Think things in the U.S. are bad? Ponder this for a moment: Auto sales in Europe are at a 17-year low.
For the automakers that do business there, including Ford (NYS: F) and General Motors (NYS: GM) , the situation is even worse than it sounds. Price wars have broken out in some countries, as some manufacturers have resorted to deeper and deeper discounts to try to capture the few sales that are happening.
That leaves Ford and its rivals with an ugly choice: Join the price wars and give up profits, or hold the line on pricing -- and give up sales.
No good choices as the market continues its free-fall
The price war is getting brutal. GM Europe executive Susan Docherty described the current discounts offered by rivals like Fiat (NASDAQOTH: FIATY.PK) and PSA Peugeot Citroen (NASDAQOTH: PEUGY.PK) as "very scary," and she's right: Incentives totaling as much as 30% of cars' sticker prices are becoming increasingly common. "Nobody can make money in Europe when you've got incentives at that level," she told Bloomberg.
Meanwhile, even the sales that are happening are suspect. Ford Europe vice president Roelant de Waard told Bloomberg that the practice of dealers selling cars to themselves to boost reported sales figures is becoming widespread. Such cars are later sold as "used" at even steeper discounts.
Ford, to its credit, has tried to hold the line on pricing, refusing to wade too far into the incentives war being conducted by Fiat, Volkswagen (NASDAQOTH: VLKAY.PK), and others. That's consistent with the principles of its global "One Ford" strategy, in which it sets pricing at profitable levels and then builds just enough vehicles to meet demand.
But its refusal to slash prices has cost it dearly in other ways: Ford's European sales were down 29% in August versus year-ago totals, and its market share fell from 7.7% to 6%.
How bad will Ford's losses get?
It'll get worse before it gets better
Ford lost $404 million in Europe in the second quarter -- down from a $176 million profit a year earlier -- and said in July that it expected its losses in the region for all of 2012 to exceed $1 billion. They may exceed it substantially: Morgan Stanley auto analyst Adam Jonas recently speculated that Ford's Europe losses could go as high as $2 billion for the year.
Despite a strong lineup of products, Ford's European sales are falling harder and faster than most analysts expected. How will Ford respond? One way will be to expand that strong lineup, drawing on Ford's global product portfolio to bring a slew of additional cars and trucks to European markets in hopes of attracting new categories of customers.
But it's clear that Ford will also have to make some hard cuts in order to restore its European unit to profitability. Ford said this week that it planned to cut several hundred salaried jobs in the region through a series of voluntary buyout programs. That will help, but bigger cuts will likely be necessary.
Analysts have been suggesting that a Ford plant in Genk, Belgium, is likely to be closed. UBS analyst Colin Langan recently suggested that a plant in Spain and possibly parts of Ford's huge facility in Cologne, Germany, could also be at risk.
The upshot: a familiar approach to a new set of problems
How did Ford turn around its operation here at home? In a nutshell, with carefully thought out cuts of factories and workers coupled with launches of strong new products. Ford CFO Bob Shanks hinted in July that Ford would follow a similar approach in Europe, a hint that CEO Alan Mulally has since reiterated.
Rival GM has learned the hard way that closing a factory in labor-friendly Europe isn't nearly as simple as closing one here in the U.S. Will Ford have an easier time as it seeks to restructure its way back to profitability in Europe? We'll find out.
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The article Grim Times for Ford in Europe originally appeared on Fool.com.Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford and creating a synthetic long position in Ford. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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