News Column

Ford to Lose $1.5 Billion in Restructuring European Operation

Oct. 25, 2012
Ford CEO Alan Mulally
Ford CEO Alan Mulally

Ford's restructuring plan for Europe cuts an additional 5,700 jobs at three facilities in the U.K. and Belgium in a move designed to return the automaker's money-losing operations in Europe to profitability by 2015.

The actions will cut capacity by 18 percent or 355,000 vehicles a year which should result in annual savings of $450 million to $500 million, the company said Thursday.

With the 500 salaried and agency workers in Europe expected to leave by the end of the year as part of a voluntary reduction program already under way, Ford said the 6,200-person reduction represents about 13 percent of its European workforce, which was 47,000 in 2011.

"We expect to achieve profitability by mid-decade," said Ford CEO Alan Mulally.

The target is a long-term operating margin of 6-8 percent. But it is not without immediate pain.

Losses in Europe are now expected to exceed $1.5 billion this year, substantially worse than the earlier prediction of $1 billion in losses. The increase includes more than $400 million from reducing dealer supplies of vehicles and $100 million in accelerated depreciation associated with plant closures.

More details will be revealed when Ford reports its third-quarter earnings on Tuesday.

On a more positive note, Ford said total third-quarter pre-tax profit and earnings per share are better than second-quarter results, despite the huge hit from Europe. North America has been the biggest profit generator for the Dearborn, Mich.-based automaker.

Ford will have strong profits and auto-generated cash flow for the full year, Chief Financial Officer Bob Shanks said.

The costs of restructuring, depreciation and capital spending to shift production to other plants will be felt over 2 \ years, said Shanks. Separation costs will exceed $100,000 per employee, Shanks said.

A report by Barclays puts the severance cost at $300,000 per employee.

All automakers are struggling in Europe, where sales are at a 20-year low and may not improve next year. Overcapacity has created a cutthroat environment where heavy discounts are needed to boost sales. Incentive spending and the cost of running underutilized plants are causing huge losses, but politics and labor laws have hampered efforts to close plants in many European countries.

Ford is trimming its ranks with the decision to close its assembly plant in Genk, Belgium, by the end of 2014, eliminating 4,300 jobs. How it will be achieved is subject to negotiations with unions, a process expected to take four to six months.

Production of the next-generation Ford Mondeo, S-Max and Galaxy would shift to Ford's Valencia plant in Spain, where wages are lower. Valencia will become a flexible facility able to make compact and midsize vehicles which are the heart of the market.

The production shifts will delay the launch of the new Ford Mondeo midsize sedan until late 2014.

To make room at Valencia, the C-Max and Grand C-Max would move to Saarlouis, Germany, in 2014.

In the U.K., Ford plans to close the Transit commercial van plant in Southampton next year and consolidate production in Turkey. Transits will also be made in Kansas starting next year for the North American market.

Also to close mid-2013 is a stamping and tooling operation in Dagenham next year. That affects another 1,400 jobs.

Ford said it hopes the employee reductions in the U.K. will be achieved by voluntary separation programs and transferring workers to other Ford operations.

It means the end of British vehicle assembly for Ford. Ford said it will instead invest to make the U.K. a leader in powertrains.

Ford said it will spend $2.4 billion to engineer the next-generation of a 2-liter diesel engine in Essex and build it in Dagenham.

The moves will take Ford's utilization rates from less than 70 percent to more than 80 percent, said Stephen Odell, head of Ford of Europe.

Other cost-cutting efforts to date include reducing inventory at dealers to about 38 days' supply to avoid large discounts when overstocked. Line speeds have been reduced, workweeks shorted and temporary workers cut back.

Poor economic conditions and cost of meeting a high degree of regulation in Europe is backdrop to Ford plan there, Odell said.

Standard & Poor's Ratings Services on Thursday estimated Ford's operating losses in Europe, including some restructuring costs, at about $3 billion over 2012-2013. That will consume a lot of cash, which should be offset by a strong performance in North America.

"We do not expect to raise the corporate credit rating on Ford to investment-grade before late 2013 at the earliest," the agency said.

"The most important factor in an upgrade to investment grade would be Ford's ability to improve the balance of profitability across regions -- particularly Europe, but also in Latin America. Accordingly, we would likely want to have a good understanding of 2014 prospects for profitability by region. We have expected results in Europe to worsen before improving."

Other ratings agencies have returned Ford to investment grade.

Source: (c)2012 Detroit Free Press. Distributed by MCT Information Services.

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