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Will Ford Act To Curb Mounting European Losses?

Will Ford Act To Curb Mounting European Losses?

“We now forecast Ford Europe losses to widen from $220 million this year to a loss of $1.2 billion by 2021”

As Ford Motor looks askance from Detroit at its loss-making European subsidiary, speculation mounts that drastic action might be on the cards as losses from cars undermines progress with SUVs and vans.

Ford Motor has said it is preparing big but unspecified changes to its European operations. Reports suggest this could range from a partnership deal with high-flying PSA Groupe to help make small car-making profitable, an expansion of its van-making plan with VW, to shutting everything unprofitable down.

Investment bank Morgan Stanley earlier this year speculated that Ford might follow the lead of General Motors, which sold its chronic loss making European subsidiaries Opel and Vauxhall to PSA last year. At the time it valued the European operation at a negative $5 billion.

It has updated its forecasts, and now says Ford Europe is worth a negative $7 billion, at least.

“We now forecast Ford Europe losses to widen from $220 million this year to a loss of $1.2 billion by 2021. Factoring in nothing more than just the change of our forecasts through 2021 would take our valuation of Ford Europe to negative $7 billion or more,” Morgan Stanley analyst Adam Jonas said.

“Ford Europe has 54,000 employees throughout dozens of facilities with extremely strong labour unions and large unfunded pension plans. In Ford´s 2Q18 presentation, they display an exhibit that suggests less than ½ of the region´s revenues account for over 200 per cent of EBIT (earnings before interest and tax). In our view, the high performing businesses (Transit and Ranger) are the businesses worth investing in.”

No positive long-term value
“Excluding commercially-oriented businesses, we do not believe the Ford brand has positive long term value in the European retail passenger vehicle market. We can envision the majority of restructuring costs aimed at Europe alone,” Jonas said.

In the first half of 2018, Ford Europe lost $73 million, pre-tax, compared with an $88 million profit in the same period last year. Ford expects that loss to reach $234 million for all of 2018.

In the first half of 2018 Ford sales in Western Europe slipped 3.3 per cent to 517,200. 

After the earnings report, Ford said its Transit van, Kuga SUV and Ranger pickup were making money and SUVs would be the focus for future profitability.

Last year Ford Europe profit fell 81 per cent 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 remained 6 per cent.

Ford and VW announced in June they were thinking about designing and making vans and commercial vehicles together. Ford said in a statement that the potential alliance wouldn’t involve equity sharing.

This fuelled speculation this could be linked to Ford disposing of its unprofitable European operation, as part of its corporate fitness plan aiming to cut $25.5 billion in costs by 2022. Its commercial van business in Europe is highly profitable, with margins often comparable to BMW, Mercedes and Audi’s closer to 10% on upmarket vehicles.

VW Deal
After the VW deal Bernstein Research analyst Max Warburton said  Ford/VW probably wouldn’t be more than a series of joint projects.

“But this won’t stop the market discussing whether this marks the start of something bigger and may herald a swap of assets, or even more,” Warburton said.

“Ford is strong in U.S. light trucks, but struggling in Europe. VW is strong in Europe but almost irrelevant in the U.S. and hopeless in light truck. Ford is behind VW in electric vehicles. Ford is a million miles from VW in China. Scale doesn’t solve everything, but there may be some logic in working together on specific projects,” Warburton said.


 

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