GM vs Ford: Who Has The Edge In European Restructuring ?

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Ford Motor

General Motors (NYSE:GM) and Ford Motors (NYSE:F) have both had a similar year in certain aspects. Both of the stocks have resurfaced in the last 4-5 months helped by strong North American earnings in the second and the third quarter. North American accounts for roughly 60% of the total revenues for both the automakers.

Europe is a big concern for GM as well as Ford, the automakers are bleeding red due to overcapacity issues and the fact that labor unions are a major impediment to shutting plants with excess capacities makes it difficult to reduce overcapacity. European losses are expected to top $1.5 billion for GM as well as Ford and both the companies aim to become profitable in Europe by the mid-decade.

See full analysis for Ford Motors

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However, when it comes to restructuring their European operations, Ford certainly seems to have the upper hand. During the third quarter earnings call last month, Ford announced its decision to close three plants in Europe; one in Belgium and two in the U.K. The UK facilities will close by mid-2013 while the facility in Genk, Belgium won’t close until the latter part of 2014. The plant closures will help the automaker shrink its capacity by 18% (or about 355,000 units) in the region as well as reduce its workforce by 13%. With these closures, Ford hopes to save around $450-500 million annually.

At the same time, the automaker also plans to boost its current market share of 7.8% with the introduction of 15 new models in the region over the next five years including newer versions of Mondeo, Fiesta and Kuga and the iconic Mustang. Since these vehicles will be global vehicles as part of its One Ford strategy, a turnaround in the sales figure would also help improve its operational efficiency through standardization of parts and shared R&D costs. Ford is targeting a long-term margin of 6 to 8% for Europe.

GM also has rolled out plans to turnaround its European operations. It purchased a 7% stake in the French automaker Peugeot PSA as part of a strategic alliance in which the two companies had initially hoped to save $2 billion annually in shared R&D costs and use of common technological platforms. But that move seems to be backfiring as GM in talks to end the alliance with Peugeot now accepting a government bailout which will prevent any French job cuts. [1]

GM will also introduce its subcompact car called Adam at the start of 2013. But as is the problem with subcompact cars, the margins are usually lower than bigger vehicles and so it would take a significant number of Adams out there on European streets to make a mark on the automaker’s income statement. Moreover, Opel’s portfolio is one of the most outdated ones in Europe and its brand perception doesn’t echo well with the average customer in the region.

Also, GM is in discussions with labor unions to close its Opel plant in Bochum, Germany in order to reduce excess capacity. However, the negotiations could very well continue into 2013 and the plant shutdown, even if it does takes place, won’t happen before the start of 2017. Compared to Ford’s shutdowns, GM’s closures are untimely and lack certainty. Overall, Ford’s restructuring seems to be more concrete and therefore we believe Ford will emerge as the winner in the race to overhaul their respective European operations. [2]

We have a $12.6 price estimate for Ford, which is about 15% above the current market price.

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Notes:
  1. GM, Peugeot Citroen discussions break down, November 13, 2012, freep.com []
  2. GM badly lags Ford in Europe restructuring, November 3, 2012, reuters.com []