Automaker Ford's (NYSE:F) announcement that it is closing down two of its units in the United Kingdom and one in Belgium should enhance its efficiency and improve its profitability in the coming years. That's because the company is unable to use its capacity fully in the face of economic downturns and debt crisis in the region. The company's restructuring efforts come on the heels of its CEO Allan Mulally commenting last month that the European auto industry needs to resize to actual demand in order to be profitable.
The current move is in contrast to the earlier one witnessed in 2008 when Ford sold its prestigious brands Jaguar and Land Rover to India-based Tata Motors for $2.3 billion. This time, the company chose to shut down the plants that are economically unviable. This is because of the fact that the company has done well to return to the profitability and dividend table following the recession in 2008-09. However, when it sold the JLR unit, it was burdened by debt in 2007-08. In fact, Ford was the only auto company in the U.S. not to ask for a bailout package in 2009.
The latest efforts indicate the confidence with which the company could make a firm decision to close the shutters on three of its plants in the European region. The closing of the three plants would result in 5,700 job cuts and cut its production capacity by 355,000 vehicles. This represents 18% of Ford's total production capacity in the region. However, compared to the 2007 level, it represents 20%.
While releasing the second-quarter results, Ford has indicated that it would incur a loss of more than $1 billion in Europe. Today, the company indicated that the loss is estimated to cross $1.5 billion.
Revenue ($ in Billion)
Pre-tax loss ($ in Million)
The above table indicates ballooning pre-tax loss and the falling wholesale units volume in the last three quarters. While revenue dipped 14.5% in the second quarter from the fourth quarter, wholesale units' volume dropped 8.2% in the same period. Ford is not the only company to face such a situation. Other automakers such as General Motors (NYSE:GM), Peugot and Fiat SpA have also reacted by either closing down or outlining their plans to down the shutters in the Europe.
Ford has indicated that the latest move will bring in yearly savings of $450 million to $500 million. The company is also aiming to achieve a long-term target of 6% to 8% operating margin in the region.
Despite the substantial loss in the Europe region, Ford has indicated that its pretax earnings for the third quarter would be higher than the second quarter of 2012. The company reported pretax profit of $1.8 billion, or 30 cents, EPS, while net income was $1 billion and EPS was 26 cents for the second quarter. Ford will release its third-quarter results on Oct. 30.
Meanwhile, in a research note to clients, S&P Capital IQ analyst Efraim Levy commented, "We believe in light of a greater than 20% decline in car volume sold in Europe vs. 2007, industry-wide plant closures are needed. Concrete plans to improve efficiency, lower costs and reduce the need for debilitating price discounting would enhance investor confidence in Ford, in our view." He has also reiterated his Buy rating on shares of Ford.
Looking at the volume of trade today, it indicates the confidence of investors in the company's announced measures. The stock has gained around 2% and is trading above 50-day and 200-day moving averages of $10.16 and $10.15, respectively.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.