Why Is Ford Losing in Europe?
Ford is doing quite well here in the U.S., but it's another story in Europe. Th company lost $1.75 billion in the Old World last year, the brutal result of a protracted car-sales slump that has hit the entire industry very hard.
Nearly all of the automakers doing business in Europe have seen big sales declines over the last year. Deep recessions in many European nations have led cash-strapped consumers to put off new-car purchases for now.
But in recent months, Ford has lost more ground than most of its rivals. Europe's overall auto sales fell 11.4% in February, but Ford's fell even more -- down almost 20% from year-ago totals.
We know Ford's latest cars are good. So what's going on? And what does this slide mean for Ford's efforts to get back to making money in Europe?
A discount war that crushed profits
As Europe's auto sales have plummeted to a near-20-year low, many of the mass-market automakers have responded as you'd expect -- with deep discounts. European market leader Volkswagen , flush with profits from China and North America, cut prices aggressively in an effort to hold on to, or even gain, market share at less-well-funded rivals' expense.
Naturally, those rivals have done their best to respond with price cuts of their own. Ford, long Europe's No. 2 car brand behind VW, did plenty of discounting -- until last fall, when mounting losses led the company's senior management to rethink the company's approach in Europe from top to bottom.
A plan to return Ford Europe to profitability
That rethink led to a comprehensive turnaround plan, announced by Ford CEO Alan Mulally last October. The plan, intended to restore Ford Europe to profitability by mid-decade, is well thought out and comprehensive. Most analysts gave it a good chance of succeeding, and Ford's stock rallied in the days after the announcement.
Under the plan, Ford will close a factory in Belgium and two in the U.K., eliminating more than 5,000 jobs and saving as much as $500 million a year. Ford will also sharply expand its European lineup, drawing on its strong global product portfolio to expand its offerings of SUVs and commercial vehicles in Europe. The expanded product lineup should allow Ford to capture additional sales in segments it hasn't previously contested in Europe, at minimal cost.
Ford also said it will engage in "brand strengthening," improving its marketing and taking steps -- such as reducing dealer inventories, and cutting sales to rental-car companies -- to improve transaction prices.
Or put another way, over the past few months, Ford has been selling its cars and trucks with fewer discounts.
Is that shift in strategy costing Ford more sales than it had expected?
Lost ground may require a change in plan
A Reuters report this past week suggests that it might be. As the report points out, Ford's Europe turnaround plan was predicated on the assumption that the Blue Oval wouldn't lose its share of the overall market, even as it contracted.
That's one thing that's not going according to plan. In the first two months of 2013, Ford's European market share fell 1.2 points, to 6.7%, according to data from the European Automobile Manufacturers' Association. Ford's position as Europe's second-place brand (after VW) is in peril. More importantly, in January, it raised its estimate of 2013 Europe losses from $1.5 billion to $2 billion.
Clearly, Ford will have to modify its approach if this trend continues. How is the company likely to respond? Ford could return to deep discounting -- according to Reuters, its discounts in Europe's top five markets jumped 30% in 2012, way ahead of the 11% industry average.
Alternatively, Ford could choose to cut further. Mulally emphasized in November that Ford is determined to "match our production to the level of demand" in Europe.
That approach has worked very well for Ford in North America, where its factories are running at full capacity and then some. Closing factories in Europe can be a very expensive proposition, but if Ford Europe is to return to profitability, it may be money well spent in the long run.
Worried about Ford?
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The article Why Is Ford Losing in Europe? originally appeared on Fool.com.Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear . The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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