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Ford aims to turn around struggling China, Europe operations

Ford Motor Co. will take measures to improve performance in China and Europe after the two regions recorded losses for fourth quarter and full year 2018, according to the automaker's CFO.

Ford CFO Bob Shanks said the company experienced a negative impact of about $3.3 billion from four areas: tariffs, commodity costs, unfavorable exchange and the Takata airbag airbag recalls.

"The first, roughly $750 million in tariff-related effects; the second, $1.1 billion of increased commodity costs unrelated to tariff effects; the third, about $750 million of unfavorable exchange, net of pricing, were taken to partially recover some of this impact; and fourth, about $775 million related to the Takata recalls announced last year in North America," Shanks said during Ford's earnings call Jan. 23.

Shanks said the company's North America operations incurred a little more than $1.9 billion of that $3.3 billion impact, and South America absorbed approximately $400 million of the impact. Despite that, Shanks said, those two regions delivered strong earnings before interest and taxes.

What drove the automaker's year-over-year earnings decline, Shanks said, was China and Europe.

"Asia-Pacific took on about $400 million of the company headwind yet delivered a much deeper decline in results from 2017, $1.8 billion in fact," Shanks said. "Europe absorbed about $600 million of the headwind yet saw a year-over-year decline of $765 million, and that was with the strongest product refresh among all our regions in 2018."

The Michigan-based automaker's revenue in the Asia-Pacific region came in at $3.6 billion in the fourth quarter, down $200 million from the fourth quarter of 2017. It recorded an operating loss of $381 million. For full year 2018, Ford's revenue in the Asia-Pacific region was $12.4 billion, down $1.7 billion on a year-over-year basis.

Ford said revenue decline was from unfavorable exchange rates and lower volumes. All of the automaker's fourth-quarter metrics for the Asia-Pacific region were down year over year, driven by China.

"China is the largest automotive market in the world, and we think it could be twice the size of the U.S. by 2025," said James Farley, Ford's executive vice president and president of global markets. "So getting our business back on track is essential, given our plan to grow both brands in China."

Ford plans to localize some of its models in China, starting with the new Ford Explorer. This will cut down on tariff-related costs and logistics costs, the company said.

In Europe, Ford had 361,000 wholesales for the fourth quarter of 2018 and 1.53 million wholesales for the full year, both down year over year. The automaker's revenue in Europe was $7.4 billion in the fourth quarter, down $700 million year over year, and it recorded an operating loss of $199 million.

The automaker is planning thousands of layoffs across its 50,000-person European workforce. This is part of the company's broader $11 billion restructuring to update its vehicle lineup, focus on products that generate higher returns and cater to specific regional markets.

Farley said on the call that there would be a "significant reduction in personnel and structural costs" in Europe.

The executive added that Ford aims to capitalize on its profitable light commercial van and pickup business in Europe and reduce its range of passenger cars. It will also prioritize higher margin markets, such as Germany, and may exit less profitable countries.