It’s not news that Ford Motor Company (NYSE:F) has been losing a ton of money in Europe. The Blue Oval’s operations in the region lost $1.75 billion in 2012, as a steep recession hammered car sales across the industry.
It’s also not news that Ford Motor Company (NYSE:F) is determined to restore its European operation to profitability. Last fall, CEO Alan Mulally announced a comprehensive overhaul plan that included three factory closings and a slew of new models for the region.
But what is news is that Ford’s turnaround plan is going to be an expensive one.
A $750 million parting gift
Ford Motor Company (NYSE:F) disclosed in a regulatory filing on Tuesday that its plan to close a factory in Genk, Belgium, would cost it at least $750 million. That’s the estimated total cost of lavish separation benefits – an average of $187,500 per worker – that Ford has agreed to pay to the roughly 4,000 hourly workers who are slated to lose their jobs when the factory closes at the end of 2014.
Workers at the Genk factory and its suppliers had essentially held up production at the plant since Ford Motor Company (NYSE:F)’s closure plans were announced last October. The agreement to pay separation benefits was a key to getting production restarted. Another agreement to pay separation benefits to the 300 salaried workers who will be affected by the factory’s closing is likely to be announced soon.
The factory finally returned to normal production this past Monday.
Ford will report the separation expenses as a series of special items, amortized over the remainder of the time Genk is open. The company said that the amount reported each quarter would be “dependent upon such factors as the timing of employee departures.”
It’s an expensive proposition that could get more expensive as Ford Motor Company (NYSE:F) proceeds with its turnaround plan – especially if more factory closures turn out to be necessary. But it’s further proof of something that has been clear for a while: Closing a car factory in Western Europe isn’t easy.
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.
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