Ford, GM Europe 2012 losses expected to exceed $1.3 billion

Ford shocked investors with its prediction that losses in financially beleaguered Europe will hit $1 billion in 2012, but one investment bank reckons that this is understated to the tune of about $300 million, and GM Europe will at least match that total for the year as a whole as well.

In its second quarter financial report, Ford Europe almost doubled its previous prediction of its losses for 2012. The news led to speculation that Ford might want to shut a factory in Europe, but analysts have said temporary layoffs are more likely.

The read across for GM Europe and its Opel-Vauxhall subsidiaries isn’t great either when it reports first half results next week. GM Europe is not only facing the same weak markets as Ford, but is in the midst of a management upheaval after dumping its President and Opel board chairman Karl-Friedrich Stracke. Rumours abound that Detroit might run out of patience and shut the whole serial European loss-maker down, while speculation persists that Chevrolet and Opel can’t coexist as separate brands, as both chase buyers at the bottom end of the market and cannibalise sales.

In a report, Deutsche Bank analyst Rod Lache said Ford’s capacity use rate will be only 66 per cent this year and GM Europe’s 71 per cent, while the sales fall is unlikely to stabilize.

“If we look to the U.S. experience in 2006-2008 as a guide, the extreme discounting and other tactics that were aimed at supporting demand ultimately led to even sharper declines down the road. While we believe Ford is responding to the problems in Europe in a sensible manner by under-producing and de-stocking in order to defend pricing as much as possible, there have been no clear signs yet that its European losses are at the bottom,” Lache said.

Lache said he expects Ford Europe and GM Europe to each lose about $1.3 billion on an EBIT (earnings before interest and tax) basis.

Lache said GM Europe has some leeway in cutting costs.

“We believe GM has greater opportunities for mitigating losses near term. Headcount reduction measures at GM Europe are well advanced, and we see significant opportunities from working with PSA,” Lache said.

GM has a seven per cent stake France’s PSA Peugeot-Citroen, which announced first half automotive losses of just over $800 million. Estimates for 2012 call for Peugeot automotive losses of up to $1.2 billion.

Ian Fletcher, analyst with IHS Automotive, said in a recent interview that Ford Europe is in fact on the right long-term track, and doesn’t have much of an “excess capacity” problem.

“Things don’t look great for Ford in terms of capacity utilization, but it is  going through a transitional stage,” said Fletcher.

Fletcher said Ford Europe is currently reorganizing its production. It will also benefit from some new models.

“Ford is in the process of raising its capacity utilization and putting similar sized vehicles in the same plants, and cutting down inefficient supply chains. All these new models will inject some new vigor into sales. Looking at the numbers, 2012 will be Ford’s lowest ebb in the region with production likely around one million. But we expect to see this start growing next year towards 1.3 million by 2014,” Fletcher said.

Fletcher said Ford’s increased production will be of higher profit margin vehicles. He didn’t think then that Ford would need to close plants, but might have to lay-off workers temporarily.