On October 24, Ford (NYSE:F) made a lot of waves in the auto industry when it announced it was closing final assembly plants in Southhampton, England and Genk, Belgium. The Company also announced it would shutter a stamping plant in Dagenham, England. In all, Ford will reduce its capacity by approximately 18% and is shedding nearly 13% of its workforce in Europe, or 5,700 jobs. The closures are to take place by summer 2013. The company will continue to build engines and transmissions in the country. Ford produced its first car in the U.K. in 1911. Ford is retaining a diesel-engine production plant at Dagenham and its petrol engine production plant at Bridgend. It will also keep its transmission-making joint venture with Getrag at Halewood. Ford Europe CEO Stephen Odell said the Company would invest £1.5 billion ($2.41 billion) in the Dagenham engine plant to make next-generation diesels.
Yet again, Ford is the first automaker that is really taking strides to fix the problem that is Europe. Europe had previously been the world's largest auto market, larger than the United States and larger than China. However, the financial crisis, Great Recession, and subsequent government debt problems struck and shrunk auto sales. Now auto manufacturers are trying to catch up and match supply with demand. In the United States, there is historically approximately two months of sales of inventory. In Europe that number has spiked much higher as auto sales continue to fall.
Europe accounts for approximately 20% of revenue and almost 30% of production. Ford relies more heavily on Europe than many of its American counterparts. However, it is the European automakers such as Peugeot and Fiat that will really have to adjust production levels to help the industry out of the pothole that it is in. Peugeot received an 18 billion euro lifeline, seven of which is guaranteed by the French government, but that is just delaying the inevitable. This feels eerily similar to the two auto bailout checks the government wrote to General Motors (NYSE:GM) and Chrysler, before the quick stint in bankruptcy. Ford didn't accept money from the government then, instead it did what it needed to do (close plants, shift production around), and it appears that CEO Alan Mulally and Mr. Odell are doing what needs to be done this time.
I am applauding this move. In contrast, GM has been throwing good money into fixing its European operations without adjusting supply. Ford is (sorry for the cliché) taking the bull by the horns and really taking a step that many other automakers are sure to follow in the coming days. 5,700 jobs lost is not what Europe needs right now, but the quicker production and supply match demand, then the quicker the auto industry in Europe will rebound. Europe is becoming a black hole as companies are spending money to restructure operations, but refuse to close plants. The moves are expected to reduce its operating costs by $500 million in the next two years. (Note: Ford lost $553 million in Europe through the first six months of 2012).
This is a great first step for Ford to fixing the European market. Management indicated it expects to lose approximately $1.5 billion in Europe during 2012 and a similar figure during 2013. The benefits will be felt in the second half of 2013 and into 2014. Europe has been a main reason why Ford's stock was stuck in the mud. Ford's stock is down 4% year to date, compared to the 12% improvement in the S&P 500. This is only the first step hopefully, and should help to jump start the stock price.
Disclosure: I am long F. 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.