Ford’s profitability in Europe is hurt by excess plant capacity

Article by Anita Panait, on July 22, 2012

With General Motors and PSA/Peugeot-Citroen announcing planned plant closures and employee layoffs in Europe for the past six weeks, Ford Motor Co. may soon follow suit by closing at least one factory in the continent. Seeing a chunk of its profits eaten away by losses in its European operations, Ford could be contemplating to shut down its assembly plants in Southampton, England, and Genk, Belgium.

Ford divulged in June that it will report "substantially lower" second-quarter earnings after posting $570 million in losses from operations in Europe, Asia and South America.

Ford is currently using just 63 percent of its capacity in Europe, where the carmaker may log more than $1.1 billion in pre-tax losses for 2012, according to Adam Jonas, an analyst at Morgan Stanley. Jonas told Bloomberg that their calculations show that Ford's capacity utilization in Europe is even lower than GM and other carmakers, except for Fiat.

Morgan Stanley remarked that Ford must address its excess-capacity problem with decisiveness “to stay ahead of the wave." In contrast to Morgan Stanley’s calculations, IHS Automotive estimated that Ford's capacity-utilization in Europe is higher than GM at 66 percent to 62 percent. Either way, Ford still faces a big problem, since carmakers need to utilize at least 80 percent of their capacity to post a profit.

Ford is currently employing the strategy crafted by chief executive Alan Mulally to produce cars only when there is a real demand. According to Ford, it is developing a plan to match capacity to demand in Europe, where it earned $1.73 billion since 2007, but succumbed to losses in two of the last three years. GM, meanwhile, has been posting losses in Europe since 1999, racking up a total of $16.4 billion.

Topics: ford, europe, profit

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