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GM, Ford hopeful of European rebound despite Ukraine, Russia

By Edward Taylor, Bernie Woodall and Ben Klayman

FRANKFURT/DETROIT (Reuters) - Ford Motor Co and General Motors Co said on Thursday the crisis in Ukraine has exacerbated a sales slowdown in Russia, but the carmakers said they were on track to turn around their European operations after years of economic instability on the Continent.

Ford said again it expected to have a full-year profit in Europe next year and GM reiterated its previous forecast that it would return to profitability in Europe "by mid-decade." Both U.S. automakers reported second-quarter results on Thursday.

Ford surprised analysts with a modest second-quarter profit in Europe, while GM matched last year's $114 million loss after writing down a plant closure in Germany.

Volume carmakers have struggled for decades to make money in Europe. Signs of better fortunes have emerged with economic recovery in the region, which for years has been plagued by austerity measures following a sovereign debt crisis.

June figures from a European auto industry group showed that demand for passenger cars had increased for a tenth consecutive month in Europe, boosted by generous incentives for buyers.

ELUSIVE RECOVERY?

A full financial recovery for GM and Ford in Europe could be elusive.

Auto sales in Europe remain 19 percent below 2007 levels, and factories are running at an average 72 percent of capacity despite the closure of several plants in the past three years, according to consultancy AlixPartners.

Ford and GM have restructured operations in Europe and pledged to introduce new products to that market. Opel will launch 27 models and 17 new engines between 2014 and 2018, making greater use of common designs and parts from parent GM. Ford's European sales could receive a boost as it churns out at least 25 new or upgraded models by 2017.

Russia's weak demand has been aggravated by the crisis in neighboring Ukraine. Violence erupted in Ukraine's Russian-speaking east after a pro-Europe revolt in Kiev that ousted a Moscow-backed president in February and led to Russia's annexation of Crimea, causing the biggest Russia-West crisis since the Cold War.

To address falling demand in Russia, GM Chief Financial Officer Chuck Stevens told reporters in Detroit on Thursday that the automaker has cut production by 20 to 25 percent at its main plant in Russia this year.

GM also is exposed to currency fluctuations between the euro and the ruble. GM imports materials and parts from the euro zone to Russia, a potential stumbling block as tougher sanctions are discussed.

GM's quarterly loss in Europe almost tripled to $305 million, a figure that included a $200 million restructuring charge for closing Opel's factory in Bochum, Germany.

"Excluding the impact of restructuring, the losses in Europe were roughly $100 million, consistent with last year," Stevens said, describing the results as "a pretty strong performance considering the incremental headwinds we have this year because of Russia."

Ford showed its first quarterly pretax profit in Europe in three years, despite a $329 million charge related to poor cash flow in the company's joint venture with Russian carmaker Sollers.

Chief Financial Officer Bob Shanks said that normal plant shutdowns in the second half and rising structural costs will mean that the company is not likely to turn a profit in the second half or for the year in Europe. But the full-year results are expected to be better than 2013’s loss of $1.44 billion.

Ford's new chief executive, Mark Fields, said the weakness in Russia will not keep the company from its expectation of a full-year profit in Europe in 2015. He also said Ford remains committed to its investment in Russia and joint venture with Sollers.

"The business environment right now is very challenging and fluid," Fields said, referring to Russia. "You’ve got GDP that’s slowing down which is affecting industry sales, the weak ruble," as well as the Ukraine crisis, he said.

"The current environment is difficult, but it's a big, important market and it has the potential to be the largest market in Europe over time."

(Reporting by Edward Taylor in Frankfurt and Bernie Woodall and Ben Klayman in Detroit; editing by Matthew Lewis)

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