Ford’s shrinking profits on its European operations (down to just USD28 million in 1999 against USD193 million in 1998) are prompting yet another re-assessment of the company’s cost base in Europe. However, the problem of falling profitability for Ford is explained by several factors – of which cost is one.

The general market environment in Europe is tough for all vehicle makers: competitive pressures are intense and margins are slim. For Ford, product cycles on key models are not helpful either, with sales of the Fiesta and Mondeo models looking sluggish prior to their upcoming replacement. While the new Focus has been well-received, it has had to compete in an ultra-competitive segment of the market at the same time as new models from Volkswagen and GM’s Opel have been hitting the market. Overall, Ford’s performance in the western European car market in 1999 was lacklustre: share declined from 11.8% to 11.2%. That took Ford’s share below that of rival GM’s share of 11.5%.

Against that background, the company is urgently looking at options for cost reduction on its European operations. For Ford, a maker with extensive UK vehicle manufacturing facilities, an additional and increasingly serious problem has been presented by the appreciation of sterling against the euro. Over the past year, sterling has appreciated by some 15% against the euro – a very sizeable shift. Against the German mark (tied to the euro, of course), sterling stands at a 14 year high. As a result of this sharp euro depreciation (sterling has barely moved versus the dollar) exports from the UK to euro-zone markets on the European continent have become increasingly unprofitable. Ford appears more exposed to this currency problem than most other European volume makers; indeed, the problem is compounded by a relatively high parts content on Ford vehicles supplied by UK-based component operations. It would seem inevitable that Ford will seek to put added pressures on its European suppliers – and especially those supplying from factories in the UK – to reduce their costs further. That can be virtually be taken as read, but will not be sufficient action on its own.

The more radical cost reduction options being considered concern Ford’s vehicle manufacturing plants across Europe. Various forms of rationalisation are possible, with particular models being consolidated at single rather than multiple plants always a strong possibility. In that context, consolidating Transit production at either Southampton (UK), or Genk (Belgium) appears to make sense – given the volumes involved. But both plants are gearing up for the next generation Transit model, so the timing would not be ideal and the UK is the biggest European market for the Transit – which would tend to support Southampton’s continuing role in spite of the impact of high sterling on costs.

Attention is currently more heavily focused on the Dagenham (UK) and Cologne (Germany) plants, both of which manufacture Fiesta cars (with Cologne additionally making the Puma small coupe – which is on the same platform – and Dagenham also making commercial van versions of the Fiesta). Cologne lost the Scorpio executive car when it was dropped from the company’s line-up in 1998, which left a significant hole in its output. Both plants are eagerly awaiting the next generation Fiesta (codenamed B153 and new in 2001) and suffering poor capacity utilisation due to low demand for the current Fiesta. On the face of it, one or other of the plants is under threat of closure, with the company able to consider consolidating all – or most – Fiesta platform production at one plant to reduce unit costs. In practice it is not that simple; Cologne is also a Ford centre for engine and transmission manufacture – these activities are very firmly in place. Moreover, Cologne has gained other responsibilities in recent years. A complete cessation of vehicle manufacturing in Cologne looks extremely unlikely after the investments that have taken place. Similarly, Dagenham is the focus of a major investment plan aimed at raising capacity there to 450,000 units, around 180,000 units higher than currently. As part of Dagenham’s ‘regeneration’ plan, there will also be a supplier park (as per Valencia, Saarlouis and Genk) as well as a new niche model (B257) added to the next generation Fiesta.

One option for Ford – and a more likely one – would be to adjust the mix of output between the two plants, so that one has a much higher output level than the other. That way, the lower volume plant could concentrate on niche variants while the other specialises in the larger volume model variants. Such a solution would also be less controversial; overall production capacity could be quietly reduced. The company has made considerable progress on flexible working progress at both plants, so industrial relations differences should not figure too highly in the decision-making. Germany’s higher labour costs have been offset to some degree by the currency differential.

One thing is for sure: any decision affecting the future of Ford’s plants in Europe will be highly politically charged. It is perhaps ironic that the Ford plant that for many years looked most vulnerable – Halewood (UK) – is out of the frame this time around. Halewood’s future has been secured as a Jaguar facility, making the X400 ‘baby Jag’ starting 2001.