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Home / Business / Ford's $ 500 million plan to make money in Russia – The Motley Fool

Ford's $ 500 million plan to make money in Russia – The Motley Fool



Ford Motor Company (NYSE: F) said it has decided to stop selling passenger cars in Russia. Ford and its Russian joint venture partner will restructure their deal and end production at three factories in the country while continuing to produce commercial vans.

Of particular interest to Ford shareholders: Ford said the moves will lead to a series of fees that can cost up to $ 500 million.

Here's what we know.

  Front entrance to Ford Sollers' factory in Vsevolozhsk, Russia.

This factory near St. Petersburg builds Ford's Focus and Mondeo sedans for Russian customers. Ford and its Russian joint venture partner will soon close the factory and two others due to slow sales. Image source: Ford Motor Company.

What Ford said about the plan to close 3 Russian factories

Ford operates in Russia via a joint venture with Russian automaker Sollers PJSC. The collaboration, called Ford Sollers, offers Ford's Fiesta, Focus and Mondeo (Fusion) sedans; its EcoSport, Kuga (Escape) and Explorer SUVs; and several variants of Ford's Transit commercial van.

Simply put, today's news is that the joint venture partners have reworked their deal, other than the transit will be discontinued in June, and three of the company's four factories will be closed.

Sollers will own 51% of the joint venture as the parties focus on expanding sales of Ford's commercial vehicles in Russia.

Ford Europe chief Steven Armstrong hit the move as part of Ford's larger plan to increase profitability in Europe.

"This represents an important step towards Ford's goal of delivering improved profitability and a more competitive business for our stakeholders," Armstrong said, noting that the focus on commercial vehicles would help Ford achieve better returns on its invested capital.

About these one-time charges

Ford said these moves will generate between $ 450 million and $ 500 million in one-time pre-tax. They will include about $ 250 million to $ 300 million of "non-cash" accounting fees related to accelerated depreciation and amortization of Ford's facilities and inventory in Russia.

The remainder, about $ 200 million, will be cash fees related to the severance pay for workers at the three factories that have been shut down and termination due to discontinued parts supplier parts.

Most of these costs will be recorded in 2019, Ford said.

Ford has said that global restructuring work will generate a total of $ 11 billion in costs over the next few years, with about $ 7 billion of these costs being cash. These Russia-related costs are included in these totals.

Ford shareholders: Is this good news?

Ford has made relocations around the world to cut less profitable business areas while investing in new products and businesses that had the potential to generate better margins over time. As part of this process, in January, Ford said it had begun a "strategic review" of its Russian business, with results to be announced in the second quarter of 2019.

About anything, this the review was too late. Ford Sollers sales and profits have been under pressure for several years. New car sales in Russia have been slow to recover after a financial downturn a few years ago, and Russian consumers buying new cars have increasingly preferred cheaper and less profitable vehicle types.

This is not the first time Ford and Sollers have reworked their deal. About a thousand jobs were cut in 2014 after major losses, and Ford took control of the joint venture a year later, after rival General Motors (NYSE: GM) announced that it would leave it Russian market.

But Ford's nearly decades old Russian joint venture has not been worth the effort. Ford Soller's factories are still underutilized, and Ford has never come close to generating the return it had expected on its invested capital.

With the sale of commercial vehicles, the only bright spot in an image that has been bleak for many years, today's announcement is not that great surprise. In that sense, it's good news for investors – as well as a reminder that Ford has more work to do around the world.


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