Ford Europe Under Scrutiny Again As Profit Prospects Melt.
“In our opinion, Ford Europe currently represents the single-biggest risk to Ford’s long-term financial health and success.
As Ford Motor prepares revolutionary but unspecified changes to enable the company to survive and thrive in an era of autonomous and electric cars, investors are wondering if unprofitable parts of the company like Ford Europe can survive the transition.
Investment bank Morgan Stanley earlier this year speculated that Ford might follow the lead of General Motors, which dumped its chronic loss making European subsidiaries Opel and Vauxhall last year. At the time, this view wasn’t shared by many experts in Europe, who saw Ford as solid, with short-term profit issues, but a healthy future.
Morgan Stanley has renewed its doubts about Ford’s European operation, valuing it at a negative $5 billion in a recent report, and offering suggestions about how it might stop being a drag on the parent company’s bottom line.
Again this view isn’t widely held. The editor of European newsletter Automotive Industry Data (AID) Peter Schmidt reckons Ford is poised to prosper in Europe, its new family sedan the Focus is expected to be a hot seller, while a less fashionable part of its line-up – vans and commercial vehicles – is hugely profitable and likely to remain so.
Morgan Stanley doesn’t see it that way.
“In our opinion, Ford Europe currently represents the single-biggest risk to Ford’s long-term financial health and success. In our view, a separation – while potentially expensive – may be the best option for both Ford Motor Company and Ford Europe stakeholders,” said Morgan Stanley analyst Adam Jonas.
Jonas doesn’t spell out what he means by “separation”, but said if Ford decided simply to shut down its European operation and leave, the costs would be huge, calculating compensation would reach $100,000 per employee. With 53,000 direct employees at the last count, that adds up to $5.3 billion.
Jonas said Ford Europe has posted a pre-tax loss 12 times since 1999, and calculates that it lost an accumulated $3 billion since then.
That is almost impressive compared with GM Europe though, which lost $20 billion since 2000.
“For 2018, we forecast Ford Europe to post another loss and we expect the trend to continue in each of 2019, 2020, and 2021. By our estimates, Ford Europe is clearly the least profitable (manufacturer) in Europe,” Jonas said.
Last year Ford Europe profit fell 81% to $234 million, hit by rising costs and Brexit related exchange rate problems with Britain’s currency. In an interview last March, Ford Europe CEO Steve Armstrong said he expected 2018 to be more profitable than 2017, and the margin target remains 6%. In the first quarter of 2018, the margin slid to 1.3%.
Morgan Stanley’s Jonas said he doesn’t see any growth in Ford Europe’s sales over the next 10 years.
“We forecast Ford adjusted EBIT (earnings before interest and tax) to remain negative through 2025 and assume an exit adjusted EBIT margin of a positive 0.5%,” Jonas said.
The trouble is, Morgan Stanley doesn’t see many options that make sense. The option of complete retreat is too expensive, and fundamentals don’t show a course for improving to a level that can create value for shareholders, according to Jonas.
“In our view, a full exit of Europe is not a feasible solution due to extraordinary high costs related to labor separation, suppliers, and residual value commitments,” Jonas said.
Academics and experts
Many European academics and experts find this baffling, saying Ford has done a much better job in Europe than GM did, and has been quick to react to weaknesses. The engineering that takes place at Ford Europe is more important to the overall company than Opel Vauxhall’s was. Some worry that what looks like a solid business in Europe, is measured by different parameters in Detroit. And if there was a plan to sell off Ford Europe, it’s hard to see who would want it.
AID’s Schmidt looks at Ford Europe’s basics and finds positives rather than negatives.
“Despite the fact that the (little) Fiesta and (VW Golf sized) Focus are made in high cost Germany, Ford is still making money from them. And then there’s hugely profitable commercial vehicles like the Transit. Ford doesn’t spell out the profitability of these vehicles, but Mercedes vans, like the Sprinter, often make more money than its luxury cars and I conclude Ford’s business is just as profitable,” Schmidt said.
Schmidt said Ford Europe’s market share has been on the slide. In the first four months of 2018, Western European share fell to 6.8 per cent or 352,400 vehicles from 7.2 per cent in the same period of 2017. Ford Europe has made big progress moving away from sedans to SUVs. Unlike Opel Vauxhall, Ford has not sought to protect market share by piling them high and selling them cheap, chasing sales even if they lose money.
“Ford Europe doesn’t look like a company about to pull the plug any day soon. It’s true that the falling market share in Europe mirror’s Opel Vauxhall’s fall in a weird way, but Ford now has product advantages, it has tackled high costs, and it has what GM Europe didn’t have, a massive proportion of its sales from light commercial vehicle production,” Schmidt said.
Given that if you have a negative view of Ford Europe there are no sensible options other than staying and making it work, it seems likely that not much will happen. After France’s PSA bought Opel Vauxhall, there’s a shortage of candidates, although always in this context we hear talk of what some mythical Chinese company might do.
Bill Ford Jr
But nevertheless, the words of Ford Motor Executive Chairman Bill Ford Jr last month must make Ford European operatives a little nervous after being asked about the future of the company.
“It could be regions, it could be functions, it could be areas of emphasis. We’ve done some big things, and we still have some big things to do,” said Ford in an interview with Automotive News.