The Big Challenge Facing Ford

To nobody's surprise, the auto industry's struggles in Europe are getting wilder as the deep economic uncertainty continues.

If a huge loss from PSA Peugeot Citroen (NASDAQOTH: PEUGY.PK) and epic boardroom drama at General Motors' (NYS: GM) German subsidiary weren't enough, now comes a war of words as Fiat (NASDAQOTH: FIATY.PK) (and Chrysler) chief Sergio Marchionne accused Volkswagen (NASDAQOTH: VLKAY.PK) of trying to buy market share while its rivals are struggling.

Could that be true? Maybe: There's no question that a price war has erupted, clobbering all of the automakers' margins as sales continue to fall. At least one analyst has suggested that VW is using profits from China to subsidize losses in Europe.

Meanwhile, everyone is awaiting the next move from the latest automaker to join the "troubled" list in Europe: Ford (NYS: F) .

A big new challenge for the Blue Oval
Because so many other automakers have struggled recently, few observers were surprised when Ford CFO Bob Shanks warned in June that the Blue Oval's losses in Europe were about to widen considerably. Even fewer raised eyebrows when Ford reported a $404 million quarterly loss in the region this past week.

The problems in Europe have quickly risen to become one of the biggest challenges on the plate of CEO Alan Mulally and his team. Sometimes, during an economic downturn, a healthy automaker's best strategy is to ride it out: Trim expenses where possible, but stay on plan and wait for the economy to improve.

But that won't work this time: Shanks, expressing a view that is widely shared, said on Wednesday that Ford views the problems as "more structural than cyclical in nature" - in other words, the auto industry's challenges in Europe go much deeper than the present economic mess, and won't be fixed by a healthier economy.

Widespread action will be needed
Simply put, Europe has too many car factories. Europeans don't buy enough cars and trucks to make them all profitable. That means that some will have to close -- but closing factories in labor-friendly Western Europe can be a political, legal, and public relations nightmare. No automaker wants to go there, but some -- if not all -- will have no choice.

This isn't just a Ford problem. Overall industry production capacity will have to decrease for any of the affected automakers to thrive. Part of Marchionne's ire at VW has to do with the German automaker's reluctance to close any of its factories, even as Fiat has already begun the process of closing a plant in Sicily.

Peugeot has announced plans to close a factory near Paris and cut 8,000 jobs -- an announcement that alarmed the French government, which responded with offers of an aid package. GM has also taken steps to close a plant, this one in Germany -- where, as the German media has made clear, no auto factory has closed since World War II.

But GM's plant in Bochum won't close anytime soon, thanks to pushback from unions and government officials. Opel's announcement of the plans to close Bochum said the factory may stay open through 2016, a time lag that may have contributed to the recent ouster of GM's European chief.

Now into this mess comes Ford -- with rumors flying that two of Ford's European factories could be on the chopping block.

How will Ford respond?
During Ford's earnings call on Wednesday, Shanks and Mulally hinted that plant closings were possible -- reporters were advised to "look at what we did in North America," where Ford's painful restructuring last decade included several factory shutdowns. But Shanks seemed to walk that back a bit in a subsequent interview with Bloomberg, saying: "Our intent is not to shrink. Our intent is to grow our business in Europe."

Ford is already reducing costs in Europe in a number of ways, Shanks said. Marketing has been rolled back, assembly lines slowed, and temporary workers cut. But Ford isn't yet ready to share more details of its plan to restore its European division to profitability, Shanks and Mulally both said.

Meanwhile, the Blue Oval's market share in Europe fell to 7.7% in the second quarter, down from 8.3% in the year-ago period. Shanks told Bloomberg that much of that drop comes from Italy and Spain, where rivals' discounting has gone beyond what Ford is willing to match.

Ford is moving ahead with plans to update its European product line, though Automotive News Europe recently reported that Ford had rolled back the production start date of its new Mondeo sedan by three months. The new Mondeo, a twin of the Fusion sedan that Ford will launch in the U.S. this fall, was expected to go into production at Ford's Genk, Belgium, facility next April.

Genk is one of the two factories rumored to be on Ford's shutdown list. Is that a clue to Ford's next move? Stay tuned.

Thanks in part to concerns about Europe, Ford's stock has been under pressure lately, dropping to levels not seen in years. 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 other 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.

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