sales plunged 7.7% to 63,000 compared with the same month of 2016.
Ford Motor has promised to slash $14 billion in costs to shakeup the global company and set it up to face expected disruption from the move from internal combustion engines to electric, connected and autonomous ones.
This led investment bank Morgan Stanley to suggest that one of many things Ford might want to do would be leave Europe.
“(Ford could) Exit Europe, potentially with the help of a partner. GM showed the way with Opel and has been rewarded with a significant expansion of the (earnings) multiple and a more focussed effort,” Morgan Stanley analyst Adam Jonas said.
“We value Ford Europe at a negative $2 billion, before pension liability, not too dissimilar a valuation to what GM crystallized when it exited Opel,” Jonas said.
Bernstein Research analyst Max Warburton, in a horizon searcher for 2018, said globalization was reversing and wondered if Ford, and Honda, might pull out of Europe.
“Could 2018 see Ford also (like GM) slim or exit, given its years of losses in the region? Could the Japanese, notably Honda, use Brexit as an excuse to pull out of Europe?” Bernstein said.
This doesn’t make any sense to Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen in Germany.
“I don’t know how Morgan Stanley is calculating this, but I don’t understand it. Ford of Europe is profitable in its operating units. Ford Europe brings scale for the (global) engineering. Also Ford is not so strong in China, hence it would be a high risk approach to leave Europe. Where would it find more than 1 million sales a year? So, to be honest, it is hard to understand the logic of Morgan Stanley,” Dudenhoeffer said.
Professor Stefan Bratzel of the Center of Automotive Management (CAM) in Bergisch Gladbach, Germany, said Ford has done a much better job in Europe than GM, but in the longer term things could change, while it’s not always clear that the U.S. side of the operation understands how Europe sees things.
“It’s a tough business in Europe. Ford has a lot of competition and Brexit won’t make it any easier. But I would say at the moment it wouldn’t make much sense to leave Europe, so it would be a surprise if they left, but we all know what guys in Detroit are doing and thinking about Europe is sometimes different to what we are thinking,” Bratzel said.
Bratzel said the huge investments required for the traditional auto industry to handle new technology make it difficult to predict the future, but Ford may feel differently about Europe in 10 years time.
“The new technology will be transformational but when the new business model takes over maybe in 10 years Ford might change its mind,” Bratzel said.
Professor David Bailey of Aston Business School in Birmingham, England, said Ford is more dependent on Europe for its engineering development than GM was, so that makes it less likely to offload.
Brexit changes could be a problem if the deal means it is more difficult to do business, currently seamless, across Europe. Britain’s exchange rate has already plunged and that has hurt Ford’s operation in the U.K.
“I don’t think they will pull out though,” Bailey said.
John Wormald, analyst with British automotive consultancy Autopolis, points out that the cost of shutting down Ford Europe would be considerable because he can’t see any likely buyers.
“If Ford wanted to sell up, who would buy it? It’s not obvious. I can’t quite see anybody picking up the whole think like PSA Group did with Opel Vauxhall. Would FCA (Fiat Chrysler Automobiles) want it? Does it need the extra capacity?” Wormald said.
The enormous cost of the new technology could be a clincher in favor of leaving though.
“The industry requires enormous amounts of investment to move to electric and self-driving. Ford could well decide it was better off to save money in Europe and invest that in North America and give up on Europe,” Wormald.
Professor Karel Williams of the Manchester Business School has a more apocalyptic view and expects all traditional auto makers, not just Ford, will be coming under severe pressure as the new technology, and China, take hold. Ford might find itself forced to retreat from Europe anyway.
“Instead of people saying that after the long-awaited rationalization the survivors will at last make money isn’t taking place. The shift to battery cars has completely upended people’s notions. I see the Chinese coming over the hill in large numbers, and how will the E.U and North America protect themselves? I think we’ll see an outcome where the Chinese make the batteries and almost all the high value components and the rest will be assembled in the E.U. and the U.S.,” Williams said.
“We’ve seen the Germans as leaders in the last 40 years, but I don’t think the next 40 years belongs to them,” he said.
Williams said Ford’s has been overwhelming dependent on one product, the pickup truck, for years, it is chronically weak in Europe in terms of market share with great dependence on a small car, the Fiesta.
“I think Ford will have to behave defensively and that whatever the Chief Executive says, the temptation to pull out of Europe will be considerable,” Williams said.