The second quarter brought good news and bad news for American auto icon Ford (F).
The good? Just like last quarter, Ford’s sales and profits in its most important market — the U.S.A. — continued to be strong enough for the company to weather just about any challenge.
The bad news? Ford’s overall profits were down 57% in the second quarter, because the challenges overseas are mounting.
The Plan That Saved Ford Domestically Is Still Unfolding Overseas
Six years ago, when Ford was facing collapse, CEO Alan Mulally laid out the “One Ford” plan that would end up saving the company.
Mulally’s vision was deceptively simple: Ford would invest aggressively in great new products, work hard to keep its costs as low as possible, and sell a smaller, more polished lineup of cars and trucks in markets around the world.
That has worked out great, especially in the U.S. Vehicles like the compact Focus, the Explorer, and Ford’s much-lauded line of pickups have proven hugely successful here — so successful that Ford added shifts in the factories that make each of those vehicles during the second quarter. The Explorer and Focus assembly lines are now running around the clock.
The Focus may turn out to be Detroit’s best-ever small car, and it’s selling well all over the world. It was just launched a couple of months ago in China, and it’s already selling at a rate not far from its sales pace here at home. It’s also a top seller in Russia, where a Ford factory in St. Petersburg makes the Focus for the local market, and it’s a hit in Europe, where Ford fights with rival Volkswagen (VLKAY) for the top of the compact-car sales charts.
Still, the success of the Focus and Ford’s other cars in Europe hasn’t been enough to save the company from heavy losses in the region. So now it’s time for Ford to put the lessons of its “One Ford” plan to work overseas.
Running at 63% of Capacity
A deep recession and other problems drove auto sales down about 10% in the first half of 2012, to their lowest levels in a decade. All of the automakers doing business there have suffered, and Ford is no exception. Ford lost $404 million in Europe during the second quarter, a big drop from a profit of $176 million a year ago.
The problems go far beyond an economic downturn: In a nutshell, Europe has too many car factories.
In order to break even, an auto factory has to be run at at least 80% of its maximum capacity. Ford’s are running at only about 63%, according to estimates put together by analysts at Morgan Stanley.
As Mulally said to reporters on Wednesday morning, the most important aspect of the “One Ford” plan is Ford’s determination to “match production to demand.” In other words, Ford won’t hesitate to close factories if that’s what it takes to make Europe profitable again — and word is, Ford’s factories in the U.K. and Belgium are at risk.
Keeping Doors Open While Closing Factories
Factory closings aren’t always simple in Europe. As General Motors (GM) has discovered while trying to stem its own losses in Europe, powerful unions and labor-friendly governments can make the process of closing a factory a long (think several years) and contentious one.
But it’s clear that Ford is going to have to make major changes in Europe — and it has some dramatic ones already in mind.
CFO Bob Shanks told reporters on Wednesday that Ford plans a “holistic response” in Europe, and suggested that analysts look to what Ford has done in the U.S. in recent years. That response will likely include cost cuts, product-line changes, and a change in marketing strategy — as well as factory closings.
Given Ford’s track record of success in recent years, those changes should be just what the company needs.
At the time of publication, Motley Fool contributor John Rosevear owned shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford.