Solutions in a Crisis: Navigating out of a European Downturn

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John Fleming Speech -Chairman and CEO, Ford of Europe, Ford Motor Company Executive Vice President Manufacturing and Labour – Automotive News Europe Congress – June 23, 2010 Bilbao, Spain

Good morning, ladies and gentlemen.

The Automotive News Europe Congress has become an important event in the European auto industry’s calendar, and I’m delighted to be with you here today.

It’s appropriate that we’re here in Bilbao to discuss how the European car industry can navigate itself out of the current crisis.  Bilbao is a great example of how a strong vision combined with determination can transform an old, industrial city into a new and vibrant urban environment that has significantly improved the quality of life for its citizens.

If you have the opportunity, do take some time to look around and see what has been done to regenerate Bilbao.

The theme of this Congress is… “Solutions in a Crisis: Navigating out of a European Downturn.”  I want to give you my perspective on the current situation, and how we can best move forward as an industry, following which I will be pleased to take your questions.

We’ve experienced an unprecedented economic crisis over the past two years, not only here in Europe, but globally.  And as we all know in this hall only too well, the auto industry has been affected more than most.  I doubt there’s anyone here today whose business has not been negatively impacted in some way.  But if we are to understand how best to navigate our way out of the current predicament, I believe we need to step back and take a more holistic view of the European auto industry.

A key question for me is whether the economic crisis has caused the difficulties we are encountering in the European industry today, or if our current problems are the result of the economic crisis exacerbating weaknesses that existed in the European auto industry before the onset of the economic decline. 

This distinction is very important.  We cannot navigate successfully out of the current crisis and steer a long term course of prosperity for the European auto industry if all we do is patch up a leaking ship.

I believe that much of the European industry was in trouble before the onset of the recent recession.  It’s true that many of us had been taking decisive actions for a number of years before the summer of 2008 to try to improve the efficiency and competitiveness of our businesses.

This has often been a difficult task.  I know from our own experience at Ford, where we started to restructure our European operations as far back as 2000 that we have had to make some very tough decisions. But we’ve taken these difficult decisions in the long-term interests of our businesses.

Nevertheless, despite restructuring by some, profitability in our industry was under pressure even before the economic recession.  Ford of Europe was profitable in the years before the downturn… and even profitable in 2008, but we had only started to achieve what I would call appropriate levels of profitability for a business of our size and scale just prior to the current economic crisis.     

It’s clear to me that across our industry we faced issues of profitability and the need to restructure even before the recession.  This is evident in the industry’s average-to-low profitability and huge overcapacity even prior to 2008.  What’s more, the situation hasn’t improved.  It’s understandable that profitability can be negatively affected in a downturn as severe as the one we are experiencing, though we are trying hard at Ford to fight against that trend.  Yet it seems unbelievable that – as an industry – we have not successfully addressed our problem of overcapacity.

Today, it is estimated that we have 35 per cent overcapacity in the European industry: a figure that’s actually increased as we have gone through the recession.  Yes, we need extra capacity to take advantage of the recovery in the market when it comes – but 35 per cent?

Overcapacity is a prime factor in fuelling the current heavy and aggressive discounting we are seeing in the market as some manufacturers battle to maintain their cash flows and production levels.  This is not a sustainable way to run the industry.  The tactic of excessive discounting is a short-term measure that only devalues brands and helps weaken the entire industry in the longer run.  Many of us are already on this path to improved efficiency by reducing significant overcapacity in our businesses.  The rest of the industry needs to follow suit.

We must remember that we need to take action not just to improve our efficiency as far as the European market is concerned, but to hone our competitive edge in the face of growing international competition.  In reducing overcapacity and restructuring our businesses, the burden of such actions should, we believe, be the sole responsibility of the affected company.

But this is not to imply that governments do not have a role to play in supporting the European auto industry.  Far from it.  Rather, it is appropriate that any such support be provided on an equitable basis, and specifically for furthering the development of technologies, products and processes that will make our industry greener and cleaner.

There is no doubt that Government action in the current economic crisis, both at the pan-European and national levels, has been highly significant in relieving the pressure on our industry.  Despite some hurdles along the way – and some continuing hurdles for one or two of us! – the European Investment Bank Clean Transport Facility loans process has been a welcomed source of relatively competitively-priced finance at a time when loans have been difficult to obtain.

EIB loans have been applied for – and received by – almost every auto manufacturer in Europe for their own specific, CO2 reducing projects.  The open and fair nature of the process means there have been no anti-competitive or market distorting effects created by the loans process.

Likewise, the introduction of scrappage schemes, even if nationally-focused rather than pan-European in nature, have been a lifeline to the industry over the past eighteen months.  These schemes have, by our calculations, helped to add around another 2.5 million units to the market in 2009.  Without government-supported, and industry-supported, scrappage schemes, the European new car market could literally have collapsed in 2009.

The EIB loans process and the national scrappage schemes are examples of positive government intervention to help support what is a mainstay of the European economy at a unique and difficult time.  But it is imperative that any assistance provided by either national governments or the European Union should not be anti-competitive or have a distorting effect on the market.

Unfortunately, we have seen some movement in this direction in a few countries, with national automotive champions receiving preferential treatment to the exclusion of others.  For me, this is Europe at its worst.  It signals a return to national self-interest, and the negation of the wider pan-European interest: and we need to guard against it.

The EU also needs to take a longer term view of the European auto industry, and of its role in helping to create and foster a strong European economy.  For example, at Ford we are fully in favour of trade liberalization, and are strong adherents to the idea of free and fair trade.  I am, however, perplexed by the drive within the Commission to approve the EU-South Korea Free Trade Agreement.

At a time when the European auto industry is still in a weak position, to approve the trade agreement as it currently stands looks like an own-goal.  It will not allow us adequate access to the Korean market, and will most likely only lock-in the one-sided flow of trade in vehicles between the European Union and Korea.

What we really need to see from the institutions of the European Union – and especially the European Commission – is a far more proactive and long-term strategic vision for manufacturing business.  Call it an industrial policy, if you prefer.  A strong industrial policy that unites Europe rather than divides it, and which will support industry in general, including but not limited to, the auto industry.

It needs to be a support structure which will demand improved efficiencies and more competitive business practices to ensure that the European auto industry can compete in the global arena and play to its strengths.  It needs to provide us with a stable legislative basis so that we can work towards sensible and realistic targets in areas such as CO2 reduction.  Plus, it needs to ensure it does not demand of us measures that go beyond what is required of our global competition, thereby placing us at a disadvantage.

This role in providing an industrial policy is a role the EU institutions need to take on with added urgency, and now is perhaps the best time in many years to take on this challenge.

The reason I say this is because I think the recession is adding to the sense that the primary goal of the EU should be firmly rooted in supporting the economic well-being of Europe, not political union.  This is not a new phenomenon: the idea of a political union along the lines of a United States of Europe has been nothing but an unrealistic aspiration for many years.

But I feel that the economic difficulties are at least having some benefit in making us reflect on what should be the role of the EU in today’s world.  EU decision-makers should be placing far more effort into making it increasingly easier to move goods, services and capital across national borders.

So far, I’ve spoken about the need to restructure the industry; to make it more efficient and leaner.   I’ve also touched on the positive – and negative – aspects of government intervention.  But there is much more we can do for ourselves as an industry to ensure we remain competitive, not only in our back yard here in Europe, but globally as well.

At the heart of everything we do as an industry lie the products we design, develop and deliver to our customers.

The seeds of the global auto industry were first planted on this continent, and we have almost a century and a half of product innovation and inspiration in the European industry.  If we are to prosper longer term, we have to play to our strengths.  We must build on our heritage of providing customers with outstanding products and technologies, ensuring that we lead and not follow innovation and inspiration in the global auto industry, and especially we must attain leadership on environmental sustainability technologies.

I fully believe that the European industry leads in many areas of product and technological development, but we need to design and engineer our products not just for a European but also a global customer base.

We have to take the knowledge and experience we have to strengthen our position as global players because to succeed today it’s not enough to be a successful or leading player in Europe alone: you must become a truly global player.

That’s what we are now doing at Ford thanks to our ONE Ford strategy.  We’ve moved away from regional teams developing different products and technologies to work across the company globally as one team.  We’re leveraging our combined skills and assets to deliver the great products that customers want around the world, while building a strong business, and contributing to a better environment.  It is so simple: and yet so powerful.

ONE Ford is changing how we do business, and the results of that change are increasingly tangible, especially in these difficult times.

The focal point of ONE Ford is the development of a range of new products designed to appeal to customers around the globe.  Products that more than ever share a global Ford brand DNA that differentiates them from others in the marketplace, like the next-generation Ford Focus models we will introduce later this year.

We’re revealing eleven all-new or significantly freshened products in Europe this year, plus an unprecedented raft of new, customer-focused technologies, from our new EcoBoost advanced petrol engines, to new active safety systems and enhanced driver connectivity.  Significantly, many of these new technologies and innovations would not have been affordable for us without the global scale of ONE Ford.

Now I know that Ford’s heritage is different to that of many other companies here today, but I strongly believe that innovation and inspiration in our products and technologies is where the European auto industry can still play a leading role and make a difference.

To conclude, if we are to have an industry that not only survives but thrives in Europe, I believe we must tackle the chronic overcapacity that is a millstone around the neck of the industry, dragging it down further through the resulting massive discounting in the market which is to the long term benefit of no one.  We must not shy away from taking the tough decisions that many of us continue to take… and which are vital if we are to have a globally competitive auto industry with a future.

Most of all though, we must not forget our customers: our products lie at the heart of everything we do.

At Ford, despite the rigours of the recession, we have tried to protect our product plans as much as possible, and to continue to develop and launch fresh new products and relevant technologies that our customers really want to buy.  We need to provide our customers with the great products, technologies and excellent customer service they expect and deserve, and that can meet their needs and the needs of society.

If we cannot achieve this, then everything else becomes merely academic.

Ladies and gentlemen, thank you for your time today.