BMI Overcapacity View Playing Out
Ford Motor has confirmed that it is to close its Southampton, UK Transit plant, its stamping and tooling operations in Dagenham, UK and its production site in Genk, Belgium. Earlier in October, BMI noted that Ford, like other mass market manufacturers, is likely to need to take strong measures to abate the decline in profit margins in the region ( see our online service, September 26, 'Ford Announces Voluntary Redundancies Across The Region'). This view is playing out.
We believe other mass-market manufacturers may be forced to take similarly drastic action to consolidate their manufacturing facilities in the region, and tackle the substantial overcapacity problem. Indeed, we have long maintained that job cuts and factory closures in the region have been delayed due largely to political pressures, particularly from the workers' unions, rather than due to financial reasons.
Ford's Southampton facility has built the European Transit since 1972. In 2008, Ford halved output from the site, from 75,000 to 35,000 units. Currently, the plant produces 28,000 Transit units per year. Production at both affected UK facilities will cease in 2013. At Ford's Dagenham facility, however, the company will start making a new, low-CO 2, two-litre diesel 'Panther' engine from 2016.
We maintain a relatively bullish outlook on vehicle production in the UK, predicated on strong export growth, especially over the longer term ( see our online service, October 19, 'Production Forecast Revised Downward On Weak European Sales'). We believe that Ford's decision to cut production in the UK reflects a need to address overcapacity in Europe, and to consolidate its manufacturing facilities in the region, rather than a specific desire to cut production in the country.
In Belgium, Ford plans to close its Genk plant and to cease vehicle production there by 2014. Under its current plans, the company may shift production of the next-generation Mondeo, S-MAX, and Galaxy models to its assembly plant in Valencia, Spain. Ford says that this plan is still under consideration. In September, the company announced that it was investing EUR800mn (US$980mn) over 18 months in order to continue producing its current model line-up ( see our online service, September 20, 'Ford Maintains Production'). As part of the deal to keep production at the Genk site, the labour union agreed to deliver 12% savings costs - an achievement that had already been in place for the previous year-and-a-half. At the time, BMI believed that these ongoing cost-saving measures formed part of the company's decision to keep current production at the plant and to invest in the facility.
BMI has maintained a relatively bearish outlook for vehicle production in Belgium over our 2017-forecast period.
Currently, the three affected sites employ some 5,700 hourly and salaried workers. The company has labelled these job cuts and factory closures as 'cost efficiency actions', as it aims to consolidate its European production.
The company aims to relocate 'production of key products', and consolidate all European Transit vehicle output in Turkey. Ford states that this will give it a 'more efficient manufacturing footprint, significantly improved plant utilisation, and workforce reductions'. Indeed, Ford's plans will reduce installed vehicle capacity by 18%, or some 355,000 units, and yield gross annual savings of around USS$450mn to US$500mn.
Ford recently downgraded its 2012 profit forecast to a loss of some US$1.5bn, from a US$1bn loss in the region previously. In the first nine months of 2012, the company's sales in Europe declined by 12.3% year-on-year (y-o-y), to 738,527 units. In this period, the total passenger car market in the region declined 7.2% y-o-y, to 9,724,423 units. The company expects to return to profitability in Europe by mid-decade, and is targeting long-term operating margins of 6-8%.
BMI believes that these measures address the company's overcapacity issues in the region, and they should be enough to return the company to a state of financial health over the longer term.
Currently, Ford manufactures the new Transit and Tourneo Custom van models at its Kocaeli facility, and exports globally. Ford stated that the consolidation of manufacturing in Europe to Turkey reflects the lower production costs. Indeed, we have long maintained a bullish view on production in Turkey, and expect to see ongoing investment for export ( see our online service, September 28, 'Supplier Segment Set To Develop As Production For Export Matures').