A Looming Crisis for Ford in Europe


Ford's (NYS: F) problems in Europe haven't received nearly as much attention as those of rivals like General Motors (NYS: GM) . In part, that's because there hasn't been much drama. Unlike GM, which has lost money year after year - more than $16 billion since 1999 -- and has gone all-in on a high-stakes restructuring, Ford's issues have seemed like less of a big deal.

Ford was actually making money in Europe, almost $2 billion since 2007, until the latest economic downturn in the region. But the decline in sales has hit Ford hard, and at least one analyst is now suggesting that Ford might have to close factories in the region.

A factory closing in Ford's future?
A recent report from influential Morgan Stanley auto analyst Adam Jonas estimated that Ford is using just 63 percent of its manufacturing capacity in Europe, according to Bloomberg. That's even lower that GM's, Jonas said -- low enough to suggest that a factory, or maybe even two, will need to be idled.

If that's true, it's a safe bet that Ford won't dither. "Matching capacity to demand" has been a consistent imperative for Ford under CEO Alan Mulally, an important part of the automaker's strategy for keeping its fixed costs in line. Mulally has shown that he's quite able to take decisive action in the face of a crisis, or a shift in demand. Put simply, Ford facilities in Belgium and the U.K. may be at risk.

That said, it could take a while to actually make a closing happen. Idling a factory in Western Europe can be a lot more complicated than idling one in the U.S. Labor-friendly laws, and government officials who make employment rates a high priority, can make the act of closing a plant a cumbersome, years-long process -- something that GM CEO Dan Akerson has recently discovered in Germany, much to his consternation.

But it's increasingly clear that Ford is going to have to do something.

Slipping sales increasing pressure
Ford's sales in Europe were down 10% through the first half of 2012. Although that drop sounds shocking, it's roughly in line with the overall market's decline. And it could be worse, as some of Ford's key competitors in the region have found:. Fiat (OTC: FIATY) posted a 16.6% decline over year-ago numbers through the first half.

Ford remains the second-best selling brand in Europe after Volkswagen (OTC: VLKAY), and its acclaimed new generation of small cars, the Fiesta and Focus, remain among the region's top sellers. But the sales environment remains very difficult, because of fewer buyers, and immense pressure to offer discounts has, in turn, cut into margins.

Ford CFO Bob Shanks warned last month that the automaker's second-quarter loss on overseas operations would be roughly triple the $190 million lost last quarter. Much of that is due to Europe, he said, suggesting that the Blue Oval's European operation might have cost it half a billion dollars or more in just the last three months.

Should Ford shareholders worry?
I still think the answer is "not yet." Ford's latest guidance reiterated that it expects to be "solidly profitable" and to generate positive cash flow for the full year, thanks to its continuing strength in North America, so the European mess is unlikely to significantly hinder Ford's global momentum.

Still, it's a big problem that needs attention -- Ford obviously can't be burning half a billion dollars a quarter in Europe. I expect that attention is forthcoming, and that Mulally and Shanks will address the European situation when they brief investors after Ford's second-quarter earnings report is released this coming Wednesday. How they decide to respond to the European sales drop, and how quickly Ford will be able to respond, will tell us a great deal.

Thanks, in part, to concerns about Europe, Ford's stock has been under pressure lately, with its stock dropping below $10 a share. But the company is still performing very well at home, and is investing heavily for growth abroad. Have these short-term pressures created an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Get instant access to this premium report.

The article A Looming Crisis for Ford in Europe originally appeared on Fool.com.

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