A new article in the Wall Street Journal explains that Ford Motor Company has come up with a drastic plan to reduce operating losses in Europe due to its large decline in European sales. The company plans to close three assembly and parts factories, cut 13% of their workforce, and reduce its new-car production capacity by 18%. The cause for this big change is because of the continuous poor sales in Europe and forecasts that say sales are not expected to get any better in the near future. These projected losses are one and a half billion dollars for this year and next. The new plan will hopefully decrease operating costs for Ford by $500 million in the next two years.
The plan would decrease their production of vehicles produced in its Europe plants by 206,000, and also decrease the workforce by 6200 people. According to the article, “Ford’s plans are the most drastic by European auto makers as they cope with the industry’s chronic overcapacity.” So this plan is Ford’s way of matching capacity to demand, and two of the ways that a company can match its capacity to demand after overproducing are by making staff changes, in this case laying off workers, and by closing facilities, which Ford will do for three of its plants.
This restructuring plan is similar to a plan implored by CEO Alan Mulally in the U.S. in which Ford cut 30% of its workforce and reduced its plant capacity by 25% and has showed some success. Ford hopes to duplicate similar success in Europe with this strategy. The profits from the U.S. and North American sales have, so far, been able to offset the losses in Europe.
One of the plants in Genk, Belgium that Ford plans on closing was already operating at the lowest level of any plant in Europe. The design capacity of the plan allowed it to create way more vehicles than they were, so the design and effective capacity were way higher than the actual production of the plant giving it poor efficiency. The plants in Europe were not producing at the optimum operating level. The tricky part for Ford is knowing the optimum capacity because with sales not expecting to increase anytime soon, it is hard to determine the level of output they need.
One question I had was even though a similar strategy worked for Ford in the U.S. is it possible to have the same success in Europe? I think it would be difficult to repeat the success because the U.S. is just one country while in Europe it would be across multiple countries with different regulations and unions. Will this ultimately decrease the losses in Europe?
http://online.wsj.com/article/SB10001424052970203897404578078360301276102.html?mod=ITP_marketplace_1
I think this move will eventually cut down Ford’s loss because they are operating at a level with high outputs and decline in demands. European economy is not doing well at this point and there is already strong competitors in this field such as Volkwagen, Audi, and Mercedes. German automobiles industries covers their basic to luxury car needs for the consumers in Europe, which makes it harder for other company to survive. Ford should concentrate on streamlining their outputs with demands, so they can start manufacturing their car at an optimum level.
I agree with the previous comment. Ford’s competitors already have a stronger hold on the market place in Europe and by cutting down operating costs, they will eventually even out the losses that they have accrued. If Ford wants to continue to globalize and continue to grow its products, there’s always the possibility of expanding elsewhere, such as in their Asia market.
I think Ford will be able to reduce losses in Europe by matching its capacity to demand. It seems like making some staff changes and closing facilities are the best way to help Ford overcome overcapacity and decrease in demand. However, in order to achieve an effective capacity, Ford needs to forecast demand accurately and able to find the optimum operating level. To answer your question, I think it is possible that Ford in Europe will success by using similar strategy as Ford in the U.S. since they both are in the same industry and company. However, it is not an easy task to accomplish because market and economy in the U.S. and Europe are different. Therefore, it is a good idea that Ford in Europe is planning to use similar strategy, but it needs to adjust the strategy to match with its own market. Another thing to consider is that Ford’s action causes many employees to lose their jobs and indirectly impacts Ford’s supplier, which will eventually hurt European economy.