Ford’s Unhappy $2 Billion European Surprise


English: Ford Motor Company Headquarters, Dear...

Ford Motor Company Headquarters, Dearborn, Michigan.(Photo credit: Wikipedia)

When we last heard about Ford and its troubles in Europe, the carmaker insisted that it had things under control. It planned to use the same tactics that led to its stunning North American turnaround to fix its operations across the Atlantic. And while there was no guarantee that broader European markets would cooperate, Ford seemed confident that its plan would take root.

Instead, Ford dumped an unhappy surprise on investors Tuesday. It expects to lose $2 billion on its European operations in 2013, on top of a $1.75 billion loss for 2012. That means Ford will lose close to $4 billion in Europe in two years’ time, something that no one could have expected as recently as last spring. By late morning, its shares were down 5.5 percent.

Ford disclosed the news in typically low-key fashion, deep in its earnings release. “Since providing guidance in October, Ford’s outlook for industry volume has deteriorated. Ford now expects industry volume to be in the lower end of the range of 13 million to 14 million units. In addition, Ford is being adversely impacted by higher pension costs due to lower discount rates, and a stronger euro,” Ford said.

“As a result, Ford now expects full year 2013 results for Ford Europe to be a loss of about $2 billion, compared to prior guidance of a loss about equal to 2012. The business environment remains uncertain, and Ford will continue to monitor the situation in Europe and take further action as necessary.”

Ford’s decline in Europe has been breathtakingly swift, and deeper than the company originally thought. Last July, Ford raised eyebrows by disclosing it expected a $1 billion Euro loss. The more the company realized its problems in Europe, the deeper the loss got. It revised its forecast to $1.5 billion and ended up even more in the red than that.

Of course, things have been awful for almost every European automaker. General Motors‘ Opel division, mired in losses for more than a year, has taken only baby steps toward getting things turned around. Fiat is in significant trouble, after a turnaround that made Sergio Marchionne an automotive household name. French automaker PSA, the parent of Peugeot and Citroen, and now a partner with GM, is facing its own crisis.

But Ford has been something of a financial darling since Alan Mulally became its chief executive in 2006. It borrowed heavily before the recession cut off access to lenders, avoided a federal bailout, and has been touting its string of profitable quarters. Its North American performance has been impressive, even though Ford is losing market share once more in the United States.

In that time, Ford hasn’t been known for getting it wrong, although product launches like the Ford Escape have not gone smoothly. Mulally has installed discipline and urged his executives to become more transparent. His goal for the company is a One Ford operation where platforms are shared around the world, and the automaker stays away from duplication and turf battles.

Some of the European issue is out of Ford’s hands, given broader problems in Greece and Spain and continued sluggishness in Britain. But given that Ford now expects a $2 billion loss in Europe this year, it’s logical to ask whether the turnaround plan is going to be enough.

Under it, Ford plans to reduce manufacturing capacity by 18 percent, and aim for a profit margin of six to eight percent, shy of North America’s 10 percent-plus, but respectable in such a hotly competitive market. Mulally also promises a “laser focus” on introducing new products, including 15 global vehicles set for the next few years.

On Tuesday, Ford insisted the transportation plan was on track. “As Ford did in North America, these are investments the company is making now to transform its European business for profitable growth in the future,” it said. Ford officials maintained that things had hit bottom in Europe.

However, given that it’s only January, it’s reasonable to think that Ford’s $2 billion loss estimate could deepen, just as its estimates for 2012 were revised. Without a broader economic rebound, Ford might be looking at a far bigger problem in Europe than it originally anticipated. And it won’t be able to wait for its new vehicles to arrive before it has to act even more decisively. Its press release vow to “take further action as necessary” may come sooner rather than later.

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