DBRS Comments on Ford’s Announcement of Planned Restructuring in European Operations

DBRS notes that Ford Motor Company (Ford or the Company, rated BBB (low) with a Stable trend) today announced a series of planned actions aimed at transforming its operations in Europe, where the structural overcapacity of the automotive industry has been exacerbated by a significant contraction in demand. Regional volumes are estimated at approximately 14 million units, which would represent the lowest annual level since 1994. DBRS notes that our recent upgrade of Ford’s ratings to investment-grade levels (for details, please refer to DBRS’s press release dated September 14, 2012) had incorporated these ongoing difficulties in Europe. Accordingly, today’s announcement will have no impact on Ford’s ratings.

While the challenges and projected losses associated with the Company’s European operations remain significant, DBRS notes that they continue to be readily outweighed by the substantial profits generated in North America, with Ford confirming again today that it expects to generate strong total full-year pre-tax profit for 2012 and positive operating cash flow of the Automotive segment. Moreover, despite economic uncertainties in the United States, DBRS expects automotive sales in Ford’s key market to continue to trend positively over the near to medium term. DBRS also notes that the Company’s favourable cost position in North America would in any event enable it to absorb a meaningful contraction in U.S. industry volumes while continuing to generate significant profitability to offset the expected European losses.

Highlights of Ford’s announced measures in Europe include the following:

(1) Planned closure of the Company’s assembly facility in Genk, Belgium, by the end of 2014, with production of the next-generation Mondeo, S-MAX and Galaxy possibly moving to Ford’s assembly plant in Valencia, Spain.

(2) Planned closure of two facilities in the United Kingdom in 2013 – namely, Ford’s assembly plant in Southampton and its stamping and tooling operations in Dagenham. (As a function of Southampton’s planned closure, production of the Transit model is expected to be consolidated in Ford’s principal commercial vehicle manufacturing facility operated by Ford Otosan in Kocaeli, Turkey, in 2013).

The planned closures are estimated to result in in a reduction in installed vehicle assembly capacity of approximately 18% and expected to result in gross cost savings in the range of $450 million to $500 million.

In addition to the outlined cost measures, Ford is also targeting a boost in its revenue base in Europe through measures aimed at strengthening its brand image as well as a significant planned product offensive that will bring 15 global vehicles to Europe within five years, thereby notably improving the Company’s product cadence. Key planned future vehicles include:

(1) Ford’s next-generation Fiesta, to be introduced later this year, with a performance version expected for 2013.

(2) Ford’s next-generation Mondeo, expected to be launched in late 2014 if the plans for Genk are confirmed.

(3) The launch of the new Kuga later this year, followed by the EcoSport small sport utility vehicle (SUV) as well as the Ford Edge, as the Company plans to increase its presence in the European SUV segment.

(4) A complete redesign and expansion of the Company’s commercial vehicle range over the next two years.

(5) The Ford Mustang will also be made available in Europe.

DBRS views the above-cited measures positively, although they collectively represent a protracted process, with Ford reiterating that its European operations are expected to incur further losses over the near term and not projecting a return to profitability on the continent until mid-decade. DBRS also observes that the planned actions are not dissimilar to steps previously taken by Ford in North America, where a significant reduction in Ford’s cost position amid a sustained product offensive (which was largely successful and afforded the Company significant pricing gains) helped the Company to return to substantial profitability during the past three years (after previously incurring sizeable losses).

However, DBRS notes that Ford’s recovery in North America was also facilitated (and expedited) by an industry-wide capacity reduction amid an anticipated increase in vehicle demand from extremely weak prior levels. In contrast, visibility in Europe on the timing of a potential recovery remains quite limited, with the regional industry’s overcapacity remaining significant for the time being, despite Ford’s proposed measures and the potential plant closures announced by other auto manufacturers. In view of this, DBRS believes that it is vital that the Company continue to generate strong profitability in North America as it undertakes its planned European restructuring.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Automotive Industry (April 2011), which can be found on our website under Methodologies.