Ford Motor Company (F) Pays Big to Close a Factory

A slow road to downsizing
In most of the countries in Western Europe, labor unions enjoy heavy legal protection – and wield considerable political power. That makes any factory closing a complicated, protracted affair.

General Motors Company (NYSE:GM) found this out the hard way over the last year and a half, as its fervent wish to close a German auto factory has run into formidable opposition even after extensive negotiations. If it closes, GM’s plant in Bochum will be the first German auto factory to close since the end of World War II – a milestone that comes with significant political implications.

After over a year of negotiations, it’s now looking likely that GM will get its plant closing, but not for several years – and not without some expensive accommodations of its own for the displaced workers.

It has to happen, though. The truth is that Europe has too many auto factories producing too few cars. An industry rule of thumb is that auto factories break even once they’re running above 80% of capacity. Many European car plants aren’t even close.

For the struggling industry to return to sustainable profitability, some – probably more than a few – of those factories will have to be closed.

But no manufacturer had wanted to be the first to announce a rash of closings, until Ford presented its plan last fall. Now, slowly, other automakers – and their unions, and local governments – are beginning to come to terms with what seems inevitable.

But these changes, as Ford Motor Company (NYSE:F) has discovered, won’t come cheaply.

The upshot: money well spent, in the long run
It’s an expensive hit to Ford’s bank account, but it’s a necessary expenditure in the long run. Ford’s European factories have been running, on average, at around 60% of capacity. Closing the Genk plant – and two more factories, both in the U.K., that Ford has marked for shutdown – will be rough for those affected, but necessary if Ford, and the European auto industry, are to return to health.

The article Ford Pays Big to Close a Factory originally appeared on Fool.com and is written by John Rosevear.

Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool recommends Ford and General Motors and owns shares of Ford.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.