EUR 850.00 For Business Accounts Only

Morningstar | Ford Begins Its Second European Restructuring Effort This Decade

We are not changing our fair value estimate for now due to Ford's Jan. 10 European restructuring announcement. Before making any changes in our model for Europe and possibly 2019 guidance, we will wait to hear more from management around targeted cost savings, possibly given as soon as Jan. 15 and 16 at two conferences in Detroit during the auto show. The European news alone would likely not impact our fair value estimate by more than $1 per share, if at all. We are also waiting to hear details of an expanded partnership announcement with Volkswagen reportedly to happen on Jan. 15 that would likely take the firms' relationship beyond commercial vehicles, but we doubt there'd be a major equity investment in each firm by the other, such as with Renault-Nissan, due to family control at both Ford and VW.

The European restructuring will involve closing a French transmission plant in August, ending production of the C-MAX and Grand C-MAX multi-purpose vehicles in Saarlouis, Germany, a strategic review of the Ford Sollers Russian joint venture with an announcement coming in second quarter, and job cuts in the U.K. Ford will provide more information later once it has had discussions with the unions and is hoping to reduce headcount as much as possible via voluntary buyouts. Salaried jobs will also be terminated, but Ford did not provide a targeted job reduction number of its roughly 53,000 European headcount. More plant closures are possible in our view but depend on talks with the Works Council.

We think management needed to make these hard decisions to make Ford more physically fit, as CEO Jim Hackett says. Management originally guided in 2018 for Europe to be profitable but changed that guidance to a loss in July due to Focus launch costs, exchange, and problems in Turkey and Russia. Ford Europe in the year's first nine months has lost $199 million, a $477 million decline from the first three quarters of 2017. The long-term EBIT margin target for Europe is 6%.

Europe also lost a combined $3.4 billion across 2011-14, by our calculation, and these losses stopped for 2015-17 once an October 2012 restructuring program finished with the closing of the Genk, Belgium, plant in December 2014. The 2012 program involved an 18% capacity reduction, separation costs of over $1 billion, and gross annual cost savings of about $450 million. We like the 2019 announcement of a more targeted passenger vehicle portfolio, which we interpret to mean much like Ford North America, Ford Europe will discontinue less desirable models and focus on higher margin performance, off-road, and light truck models. Ford's SUV's in Europe had a record volume in 2018 at over 250,000 vehicles sold, so demand is moving toward these types of vehicles. Ford Europe will import another SUV to be revealed in April and import a Mustang inspired all-electric utility vehicle in 2020. All European nameplates, starting with the new generation Focus that went on sale last year, will eventually offer an electrified option, which would mean anything from a mild hybrid to full BEV.