Ford’s current problems in Europe – deteriorating financial results and poor sales – are well known. Already, action has now been taken to address some of the difficulties, but more action is needed. This exclusive EIU feature reviews the latest position for Ford in Europe and considers some of the options that lay ahead..
The problems for Ford in Europe amount to what can be described as an unhappy confluence of negatives, some of which are industry-wide and some of which are more Ford-specific. The biggest industry-wide factor is the highly competitive state of the European light vehicle market. Conditions have not eased significantly in the early part of the year, with the apparently strong industry unit sales volume serving to disguise the generally poor industry fundamentals affecting many car makers. Margins remain slim and downward pressures on prices can be expected to continue for the foreseeable future. The competitive environment has been underpinned by low interest rates, a number of important model introductions and a general reluctance among the manufacturers to surrender volume or share to competitors. Further, the single currency has added to ‘price transparency’ and looks set to help to prevent any significant recovery in prices. The competitive ante is being raised even further by the ambitions of the Asian makers in Europe. The Japanese makers with European production bases are adding production capacity; the Korean makers are steadily expanding their presence too.
The downward pressures on prices and the generally highly competitive environment look set to increase in intensity in the future. Several factors are at work:
¨ Within the EU area, the agreed restriction on Japanese imports (the so-called ‘elements of consensus’) has been scrapped from 2000. While the loss of the restriction will most likely not lead to an immediate surge in the volume of imports from Japan, over time the Japanese makers will be able to import more vehicles that were discouraged by the volume restriction – especially smaller low margin cars. For Toyota, Nissan and Honda, there is also a substantial increase to production capacity at European plants to consider.
¨ A product offensive by the Korean makers should not be underestimated. They expanded volume by some 25% in 1999, and a raft of new models is in the pipeline. In a number of west European markets – such as the UK and Germany – their presence is already highly visible. Their pricing is also extremely aggressive.
¨ The arrival of the euro currency has brought considerable price transparency across continental European markets. Pre-tax differences to car prices between countries are easier to identify now; the taxation differentials on registration – and the fact that tax is paid at the rate applying in the country of destination – mean that this trade is growing.
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¨ Retail distribution structures are changing. In particular, changes to the ‘Block Exemption’ through which the European Commission allows carmakers to avoid normal competition law by selling cars through captive dealers looks certain to be – at the very least – heavily reformed. Changed arrangements could be in place by 2002 and any liberalisation could be expected to put further downward pressure on prices. The growth of internet sales and specific groups specialising in internet sales transactions (such as autobytel) will also be at work.
All of these factors – to varying degrees – will be making life increasingly difficult for all players in the European marketplace.
Looking at the more Ford-specific factors, excessive Ford production capacity in Europe is linked to an unfavourable plant location mix that sees high manufacturing costs from production plants in the UK – as well as a relatively high level of UK sourcing for components. The UK is currently a highly adverse production location – relatively speaking – on cost grounds due to the appreciation of sterling against the euro over the past year. That is expected to move the other way, but a full reversal is not in prospect in the short term.
Ford is embarking on a review of its entire European operation, but already measures have been announced. Most critically, Ford has opted to reduce output at its Dagenham (UK) plant. Around 1,500 jobs will go as production is halved with the loss of one of the plant’s two production lines. As we suspected, Ford has decided to make Cologne the lead plant for Fiesta, with Dagenham as a secondary base – and likely to concentrate on Right-Hand-Drive units for the UK and Ireland, as well as certain Fiesta-based niche models. Cologne has in recent years seen considerable investment, in part to offset high German labour costs. Dagenham has at times been given assurances by Ford over its long term future, but these ring hollow now. The full cessation of vehicle manufacturing at Dagenham must now surely be a possibility. The decision not to go ahead with a Focus-based MPV (quite a product shock, see below) could spark a similar rationalisation of European production on the Focus (CW170) platform. Saarlouis (Germany) and Valencia (Spain) are the plants in question. It is not too difficult to envisage scenarios in which Spain could win out on cost grounds, with the next Ford Ka moved out of Valencia to one of the two Fiesta sites (which would make sense, as it shares platform). Similarly, Ford Transit production could be usefully consolidated at one site, against the present two (Southampton (UK) and Genk (Belgium)).
While the move on capacity at Dagenham is certainly a step in the right direction, it should really mark the beginning of a broader rationalisation of Ford’s European product/plant mix to leave a lower cost base and a capacity level more in tune with realistic future demand levels.
Ford’s poor market position in Europe (losing share in the passenger car market in 1999 to stand at a level below that of its main rival, GM) is in part due to unfavourable product cycles. Two of Ford’s high volume model ranges – the Fiesta and the Mondeo – are fairly near to full replacement. Sales of both ranges have flagged in the run-up to replacement. Mondeo managed an estimated 230,000 units in Europe in 1999 against 311,000 in 1998; the Fiesta 311,000 against 384,000. Niche models like the Puma and the Ka have also passed their initial sales surge. The relatively young Focus range has been well received, but is competing in a tough segment with other relatively young models, such as the Opel Astra and VW Golf. Most shockingly, Ford has decided not to roll out its own ‘compact minivan’ off the current generation Focus platform. That fast-growing segment is seeing a proliferation of products and GM has achieved considerable success with its Zafira, which is built on the Astra platform. Engineering costs and delays had apparently driven the decision, which may yet prove strategically mistaken.
The year 2000 looks like being another difficult one for Ford in Europe. However, looking further out, there are some positive product actions which will be lifting sales – especially in 2001, when Ford can look forward to recovering share. Crucially, the Mondeo and Fiesta ranges will be renewed in 2001. Also, Ford will benefit from steadily rising Jaguar sales – the S-Type will be joined by the X400 ‘BMW 3 Series fighter’ in 2001. In addition, Ford looks to be in line to take over Land Rover (a prize asset that surely could have been sold off for a higher price if BMW had let others in to bid) and that will have a beneficial impact on Ford’s group sales. Wider synergies could also be very significant in the future.
The company will almost certainly be in the hunt for further acquisitions or ‘strategic partnerships’. A long-speculated tie-up with PSA or a bid for BMW (weakened by the Rover fiasco) are just two possibilities. The former would not come as a great surprise, in spite of PSA’s public line that it will retain its independence at all costs.