Ford Motors Loss in 2006 and Its Influences in the US Automobile Market - Essay Example

Ford Motors loss in 2006 and its influences in the U.S. automobile Market The year 2006 closed with devastating and grim numbers for the US automobile industry. Ford Motors, one of its pioneers, with history dating back for more than a century posted a staggering loss of $12.7 billion. This overshadows the company's previous loss record of $7.4 billion when they were charged for changes in accounting practices in 1992 and a nose dive from 2005s gain of $2 billion. Decline in sales combined with massive workforce buyouts and plans to close plant sites resulted to this biggest loss ever. This happens a year after an equally dreadful $10 billion net loss of General Motors in 2005. The beleaguered U.S. automaker announced its plans to close 16 more plants in North America in the next two years; nine plants by 2008 and seven more after that. (Isidore) Plans to cut-off more jobs were also announced and more than half of its U.S. hourly workforce had already agreed to take one of its buy-out schemes in the next few months. For the first time, Ford Motors is mortgaging its total assets to finance all of this restructuring. It hopes to raise $18 billion from its factories, equipment, office buildings, patents and trademarks, and stakes in subsidiaries; an amount that exceeds the company's total market value of all its outstanding stock by more than $2 billion. This move has never been done before as Ford Motors' credit line has always been good and it can borrow money without mortgaging its assets (Bunkley) So what is really happening to Ford Motors and the U.S. automobile industry as a whole Why is it losing so much while its overseas counterparts like Toyota and Honda, are moving towards the opposite direction Declined Sales, Quality Issues, Marketing Strategy, Labor Cost Discrepancies, Productivity and Currency Exchange Rates are the principal factors. Declined Sales - Overseas Automobile makers share in the U.S. market had steadily grown through the years. Chart 1 shows how Japan and the European markets had slowly crept up in market share from the 70s to the present, a trend that had Toyota surpassed Ford Motors as being the second biggest seller of automobiles in the U.S. This loss in the market share however, is not experienced by Ford Motors alone but by practically all U.S. automobile manufacturers as well. Honda has exceeded Chrysler in sales and is almost catching up with Ford. On the other hand, General Motors has not had the lowest share in new car and light truck sales since the 1920s. (Train & Winston) The pickup trucks, though still considered as the nation's best selling vehicle, also experienced very low consumer demand in 2006. Ford Motors' F-series pickups, regarded as one of its main product lines had a major sales drop exceeding 100,000 units. (Isidore) This shows the magnitude of the dire state the U.S. car makers are facing. With surging oil prices in the world market, consumers are opting for the more fuel efficient smaller cars, vehicles that does not guzzle gasoline like light trucks do. With this preference shift, U.S. automakers, such as Ford Motors are left with many truck factories that can't afford to be operational but stay inactive. Adjusting to the changes, U.S. car makers are not only closing their truck factories but have re-focused towards the smaller "cross-over" type cars which are scaled down versions of SUV. While GM announced its plans to shift towards building more small vehicles in the Beijing auto show last year, Ford Motors also confirmed that it will cease its Freestar minivan production and redirect its focus on building more crossover vehicles (CBC) Quality Issue - Sales drop due to quality issues is totally another story. Of this year's "Top Picks" lists based on the annual Consumer report, all picks are vehicles made by Japanese automakers. It has been two years in a row that no American cars made it to the list. To merit a Consumer Reports' recommendation to the "Top Pick", the car must pass certain criteria like reliability, safety, and maneuverability and consumer adaptability. (Valdes-Dapena) A recent survey conducted for Detroit News by J.D. Powers and associates found that majority of those who avoided buying American made cars do so because of concerns in reliability and quality. Ford Motors record on reliability and quality for instance, was smudged with the specter of the Ford-Firestone tire debacle in 2001 that still hovers in its company's image today. With more than a hundred lives lost due to this oversight, it can be considered as a reflection of the company's ideology. A report on "The Real Root Cause of the Ford-Firestone Tragedy: Why the Public Is Still at Risk" by C. Tab Turner in April 2001 argued that the principal culprit to the tragedy that resulted to the needless loss of lives is Ford Motor Company. It was Ford Motors who made the key decisions that produced the flawed combination of vehicle and tires that eventually led to the mishap. (Turner) The other U.S. car makers like GM and Chrysler didn't score high in the Consumer Report as well. GM cars were judged as having problems with its emergency handling and fuel economy while Chrysler scored the second-lowest of any automakers with bad reviews on its interior and engine performance. (Valdes-Dapena) Although the quality gap between the domestic and overseas car makers products may be closing in as management of the Big Three are intensely focusing on quality and dependability with extended warranties (Vlasic, Bill), but dominance of the Japanese cars in quality still lingers in the minds of consumers come decision time. And it may take awhile and more effort from the locals to regain consumers' positive perception and the bottom line, consumers' choice. Poor Marketing Strategy also added up to the losses. With the drop on sales, U.S. car makers sold its excess production to car rental companies at huge discounts or store them in open-air spaces. This practice temporarily assured production in plants that otherwise would have been closed. Several months later, a sudden surge of used cars would flood the market with negative impact on dealer relations and affecting car resale value. Labor Cost Discrepancy between overseas and U.S. based companies is also a major culprit. Health care cost takes up the chunk of the whole difference. Chart 2 shows how disadvantageous the American companies can be against their Asian counterparts. While the American automakers are paying roughly two-thirds of their total health care cost to retirees, the Japanese covers only the active employees. But still, discounting retiree health cost coverage, domestic car makers health cost to active employees is still way over the Asian competitors. Another labor cost in forms of peculiar plant practices also add up to the problem. With slack in the demand, assembly plants can either continue operations risking inventory problems or temporarily close plant for a week. In case of the latter, the company still loses money since it still has to give its idle workers 95% of their take home pay plus benefits. This translates to a week's loss of $7.7 million. A loss not experienced by the Japanese companies. (Taylor) Productivity Factor - A study on the productivity of the automobile industry conducted by Harbour- Felax group suggest that American plants with UAW affiliated workers are less efficient and restrictive UAW work rules add more to production cost. Though this is contrasted by the Harbour report in 2006 which finds the unionized plants as more efficient (Harbour), it is evident that Japanese plants are more efficient and well-organized as affirmed by Spear and Bowen in Decoding the DNA of the Toyota Production System. It hailed Toyota's production system and regarded it as the world's benchmark for manufacturing companies. Executives and managers from different companies have toured the Toyota plant and tried to emulate the Toyota Production system but only very few are successful. The major U.S. auto makers too like GM, Ford and Chrysler have initiated reforms to adopt the Toyota way. (Spear & Bowen. 3) Lastly, Currency Exchange Rate that sets the yen so low has favored overseas auto makers in the overall price cost. Currency Manipulation by the Japanese banks in influencing currency markets to artificially depreciate the yen makes Japanese cars very affordable in the U.S. market. It is actually subsidizing each Japanese car that is being sold in America by thousands of dollars. Another advantage that American car makers do not enjoy. In conclusion, U.S. automobile industry, one of the backbones of the U.S. economy, is in dire straits. U.S. car makers may have been the best decades ago but emerging overseas competitors are gradually seizing that position. America may have saw it coming but had closed her eyes and finally embrace the competitors as it inched its way in America's major economic backbone. Armed with quality conscious values, good work ethics, and a strong support by its government, Japanese auto brands have established their place in the hearts of Americans. Today, thousands of Americans are in danger of losing their jobs as major U.S. car makers are closing down plants. With earnest desire to climb back on its previous reigns, U.S. car makers are fighting back. Its fate is in the hands of Americans. Source. Automotive News Market Data Book (1980 - 2006) Chart 2 Health Care Cost Source: Automotive Competitive Challenges - Going beyond lean by Harbour-Felax Group. 5 Oct. 2006 p 17 Works Cited Bunkley, Nick. Ford Mortgages Assets to Pay for Overhaul. 27 Nov. 2006. The New York Times. 11 Mar. 2007 CBC news. Ford exits minivan market to focus on crossover vehicles. 3 Jan. 2007. CBC.CA. 13 Mar. 2007. Harbour, Jim & Harbour-Felax Laurie. Automotive Competitive Challenges- Going beyond lean. 5 Oct. 2006. 17 Harbour, Jim. Missed Opportunity: Auto report details policy flaws, but short on industry data. 23. Oct. 2006. UAW Research Bulletin. 13 Mar. 2007. Isidore, Chris. Ford Paying bonuses to all employees. 9 Mar. 2007. CNNMoney.com. 11 Mar. 2007. Spear, Steven & Bowen, H. Kent. Decoding the DNA of the Toyota Production System. 1999. Harvard Business Review. 3 Train, Kenneth & Winston, Clifford. Vehicle Choice Behavior and the Declining Market Share of U.S. Automakers. 10 Feb. 2006. Forthcoming, International Economic Review Turner, C Tab. The Real Root Cause of the Ford-Firestone Tragedy: Why the Public Is Still at Risk. 25 Apr. 2001. 2001 Public Citizen and Safetyforum.com Taylor, Alex III. Behind Ford's scary $12.7 billion loss. 26 Jan. 2007. Fortune Valdes-Dapena, Peter. Best Cars 2007 - Consumer Reports. 8 Mar. 2007. CNNMoney.com. 12 Mar. 2007. Vlasic, Bill. Changing minds: What Detroit can do to win back car buyers. 3 Jan. 2007. the Detroit News. 13 Mar. 2007. Read More