Ford Earnings: A Lesson for Automakers

Ford (NYSE:F) reported record pre-tax profit of $2.2 billion, or $0.40 per share, for the third quarter. This marks 13 consecutive quarters of pre-tax profit.

The company’s strong earnings cast an interesting light on problems in the European market. Ford lost $468 million in Europe for the quarter, just below recently revised estimates of $500 million, but in line with expectations for losses exceeding $1.5 billion for the year.

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Last week, Ford announced that it would be closing three plants in Europe, including a major factory in Genk, Belgium. The facility will cost about $1.1 billion to close for an estimated savings of $730 million annually. The 4,300 employees and local government have made an effort to change the company’s mind, but overcapacity and evaporating demand will force Ford’s hand. European demand has dropped by nearly 20 percent, and Ford is only operating at about 52 percent of its capacity, resulting in massive losses.

In the most recent quarter, these losses were offset by $2.3 billion pre-tax profit from the North American business unit, which boasted a 12 percent operating margin. Ford posted pre-tax profit of $9 million in South America, and $45 million in pre-tax profit from its Asia Pacific Africa unit.

Ford’s initiatives to close plants in Europe have earned it some negative attention, but analysts and investors seem to favor the idea. The company’s hands are effectively tied. If it wants to continue operating in the region, there must be massive restructuring. Ford hopes to return to green in the area by the middle of the decade.

General Motors (NYSE:GM) has pursued a different strategy in the region. GM is hoping to strengthen its European position and cut costs by entering a strategic partnership with French manufacturer Peugeot. The companies hope to save a combined $2 billion through 2015 by cooperating on parts buying and logistics. However, GM recognizes that the relationship won’t be enough to turn a sinking ship around, and has announced that it will try to close a plant in Germany as part of its own restructuring efforts.

Ford has been making tough but smart decisions over the past few years. Its clearly effective turn-around plan in North America saw its salaried workforce cut by 30 percent, and plant capacity slashed by 25 percent — far from an ideal solution to problems in the larger car market, but other manufacturers may have to bite the bullet as well.

On Monday, Honda (NYSE:HMC) cut its forecast for the 2013 fiscal year by 20 percent. Honda and Toyota (NYSE:TM) are both facing problems of low demand and high capacity in China due to general market conditions exacerbated by a territorial dispute that saw sales for September drop over 40 percent. The quickest road to recovery may be one that follows in Ford’s footsteps, and involves the shuttering of plants.

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