Ford hit by high costs in Germany

29 August 2012

BERLIN: US automaker Ford is facing fierce competition from rival brands in the major European car markets.

Ford suffered a second quarter operating loss of $404m in Germany following a sales decline of 9.9% while Korean car firm Hyundai-Kia posted 12% sales growth, Bloomberg reports.

This divergence in sales performance suggests broader challenges for established automakers in Europe, as the two companies are being increasingly differentiated by their operating costs.

Hyundai-Kia, which began manufacturing in Europe in 2005, has taken advantage of lower costs in Eastern Europe and has plants in Slovakia, Turkey and the Czech Republic.

By contrast Ford, which opened its first European plant in 1911, is sited mostly in Western Europe with facilities in Germany, Belgium, Spain and the UK.

Operational costs differ widely, with Hyundai able to produce a compact car for approximately €207 at its Czech Republic factory. In Ford's German plant in Saarlouis, it costs the company about €480 for each vehicle.

As a result Hyundai is able to significantly undercut the American company on price, thereby appealing to recession-hit European consumers.

Ron Harbour, a partner at New York-based consulting company Oliver Wyman, also noted that Hyundai enjoys greater operational efficiency due to its late entry. "[Ford is] dealing with the legacy of what was built over 100 years [ago]," he added.

Meantime, the marque must weigh the potential risks and benefits of trying to compete with companies like Hyundai by moving production to cheaper facilities in Eastern Europe.

There is a risk of further sales decline if Ford stops manufacturing in Germany.

"If I pull out of a country, do I lose my brand image there?" said Harbour. "If I save a billion, do I lose a billion in revenue in that country? There is no magic formula."

Company spokesman Mark Truby, of Ford, admitted that the company's factories are running below capacity and said: "We will continue to match production to demand and further raise our capacity utilisation rate."

Data sourced from Bloomberg; additional content by Warc staff