Ford Makes Its Move in Europe

It's official: As was widely expected, Ford (NYS: F) management informed union leaders at a Belgian factory on Wednesday that their plant would be closed at the end of 2014. About 4,300 workers will likely lose their jobs.

It's the first European plant closing for Ford in 10 years. According to reports, Ford told its labor leaders that the move was necessary to eliminate excess production capacity in the slumping European auto market, where sales have fallen to a near-20-year low.

Ford has suffered steep losses in Europe this year. Sales have declined sharply as a bitter recession has kept consumers away from dealers. Closing at least one factory was widely seen by analysts as a necessity for Ford, and the Genk, Belgium, facility was thought by most to be a likely target.

But will there be more to come?

This might just be the beginning
There's reason to think that closing Genk might just be the beginning of Ford's plan to remake its European operations. Bloomberg reported on Wednesday that Ford Europe chief Stephen Odell is expected to meet with labor representatives from all five of its U.K. manufacturing sites on Thursday. As was the case before Wednesday's meeting with labor leaders in Belgium, Ford has not announced an agenda for the U.K. meeting.

Ford's standard practice is to inform labor leaders of plant closings before making them public. So is Ford planning to close a factory in the U.K.? It's possible. Ford has one vehicle factory in the U.K., in Southampton, and three factories that manufacture engines and body panels. It also has a transmission factory in Halewood, a 50-50 joint venture with German supplier Getrag.

One (or more) of those plants could be targeted for closure. Ford's engine plant in Dagenham is by far the biggest of its U.K. manufacturing facilities, employing almost 2,000 workers. It makes an array of diesel engines, including a series of 4-cylinder diesels jointly developed with PSA Peugeot Citroen (NASDAQOTH: PEUGY.PK). The assembly plant in Southampton, which makes the Ford Transit van, is a relatively small facility with about 500 employees.

What will drive the decision?

How Ford decides to close factories
The decision will come down to how Ford can best consolidate existing production. Put simply, Ford wants to be able to make everything it makes today, but in fewer factories. The cars and minivans built at the Belgian facility will probably be built instead in Spain, Ford said on Wednesday.

As with rival General Motors (NYS: GM) and most other European automakers, most of Ford's European factories are underutilized, meaning that they are running well below capacity. Analyst estimates suggest that the Belgian factory was running somewhere between 50% and 60% of its maximum capacity. A general rule of thumb in the auto business is that factories break even at about 80% capacity; below that, they're losing money. Ford's goal will be to get all of its plants over that magic 80% mark by consolidating production, while leaving some room for growth once the European market eventually recovers.

Ford lost $404 million in Europe in the second quarter, and is expected to post another sizable loss when it reports third-quarter earnings next week. Morgan Stanley auto analyst Adam Jonas estimates that the closing of the Belgian facility will save Ford about $300 million a year – helpful, but far from enough to restore Ford Europe to sustainable profitability.

Sustainable profitability in Europe is CEO Alan Mulally's stated goal, and while Ford is making other moves to boost its business in the Old World, further factory closings seem almost inevitable. Ford's approach under Mulally has been to deliberate carefully, and then take quick, decisive action.

Wednesday's move in Belgium was a tough but welcome first step. How much more will come? Stay tuned.

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The article Ford Makes Its Move in Europe originally appeared on Fool.com.

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