Fitch: Ford's European Restructuring, an Aggressive Move
Ford Motor Company's (Ford) plans to close plants in Belgium and the U.K. is a positive and necessary step in rightsizing its European capacity, according to Fitch Ratings. Although the restructuring will result in significant cash outlays over the next two years, Ford has the liquidity to accomplish it, and over the long term, it will contribute to a lower cost structure and stronger pricing. Overall, we view the strategy outlined today as consistent with the rationale behind our 'BBB-' issuer default rating on the company.
Ford's restructuring plan is the most aggressive announced thus far in the European auto industry, with an assembly plant in Southampton, U.K. and a tooling and stamping plant in Dagenham, U.K. both slated for closure in 2013. In addition, Ford intends to close its assembly plant in Genk, Belgium in 2014. The plant closures will result in an 18% reduction in Ford's installed vehicle assembly capacity and estimated gross cost savings of between $450 million and $500 million annually once completed.
Within the European industry, only two plants have been closed since the downturn of 2008-2009, a General Motors Company (GM) plant in Belgium in 2010 and a Fiat S.p.A. plant in Sicily last year. GM continues to work with its unions on a plan that would potentially shutter a German plant, but, assuming an agreement is reached, the closure is not likely to occur for several more years. Meanwhile, Peugeot SA (PSA) has announced that it will close a plant in Aulnay, France in 2014. Increasing French government involvement in PSA through the appointment of a board member could inhibit the company's ability to undertake further restructuring in the future, however.
The relatively swift pace with which Ford plans to implement its restructuring is made possible, in part, by its European plant footprint and by the cadence of its new product releases. These have provided the company with sufficient flexibility within its European manufacturing operations to shift production from the U.K. to Turkey, while Genk production is planned to be moved to Spain. Once the moves are completed, Ford's restructuring should lead to significantly better capacity utilization in its European operations.
The restructuring is not without risks. Shifting production on the scale that Ford is contemplating could lead to production issues, and quality-control problems could rise as disgruntled workers continue to build vehicles for another year or two at plants slated for closure. More broadly, if Ford's European competitors do not also sufficiently rightsize their capacity in the region, the company will not fully realize the pricing benefits of its reduced capacity.
In addition to the plant closures, Ford intends to strengthen its market position in Europe with the introduction of 15 new vehicles in the region within the next five years. Ford's relatively strong liquidity position, driven largely by positive free cash flow generation in North America, as well as its increasing use of common global platforms, has put the company in position to undertake this significant roll-out of new vehicles despite the weak European market.
Ford noted today that it expects losses in its European unit to exceed $1.5 billion in 2012, highlighting the severely weak market conditions in the region. Ford's sales in Europe were down 12% in the first nine months of 2012, roughly in line with most other mass-market auto manufacturers in the region. Ford projects that its European profit outlook in 2013 will be similar to what it has seen this year, suggesting that conditions in the region are not likely to meaningfully improve in the near term. By mid decade, Ford is projecting that its European operations will once again be profitable.
Despite the weakness in Europe, Ford also noted this morning that it expects to post a pre-tax profit for the total company in 2012. A relatively strong performance in the U.S. is expected to more than offset the losses in Europe. Ford's U.S. profitability is a result of its low breakeven level and strong product pricing, both of which are due, in part, to the restructuring work that the company has undertaken over the past several years. The European restructuring rolled-out over the past two days will constitute an important step in positioning the company's European operations to ultimately perform in a similar fashion.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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